01 September 2003 Comments

 

Offshore Business Processing

How to benefit from a new source of value, by Amir Roy , MA Partners

Petrol is available at 25p per litre, yet in London we buy at 75p. For the average car user, the saving per litre would yield £1000 per year. If an organisation had 100 heavily used cars, the saving would be £200,000. However, the 25p gas station is 5 time zones and 5000 miles away, so it is not practical to buy there. But for other services, especially those where there are no physical barriers, why don’t we take advantage? What if, for example, you could buy low from a developing economy and sell high in a developed one? After all, the capital that drove the industrial revolution was generated in this way. And today, offshore business processing means that financial institutions can apply this principle.

Offshore business processing means relocating processing functions to an offshore, usually lower-cost location, whilst keeping physical systems and infrastructure where they are, onshore. This can yield savings in excess of 50% despite higher telecom costs and the opportunity is huge. In the financial markets industry, an organisation could save $20m per year and potentially benefit from account productivity and quality improvements, since many offshore processing centres employ “six sigma” and other quality management processes as standard.

Organisations which stand to benefit most are those with an established presence in a major low-cost offshore location, since they have been able to use this to grow an in-house offshore processing capability. Citigroup did this a decade ago and now has more than 4,000 operations jobs in India, saving more than US$200m per year. And recently, with sharp growths in the industry, there are a number of established and stable organisations that offer this as a service. With this it is now possible to have a centre, outsource to a vendor or do a joint venture arrangement of some kind.

It should be recognised that these services are not simply commodities and implementation does hold a number of challenges and risks. However, the macro-economic conditions and business capabilities provide strong enablers that can sustain a business case even in the face of barriers. These include such things as labour supply in excess of demand, keeping labour inflation in check, established, reliable, high-capacity telecommunications services, available at ever-decreasing cost, strong language skills and increasing familiarity with business practices and standards

Key challenges are the organisational, commercial and people-related ones associated with major business and organisational change. Success factors can be things such as the drive for operational excellence. Vendors, management and individuals need to be incentivised to deliver high quality service. Building and retain value in people is another factor. Leading offshore centres can provide highly educated, enthusiastic people and the secret to keeping these people is through ongoing rewards and broader career prospects.

And partnering with offshore centres to share risk and rewards can also ensure success. Rather than treating a captive offshore unit as a cost centre, they can deliver greater value by treating the centre as a business partner.

Finally adapting onshore business units to be information users, not producers and clarifying the responsibilities and competencies of each location, so each can focus on maximising its own effectiveness is another success factor.

But for many organisations perhaps the greatest challenge is how to establish a foothold. For many, partnering with a vendor that specialises in establishing and running offshore processing centres is an attractive option. A joint venture can provide access to infrastructure, local knowledge and management capabilities more quickly and at a lower level of investment than going it alone. And it also avoids some of the drawbacks of full outsourcing, including the risk of loss of control over key resources and potential barriers from financial regulators.

A strategic partnership between onshore business centres and offshore processing units is key to maximising value from the offshore business processing opportunity. It takes time, effort and patience to build an offshore processing unit successfully, either in-house or in partnership with a vendor. But given the size of the prize, most would consider the effort to be worthwhile and, perhaps, necessary for long-term business success.