Why banks will push ahead with offshoring

perspective Offshoring in the banking and financial services sector, like most industries, is an accepted and widely adopted way of doing business.

Throughout the 1990s financial services (FS) organizations quickly embraced offshoring. Organizations such as HSBC and Morgan Stanley set up captive shared service centers in locations such as Mumbai and Chennai for the provision of predominantly IT and transactional back-office functions including mortgage, credit card and loan processing. This early enthusiasm focused on standard, repetitive transactional processes.

Today the FS offshore market still strongly reflects its heritage--and take-up of offshoring more complex processes such as finance and accounts (F&A) has been minimal.

Given the current market turmoil, what lies ahead for this industry? Will FS institutions venture into offshoring processes that were previously retained?

To answer these questions, we must first look at why the FS sector lags behind others in offshoring F&A.

The first reason is that over the last few years FS organizations have had other priorities, primarily dealing with changes in accounting practices and regulations such as Basel II, MiFID and Sarbanes-Oxley.

But that's not all. While working on a recent U.K. bank engagement, three areas of risk were cited as barriers to offshoring: operational, compliance and reputational.

For operational risk, the safety and 'lock-down' functionality of technology, systems and data were cited as reasons for blocking certain types of offshoring. There was concern that remote offices are less secure. This location issue has, however, not stopped other banks from offshoring, so clearly this is not insurmountable. Fraud was also a concern and it was felt the increased remote nature and use of third parties extenuated the risk.

The compliance risk makes sense as the FS industry is fiercely regulated. There is increasing pressure for the sector to be more transparent and able to provide regulators and investors with meaningful investment information. Because top executives are personally responsible for compliance, they want to guard all work closely so they can ensure compliance and control.

Some organizations have taken innovative steps to minimize compliance risk. Credit Suisse, for instance, puts their management 'on the ground' at their offshored location, working alongside their third party provider. This relationship and contract is a success.

The reputational risk is based on the fear among FS organizations that if something fails, it could be detrimental to the brand. That's true, but the risk is not necessarily increased because a third party supplier is involved.

Despite all the reasons the finance sector hasn't widely adopted the offshoring of F&A, the climate is now changing.

You cannot open a newspaper or turn on the TV without hearing about the worsening economy and the government bailing out the banks.

The last decade has been a time of great success and profits for banks, meaning they have not had to focus on their cost base. However this is going to change. Over the next 12 to 24 months FS organizations will have conflicting pressures. There will no doubt be more regulatory changes (as a result of recent events) to implement but at the same time they will have to also address cost pressures too.

CFOs are going to have to make tough decisions. For those organizations which have not already done so, offshoring is an option to overcome both cost and resourcing challenges. Offshoring will be utilized not just to get the competitive edge as the likes of HSBC and Morgan Stanley did years ago, but to ensure these organizations stay in the game.

Recent events will increasingly focus attention to parts of the FS organization where cost savings and efficiencies can be achieved. F&A offshoring is an established market with a proven track record so is a sensible starting place. The current economic situation will result in boundaries being pushed and changes that were 'nice to have' becoming a necessity.

Andy Jones is a director with offshoring consultancy Alsbridge. This article was first published on ZDNet Asia's sister site, Silicon.com.