Thursday, June 28

India may lose offshoring hubs to China

India continues to be the global offshoring hub but is likely to lose its share of two-thirds of offshored staff in the next 10 years due to stiff competition from China, according to a report by consulting firm Deloitte.

The report, titled Global Financial Services Offshoring Report 2007, states that offshoring is saving the financial services industry an estimated 4.5 billion pounds a year, up from around 2.5 billion pounds a year ago, propelled by a 1,800 per cent increase in headcount over the last four years.

The UK financial services industry alone now saves up to 1.5 billion pounds per year from offshoring, most of it to India.

The report adds, “India remains offshoring's hub but is likely to lose share in the future. The DTT GFSI group estimates that about two-thirds of global offshored staff is employed in the sub-continent. China threatens to be India's principal offshoring competitor.”

"Some 200 million Chinese people are currently learning English, providing a growing pool of skilled labour that may compete with India over the next 10 years. China's share of offshore labour is already rising, with a third of financial institutions now having back-office (mainly IT) processes based in China.”

"China's growing competitiveness may dampen salary inflation among Indian offshoring industry workers. Further, there are growing concerns over the supply of skilled workers in India. Only 10-15 per cent of Indian college graduates are considered suitable for direct employment in the offshoring industry. This may result in a shortfall of up to half a million professionals by 2010."

Chris Gentle, associate partner, financial services, at Deloitte and author of the study, said, "Offshoring is maturing at a rapid pace but, in future, the best offshoring strategies will not, and cannot, be based on labour arbitrage alone. Financial institutions need to re-engineer business processes, or risk simply transferring offshore the legacy inefficiencies of older, onshore processes.”

"The industry's star performers have successfully deployed aggressive offshoring strategies, transferring more than 5 per cent of group headcount offshore and achieving bottom line savings of over 40 per cent. In some cases, the savings are equivalent to 3 per cent of the total cost base. However, at the other end of the spectrum, institutions that have failed to adopt best practices are experiencing a decline in operational performance.”

“While most major financial institutions now have a sizeable offshore delivery function, the gap between the best and the worst is widening. We believe it is critical that a business builds a platform for success, based on relocating at least five percent of the total group's headcount offshore.”

“The best performing institutions offshore around 12 per cent of group headcount and, on average, save 55 per cent on each business process. The companies whose offshoring programmes are suffering, offshore less than 5 per cent of headcount and typically save 32 per cent per process. The most efficient offshorers take just 15 months to migrate each process, compared to around 25 months for poorer performers."

Reacting to the Deloitte report, British finance union Unite warned that the "human and social costs" of offshoring "have been absolutely huge", and added that the money saved through offshoring represented a tiny amount when compared to the overall profits made within the financial services industry.

The union argued that an effective business case for offshoring had yet to be made, pointing towards an increase in staff turnover and rising wages in countries such as India. Unite national officer David Fleming said that the union had recently seen staff turnover rise considerably.

He said, "It is as high as 75 per cent or more in some cases. Many companies have to retrain an entire workforce over the course of a year and wages are rising. These cost savings hardly dent the profits that UK financial services companies make collectively," he added.

"However, the human and social costs have been absolutely huge and customer dissatisfaction is widespread. Unite still believe that organisations are overlooking the complexities of offshoring and are still failing to make a sound business case for exporting work overseas."

Meanwhile defence group QinetiQ is reported to be on a collision course with staff and unions over its plans to ship administration jobs over to India, which could lead to 100 redundancies. Staff at the defence group is worried about the security of their personal information, contract and bank details. QinetiQ has confirmed that it is outsourcing work to Accenture, which will do the work at its delivery centre in India.

A QinetiQ spokesman said "Our risk, compliance and security experts have reviewed Accenture's processes and are satisfied that they are as robust as our current procedures."

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