Global Financial Services Offshoring Report 2007 - Optimizing Offshore Operations

Foreword

Offshoring in financial services is growing in both strategic and operational significance. As the practice matures, the challenge for financial institutions is how to optimize their burgeoning offshore operations.

Financial institutions' shareholders demand a flat expense base. The required response is a never-ending review of operating efficiency, with offshoring and associated sourcing strategies likely to play a key role.

In future, the best offshoring strategies cannot be based solely on financial gains from labor arbitrage. Otherwise the legacy inefficiencies of older, onshore processes may simply be transferred offshore. Yet research undertaken by Deloitte Touche Tohmatsu's (DTT) Global Financial Services Industry (GFSI) group - a group made up of DTT member firms' Financial Services Industry practitioners - shows that offshoring and sourcing decisions are too frequently based purely on cost arbitrage grounds.

This report sets out the best practices that financial institutions should consider in order to be the biggest beneficiaries from offshoring. Drawing on the DTT GFSI group's fourth annual global offshoring benchmark of the financial services industry, this report highlights the key processes and behavior necessary to help ensure institutions optimize their performance.

I hope you find the insights provided by this report commercially valuable.

Jack Ribeiro

Managing Partner

Global Financial Services Industry Group

Executive Summary

J-curve growth: The offshoring industry is growing up quickly. Most major financial institutions now operate a sizeable, low-cost offshore delivery function. The industry's cumulative cost savings for the last four years have risen sharply, propelled by an 18-fold increase in offshore headcount1. Over 2006, average total headcount offshore doubled to six percent2 of total group staff. More than half of all financial institutions surveyed are now saving more than 40 percent for each business process offshored3. However, the range of savings is polarizing, and is now between 20 and 70 percent per business process4.

Enter Phase II: The DTT GFSI group's analysis has identified three phases to an offshoring journey for financial services institutions: Build, Optimize and Release. Organizations can realize the full value from their offshore operations only when all three phases are complete. Most organizations are currently entering the second phase, at which point, the key challenge is to optimize operations. In other words, they need to progress beyond pure labor arbitrage benefits by re-engineering business processes to make them world class.

Optimizing performance: As financial institutions enter the second offshoring phase, their efforts are on streamlining migrated business processes. The impact of this application on best practices is becoming evident across all financial services. A select group of financial institutions - offshoring's stars - has successfully deployed aggressive offshoring strategies, resulting in the transfer of more than five percent of group headcount offshore and achieving bottom line savings in excess of 40 percent. In some instances these savings have been equivalent to three percent of their total cost base. Other institutions, that have failed to apply the best practices have, in some instances, experienced a decline in their operational performance. This has put their prospects of realizing full future value from their offshoring operations at risk.

Critical decisions ahead: Along the offshoring journey there are three key decisions to make. Additionally there is an ongoing need for a systematic review of a financial institution's offshoring strategy. The critical choices, made at the beginning of each of these three key phases, are likely to determine the future success of the offshoring strategies:

Should offshore capacity be bought or built?

How can operations be optimized?

How can value be realized through multiple choices?

Financial institutions that take a longer term perspective and map out how they can extract value at each of these vital stages are most likely to shine by delivering the highest quality at the lowest cost within a global operating model.

The End Of The Beginning

Financial services continue to lead the way in offshoring. Many of the world's major financial institutions are continuing to set the offshoring benchmark. As offshoring matures, the gap between the best and the rest widens. This report charts the widening gulf across the financial services industry. It outlines how a small number of financial firms are outperforming the rest of the industry. The move offshore has clearly changed the dynamics of the global financial services industry.

Offshoring has matured at a rapid pace. Less than 10 percent of major financial institutions had moved processes offshore in 2001, according to research by the DTT GFSI group. By 2006, over 75 percent of major financial institutions had operations offshore5. US and UK banking and capital market institutions...

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