Firms Need to Increase Offshore Presence: Deloitte
November 28, 2005
The results of the Deloitte Touche Tohmatsu "2005 Global Offshoring Study" are in, and they indicate that many financial services companies are not committed enough to offshoring, and therefore do not receive the maximum return ratio that could have been gained from the operation.
The most effective offshorers among financial institutions have 6.7% of their global head count offshore, which is much more than the study average of 3.5%. With this in mind, it is safe to say that if all of the surveyed companies that offshore were to reach this ratio, they could triple cost savings just from offshore operations.
"Offshore operations that aggressively expand their scope and scale typically deliver much higher returns," said Chris Gentle, a director at Deloitte and author of the study. "Financial institutions that make a half-hearted attempt at offshoring are exposed to all of the risk, while enjoying only some of the benefits.
The first few months of offshoring achieve the best results, before declining for the rest of the year. The second- and third-year performance improves, because of the gain in experience over the first year.
The research also found that companies often come across a worrisome drop-off in cost savings and quality shortly after the third year, and this may result in a decline in operations and an inability to aggressively expand a company's offshore ventures.
The study also unveiled many "best practices" that, if used, can assist in making sure that financial institutions are utilizing their offshore entities to their full potential. These best practices include the need for offshore operations to become engrained in the company's management culture and a focus on recycling short-term savings into continued investment.
Offshoring is no longer just about costs, since it also provides an opportunity for a company to establish a foothold in an emerging market. Offshoring has also moved past just India and China into the Philippines.
"Relentless margin pressure and intense competition have made offshoring a competitive necessity for most financial services companies. However, offshoring should not be viewed as a simple cost savings but rather a part of a wider drive for operational efficiency," said Peter Lowes, the leader of Deloitte's outsourcing advisory service practice. "It is also critical that some of the savings reaped in the early years are reinvested in the ongoing development of the expanded offshore services."
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