Financial institutions worldwide are increasingly interested in sending IT work to lower cost countries. That was the key finding of a new Deloitte Research study, which surveyed 27 global financial institutions including 11 of the top 20, based on their market capitalization, in the U.S., U.K, the Netherlands, Germany, Switzerland and Japan. “We are on the cusp of a revolution,” reports Chris Gentle, global director of financial services research for Deloitte Research.
The London, England-based analyst says 33 percent of the respondents told Deloitte they already have sent IT work offshore and 75 percent said they will have work offshore within the next 24 months.
Gentle says intense cost pressures, lower share prices of these publicly traded companies and the general economic downturn are the major reasons historically staid financial institutions are looking for a new solution. “The financial services industry is becoming increasingly mature. Banks have to reduce their costs to compete in the future,” the analyst explains.
How much are the financial institutions saving? The average was 39 percent, Gentle says, although some participants reported savings over 50 percent.
IT Leads, But BPO Follows
While the survey respondents said they were immediately working on sending IT work offshore, many said moving business processes offshore was just over the horizon. BPO processes migrating to India include call centers, general processing for human resources, finance and accounting, and back office, and transactions like life insurance.
Gentle says this offshore revolution “separates the delivery of financial services from their processing for the first time.”
The banks that are currently sending work offshore are predominantly using outsourcing as their business model, Gentle notes. In the future, Gentle predicts a hybrid model will emerge. He thinks the banks will create joint ventures with their outsourcing partners. For example, a bank may own the facility and hire the people. The outsourcing service provider runs the operation and owns 55 percent of the venture. “In this model, the banks have more control over the process. They can ensure the offshore systems and processes comply with their business models.” This is important for tax and liability considerations, Gentle explains.
Where’s the Work Going?
Where are the banks sending their work? India. “India has become the back office of the world,” he says. However, the financial institutions “don’t want everything in one place,” he reports.
To diversify, the banks are creating more than one outsourcing relationship. Secondary work is going to Sri Lanka, China, South Africa, the Philippines, Singapore and Malaysia. Gentle says banks are using these dual relationships to create labor arbitrage between the offshore service providers to produce the best cost savings.
This revolution also applies to Wall Street and the City of London. Trades completed on the New York Stock Exchange may be processed in Bombay or Bangalore. “Today these organizations have to adopt a new business model. Now they must operate in a truly multinational environment. They have to be comfortable dealing with Manila and Bombay,” Gentle observes.
He adds that financial institutions that send work offshore gain no competitive advantage by doing so. “But they’re at a big competitive disadvantage if they don’t,” he says.
Citigroup, for example, grew its revenues $35 billion over the last five years but only experienced costs increases of $12 billion during that period, thanks to offshore outsourcing, according to the Deloitte researcher. “Numbers like that make a huge difference in the industry,” Gentle observes.
What does this mean for bank customers? Gentle predicts offshore outsourcing will “keep costs down for end-users.” This is a good thing for all bank customers.
However, this trend also impacts current bank workers negatively. “There are HR implications. Offshore outsourcing is putting downward pressure on labor prices,” the Deloitte executive reports. And U.S. workers are losing jobs. This may have political repercussions. The report says 15 percent of the global workforce–that’s 2 million people–will see their jobs move offshore.
The tectonic plates are shifting in the financial services industry. Bank on it!
Lessons from the Outsourcing Journal:
- Competitive pressures are encouraging financial institutions to send work offshore. A Deloitte study found one-third of the globe’s major financial institutions are already utilizing offshore outsourcing with 75 percent reporting they will be doing so in the next 24 months.
- IT processes are going offshore first. But BPO processes will soon follow.
- India is currently the back office of the world. But banks don’t want all their processes in one location and are sending work to secondary locations, too.
- Respondents said cost savings averaged 39 percent. But some enjoyed savings over 50 percent.
