By Paul Taylor, Director of Global Matching, SWIFT
I read that an interesting trend is developing in manufacturing industries: reshoring operational processes.
Why should we care, and how does this impact financial services?
Well, much of the trend to offshore started somewhere else – like the trend for Six Sigma. If I remember my Six Sigma training, I think it was the airline industry – and financial institutions tried to mimic best practices from other areas of industry to achieve by and large the same positive impacts (Let’s face it, not many planes fail!). And indeed, seemingly, the first retail institutions to start to reshore are already being publicized openly.
The question then becomes why reshore if there were such sound financial reasons for offshoring in the first place?
Among other reasons, I believe one is the result of business case reviews, which are revealing that the anticipated financial benefits of offshoring have not been realized. This could be due to an increase in directly attributable costs through error, travel, staff turnover in lower cost locations (India c50%), the additional management oversight on offshored processes, or indeed, client service impact.
Back in the early 2000s, the direct cost-benefit of labour arbitrage was well understood, with broadly a 5/1 ratio being easily within reach. This narrowed to around 3/1 depending on location or approach in more recent years. However, at a time when “on-balance sheet headcount” needed to reduce, and there was an apathy in terms of understanding the impact in monetary terms elsewhere in the financial statements, this all made sense.
Typically, suppliers were identified (vendor engagement model) or staff hired (captive model) and processes were simply moved to these lower cost locations through documentation, with as little training as could be managed given (due to impending cost implications, travel and the need to redeploy/exit onshore staff).
Generally the processes themselves were not considered candidates for improvement, and so processes with existing flaws, workarounds from re-scoped IT programs, or indeed, processes shoe-horned into poorly performing infrastructure were passed to relatively unskilled teams of people a considerable flight away from home.
Is reshoring, or even a lesser move from far- to near-shoring, an opportunity to rebuild process and operational capability in order to fix root cause issues?
Why would this be easier than simply moving processes back to base in a similar fashion? I would argue simply because many financial institutions would likely lack the skilled resources themselves to bring processes back en masse – a reverse of the original issue – since many of these skilled practitioners have been redeployed or simply have left the industry.
So the opportunity to take a look with “fresh” eyes, using technology that could only be available today, might be a good proposition.
However, if the business strategy is to still maintain outsource arrangements and the business case still stacks up, perhaps we should consider the risk profile of these services.
We read that actually, there is an increase in the use of outsourced technology by brokers, who are seeking to reduce operational burden and cost, especially against a backdrop of around a third less commissions paid in 2012, and its impact on revenues.
It is therefore interesting that the Director of Supervision from the FSA was recently quoted as saying that there was “concern that if a outsource provider were to face financial distress, then UK Asset Managers would not be able to perform critical and important regulated activities, thereby causing detriment to customers. Based on findings so far we are not confident that across the industry, effective recovery and resolution plans are in place for the asset management sector as a whole.”
Of course, it is not only asset managers who outsource, but many more different segments of Financial Services, in order to leverage labor arbitrage opportunities, and to centralise compliance, operational and regulatory practices with trusted “hosted” providers. All good reasons I think.
But is there a concentration risk regarding outsourced services? How would the movement of assets from one distressed provider to a safer haven work? In what timescale? It is quoted that to move providers would take between two to three months, and so perhaps the regulators have a valid concern.
Of course, you would hope that the tsunami of regulation applied, or indeed, inflight would guard against asset or cash loss, but there are enough examples of where this has indeed been the issue, particularly where re-hypothecation has taken effect, or there has been mismanagement of client assets and money.
Is there an issue by extension with Fund Administrators, not through loss or lien of assets, but through operational concerns regarding migration between providers in the event of issue, the setup of new relationships, bank information, etc.?
I’d be happy to discuss! It certainly seems like an opportunity to reconsider operating models!