American banks, broker-dealers, insurers and fund will export half a million jobs by e-locating them outside the United States, saving itself as much as $30 billion a year in annual operating costs. Or so says a study published last week by management consulting firm A.T. Kearney.
Though the conclusions are mitigated somewhat by the fact that Kaerney is owned by out-sourcing specialists EDS, they do suggest that the long-awaited surge in out-sourcing to emerging markets by US financial services firms is set to take off, and at a higher level than expected.
Kearney predicts that the re-locations will go beyond the usual back office functions to include financial analysis, research, regulatory reporting, accounting, human resources and even graphic design. Until recently, offshore job transfers have tended to be restricted to back office functions such as data entry, transaction processing and account reconciliation. Now almost everything can and might be done outside America.
“Any function that does not require face-to-face contact is now perceived as a candidate for offshore relocation,” explains Andrea Bierce, the A.T. Kearney managing director who oversaw the study. “The debate at major financial services companies today is no longer whether to relocate some business functions, but rather which ones and where.”
The number of jobs Kearney puits at risk is equivalent to 8 per cent of the US financial services industry workforce. However, Bierce cautions that while the trend toward re-location has accelerated in recent years, her research indicates that the effectiveness of these moves is less certain. Half the respondents reckoned the results of moves they have made already were either “somewhat effective” or that it was “too early to tell.”
“It’s clear that some financial services companies have experienced formidable challenges deriving all the benefits they hoped to achieve from their offshore initiatives,” says Bierce. “Although 50 per cent cost reduction can be achieved in many instances, companies need to manage the process transition effectively and establish metrics in the beginning so they can measure the overall effectiveness.”
Bierce also notes that although international tensions have increased concern about moving jobs overseas, they do not seem to have reduced the appetite. Bierce says geo-political issues so far have not adversely affected the trend at all. Indeed, she says one major firm moved several job functions to India at the height of tensions over Kashmir that almost led to war with Pakistan.
In fact, Kearney believes that re-locating abroad is now an integral part of business continuity planning at major firms. “Most major U.S. financial services companies are increasingly trying to establish a global footprint by maintaining operations in multiple overseas locations,” says Bierce. “This limits their exposure to any one country and gives them secure disaster recovery capabilities for the various regions they serve.”
Kearney – using a proprietary scoring methodology that assesses multiple factors, including labour costs, political stability, the presence of multinational corporations, the degree of information technology and business process maturity, the availability of skilled labour, the expected future development of the country and the scalability of operations – ranks India as the optimum country overall for offshore business processing, followed by Canada, Brazil, Mexico, Philippines, Hungary, Ireland, Czech Republic, Australia, Russia and China.
The 11 countries selected were then ranked against three major categories – cost, environment and people. Although India will likely maintain its lead for the next few years, the firm expects China to become an increasingly popular location once US financial services firms have the necessary confidence that their intellectual property rights will be safeguarded. “We already know that one major insurance company is developing an innovative product to protect intellectual property,” says Bierce. “As these types of products proliferate, we believe China will make great strides in attracting U.S. financial services companies.”
The Kearney conclusions are based on a study of roughly one hundred US firms in all sectors of the financial services industry, and reflects the opinions of CEOs, CFOs, chief administrative officers and other senior executives as well as those of A.T. Kearney consultants. In fact, the survey found that 64 per cent of the financial services firms surveyed have already begun to implement offshore business process initiatives, and 57 percent have already engaged or intend to engage outside assistance to manage the implementation, including selecting the location and providers and identifying which business processes to move offshore.
“While the vast majority of financial institutions surveyed see reduced costs as their primary reason for offshoring, improved productivity and enhanced service quality are secondary drivers,” according to Bart Kocha, a vice president who leads Kearney’s enterprise services transformation practice. “Because offshore activity is evolving to include not only traditional back-office functions but also more complex, analytical activities with higher value-added, we are now beginning to see aggressive efforts to capitalize on this trend.”