Financial institutions bank on offshoring

More than half of the country’s top 50 financial institutions use offshore services with 20% more planning to send work offshore during the next two years as employing overseas IT service providers becomes a competitive necessity in the banking industry, according to a report released this week by Deloitte.

“Several years after it first gained prominence, offshoring continues to grow, as banks look for ways to lower costs and tap a skilled global workforce,” Deloitte says in the report titled, Global Banking Industry Outlook: Issues on the horizon in 2007. “Offshoring has moved from an experiment to becoming business as usual – a core competency that nearly every bank needs to posses.”

According to the report, about 6% of the banking industry’s $44 billion in IT spending is handled offshore today, but that number will grow to 30% of total IT spending by 2010.

The move offshore is prompted in large part by lower labor costs. Deloitte Research says that nearly half of all offshoring efforts result in savings of more than 40%. Even as the labor market tightens in key offshoring areas such as India and costs escalate, Deloitte says that a survey it conducted earlier this year shows banks don’t expect offshore labor costs to rise dramatically.

More than half of financial institutions surveyed said they expected the annual bill for their offshore projects to increase by less than 10%, while 36% expected labor costs to stay the same or decline, according to Deloitte Research’s 2007 offshoring survey. Just 9% of companies said they expected their offshore costs to rise between 10% and 20%.

Deloitte says that while many banks are having great success with offshoring, many could increase their savings. If global banks adopted the practices of the most successful organizations using offshoring, they could reduce costs by up to $16 billion, triple the current savings of about $5 billion, Deloitte Research says.

To do that, the banks need to focus on four key factors:

* Complexity. Deloitte says that companies need to do more than simply move existing processes overseas with the hope of cutting costs. “Instead they need to see offshoring as a way to redesign and improve processes,” the report says.

* Compliance. Banks must realize that in moving work offshore, they are agreeing to comply with new rules and regulations imposed by different countries. “Banks need formal and effective governance processes to monitor and enforce compliance in their offshore operations,” the report says.

* Culture. Banks should bridge the cultural divide by sending top talent to participate in offshore projects and by offering offshore workers opportunities similar to those available to onshore employees.

* Costs. In order to get the greatest cost savings, Banks should jump headlong into offshore opportunities. For example, Deloitte Research found that increasing the percentage of total head count located offshore from 3.5% to 6.7% could result in increases in savings from today’s average of about 35% to 60%. “Significant gains in efficiency can also be achieved by expanding the scope of operations – by moving from the offshoring of basic stand-alone processes to ‘full-service’ operations that encompass a wide range of IT and back-, middle- and front-office processes.

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Copyright © 2007 IDG Communications, Inc.

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