Forbes on Outsourcing: Cashing In On Savings

Cashing In On Savings
Kerry A. Dolan, 07.01.04, 5:10 PM ET

SAN FRANCISCO - The public backlash against moving jobs overseas has died down of late. But the offshoring of specific functions by financial services companies is moving full steam ahead, according to a new report out this week.

More than 80% of the world's largest banks, insurance companies, investment banks and brokerages have undertaken initiatives to move jobs out of their home bases, says Deloitte Research. The study found, in the last year, a 38% increase in the number of financial firms that have moved activities offshore for the first time. And the large financial institutions that have yet to offshore anything are seriously considering it, the report concludes.

Some of the world's biggest financial players, including American Express (nyse: AXP - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ), have moved jobs like call centers and software development for a number of years. Others, like Mellon Financial (nyse: MEL - news - people ) and Bank of America (nyse: BAC - news - people ), are more recent converts to the trend. Bank of America just opened its first offshore "back-office" center in India in late May this year.

In the same survey a year ago, only 29% of institutions surveyed by Deloitte had moved operations offshore. This year 67% have already done so, and another 13% are planning to move at least some operations offshore. The big players are embracing offshoring more wholeheartedly than smaller financial institutions, according to Deloitte.

The primary reason for most offshoring is cost savings. The top 100 global financial services institutions--those with market capitalizations exceeding $10 billion--will send approximately $210 billion of their cost base overseas, saving an average $700 million per institution by 2005, the survey concludes.

Given the Fed's recent move to raise interest rates and the expectation of more hikes to come, savings from offshoring look even more attractive to lending institutions in search of new ways to boost the bottom line. The principal activities being moved overseas are IT services, software development, call centers and back-office work.

India ranked as by far the top destination for offshoring activities. "India is winning eight out of ten new deals," says Peter Lowes, U.S. leader of Deloitte Consulting's outsourcing practice. "It's developed the critical mass and the necessary infrastructure. The system in India is now a much more well-oiled machine."

India's large supply of educated workers, as well as tax deals offered by the Indian government, are important incentives. Many financial firms are not even evaluating other countries, says Lowes. However, the Philippines and Malaysia follow India as destinations of choice.

A growing number of firms--40%--are choosing to set up "captive" operations offshore, rather than outsource activities to a third party. One reason, says Lowes, is that global firms are already comfortable managing operations--and risk--in overseas locations. Such a move is a greater challenge for smaller financial firms.

Deloitte's second annual Global Offshore Survey, called "The Titans Take Hold," was based on responses from 43 financial institutions, 60% of which are U.S. based, with the remainder in Europe. It included 13 of the top 25 financial institutions in the world by market capitalization.

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The Prudent Investor's view: In answer to Morgan Stanley economist Mr. Lian's dour outlook on the Philippines (article posted earlier), the prospects of outsourcing as presented above by the Forbes magazine, could be one of the possible growth corridors which could help spur the Philippine economy. This would be only possible if government is cognizant of its potentials and works on ensuring the viability, conduciveness and competitiveness of the industry players, as well as, retool the local labor force to meet the required standards.

Moreover, if there were any economic models that the Philippines should possibly try to emulate given its litany of disadvantages such as low savings and inadequate investments, low-value added exports, weak government finance and burdensome debts, vulnerable government institutions, poor infrastructure, low inflows of FDI and dependency on consumption, possibly the Indian paragon of a domestic services sector led growth strategy could be the rightful answer to our plaguing woes.

India’s economic infirmities in some ways parallel that of the Philippines, while on the other hand, India’s strengths, namely, well educated workforce, IT competency and English proficiency are by no means strangers to the Philippine labor force. The key to curbing the brain drain or the intellectual hemorrhage would be to harness these skills to attract offshoring service contracts. The offshoring/outsourcing phenomenon is by large an offshoot of the globalization efforts linked by the web-based platform and other IT enabled services. All that is required of the Philippines is to focus on attaining its competitiveness in an industry with exploding potentials.