SHAPING THE FUTURE OF FINANCIAL SERVICES OPERATIONS: OFFSHORING, NEARSHORING & RIGHTSHORING

Published : 8 years ago, on 22/02/2017

Tim Smolcic, Programme Manager at Brickendon, looks at why financial services companies are moving closer to home

Offshoring was once seen as the future for financial services (FS) companies around the world. It was meant to be part of an unrivalled age of cost saving, fiscal and logistical efficiencies and advantageous market conditions. This apparently ideal business model initially provided companies across the FS sector with a competitive, efficient and economical system to relocate an array of day-to-day, primarily functional, roles to countries with lower operating costs and cheaper manpower. In reality the consequences of offshoring have proven more complex.

Companies which moved some or all of their operations overseas subsequently discovered that the relative lack of multi-skilled staff available could hinder the efficient technical and logistical solutions to which they were accustomed. They also realised that levels of education and the range of specialist training available are often not interchangeable with the standard in the country where the business is headquartered. This resulted in more management layers to carry out the same processes, while accompanying costs and time-management issues also increased – levelling the playing field compared to resources in high-cost locations. Consequently, increasing numbers of financial services companies reviewing their current practices are discovering that due to the additional hidden or unforeseen costs, offshoring can be several times more expensive than originally anticipated.[1]

Amid rising public discontent as a result of more services and operations being offshored – due to the accompanying loss of jobs and employment – more companies are becoming increasingly concerned by how their own offshoring practices are perceived by customers and employees alike.[2] Rising wages overseas and volatile foreign economies, as well as events like the vote to leave the EU and the rise of pro-nationalist politicians across Europe and the United States have also influenced companies reconsidering their operating processes.

New business models are emerging in response to these pressures and shaping the wider financial services operations mix. These new players such as rightshoring and nearshoring are providing businesses with the opportunity to return closer to home and relocate parts of their operations while also keeping costs at a competitive minimum and streamlining business processes.

Nearshoring

Partly in response to the backlash against offshoring, nearshoring has acted as a useful counterpoint to several of the main disadvantages inherent within offshoring. With this model, businesses are able to move their operations to a location closer to home that also provides a comparatively highly skilled-base, infrastructure and resources – all at a lower cost than the country of origin. Locations such as these typically operate in similar time-zones and have less cultural differences – allowing business practices to retain their original efficiencies and competitiveness. For example, companies located in the UK might choose to nearshore to other European countries due to them sharing similar laws and trading routes, such as “passporting rights”, while remaining close to London – one of the world’s leading financial hubs.

Another important point to consider is that the accompanying costs of transferring operations from a perceived low-cost to a high-cost region are often lower than originally anticipated. This is a result of the international presence of many companies who may already have an established presence in these areas. These pre-existing and highly valuable resources, assets and facilities can smooth the transition and simplify the processes involved with relocation. Another advantage is that these more efficient operational processes also save time and reduce overheads as well as cutting down on unnecessary costs. Moreover, the most significant benefits tend to come from the ability to source highly-skilled workforces more quickly than are generally otherwise unavailable or difficult to acquire in low-cost markets. This results in teams that are smaller, require less management structures, work faster and more efficiently while delivering workloads rapidly. This leads to lower operating costs for a comparable output as opposed to a bloated and inefficient low-cost team. Some organisations have discovered that when compared to low-cost locations, nearshore locations have been able to use a quarter of the staff whilst delivering results more quickly and efficiently.

Rightshoring – and the future

With growing numbers of companies across the financial services sector worldwide looking to balance costs and quality, new financial hubs such as Tel Aviv and Warsaw have emerged and are vying to attract the attention of potential businesses. Offering high-quality services with low overheads and operational costs, these mid-cost regions have positioned themselves as highly competitive and appealing areas for companies to consider outsourcing some or all of their business operations. Allocating the time and resources for strategic analysis and planning reduces costs, maintains quality and simplifies day-to-day business operations as opposed to offshoring thousands of miles from where a company is based. Rightshoring also strengthens managerial control and helps protect against overseas vulnerabilities – an increasingly important issue as the protection of intellectual property continues to be a growing concern within the FS sector. Rapidly improving technology means that new FS hotspots such as these are increasingly well-connected to global financial and communications systems in addition to regional resources and infrastructure.

While offshoring may have lost some of its appeal across the FS sector it is by no means finished. It remains the ideal option for specific scenarios where skills and resources in low-cost markets are readily available, such as testing. Rightshoring is also increasingly viewed as the optimum combination of local and foreign allocations of workforces and business operations. Domestic, financial and political factors – ranging from new regulatory requirements to growing competition from disruptive financial services providers – have motivated companies to reassess their outsourcing procedures and consider strategies that can help them deliver better quality more quickly, whilst maintaining a lower cost base than operating fully onshore. As the financial services sector continues to evolve at such an exciting rate, the trends shaping offshoring, nearshoring and rightshoring are by no means over – but a key issue to keep your eye on.

[1] Brickendon, September 2016

[2]The Guardian, July 2016