Nearshore, onshore or offshore for investment banks?
Some of the UK’s largest financial institutions are increasingly onshoring and nearshoring work to locations such as Scotland, Ireland and the north of England – and for good reason. Not only has the cost of offshoring to India and other ‘low-salary territories’ increased in recent years because of wage increases in these areas, but many of the costs associated with offshore project management have gone up as well. As a result, some of the major investment banks are seeing their margins shrink considerably as costs in India and other popular offshoring locations continue to rise.
Of course, there is still no comparison between labour costs in the UK and the most popular offshoring destinations; it is still much more expensive to hire UK workers compared with Indian workers performing the same role, for example, and it will be that way for some time. However, this gap is narrowing and will continue to tighten as the result of increased market competition in these regions.
The reasons behind this change are clear. Many global firms have now opened up offshore centres in India, and many large Indian companies are using these same resources as well. As a result, there is no shortage of work in these areas at the moment, which means that local workers now have the opportunity to shop around for the very best pay and conditions. That’s good news for them, of course, but this new dynamic will have a significant impact on a bank’s bottom line, since rates of pay will no doubt continue to climb in this region.
Along with these rising costs, there are also a number of practical challenges associated with offshoring. For example, some UK banks have been disappointed by the lack of visibility and accountability provided by their offshore partners, either because of logistical/timezone challenges, inaccurate metrics or incompatible IT systems.
Cultural differences have a role to play here as well. In many cases, IT experts in the UK are happy to be exactly that: IT experts. Within the domestic IT market, there is nothing wrong with writing code for 20+ years, since UK IT workers put a great deal of value on gaining knowledge and becoming a true technical expert in a particular area.
In India, however, there is a much stronger emphasis on moving into management. In fact, anything else can be perceived as stagnation. As a result, there is a continual need for management career progression and backfill and training of new subject experts – all of which places an overhead on the offshore organisation. Some banks have taken a proactive stance to respond to this cultural dynamic, taking advantage of the opportunity to place the end-to-end managed lifecycle for IT projects offshore and locate senior managers in offshore locations. To support this strategy, IT management training centres have been established by a number of institutions in India.
The IT systems used by investment banks have a role to play here too. Front office operations are becoming increasingly complex, and it’s now more vital than ever before to support and develop business-critical applications – such as risk calculations, profit and loss, and collateral management – in real time. As such, banks are finding it very appealing to have these applications supported in the same timezone as their business, since they rely on this information to make immediate and informed decisions. Many financial services organisations are starting to build global teams that can offer different services and skills in many different areas, whether that means Poland, Ireland or the Philippines. With this approach, banks can take the same ‘follow the sun’ approach that has allowed other global organisations to benefit a 24/7 working schedule for decades now, with regional centres in the Philippines on hand to serve the Asian markets and other centres in Brazil to handle the US markets, for example.
Considerations like these are important, because the real goal for today’s banks – even more important than cost control – is operational efficiency.
As a result, many investment banks are refocusing their attention on nearshore and onshore locations as a way of streamlining their operations and tightening their internal controls in order to take advantage of this changing global market. Banks have also decided to extend their operations in locations that are closer to home as way of lowering the complexity of their operations, reducing the risks associated with offshore outsourcing, and making sure that they have the right capabilities to hand to support an increasingly real-time global business.
For example, by choosing an IT site that is based in the UK, compared with China, banks can benefit in a number of areas: reduced language barriers and cultural issues, everyone working in the same timezone, closer collaboration between teams, and better control over data security. There may be government incentives, as well, to attract businesses to particular parts of the UK in order to create more jobs and stimulate the economy.
Plus, when a nearshore site is a simply a car ride, train journey, or even a short flight away, complex projects will benefit from a more collaborative development process. By comparison, disruptive long-haul trips to far-away places can be extremely inconvenient, as well as expensive, which can lead to a vicious circle of postponing meetings as long as possible, thereby creating yet another obstacle to relationship-building and understanding key cultural issues.
Even though nearshoring and onshoring will never replace offshoring completely, a strategy that brings nearshore and onshore partners into the mix can still offer enormous benefits, since face-to-face contact, regular ‘town hall’ meetings and timely feedback are much easier to achieve with this model. For this reason, proximity and shared timezones are probably one of the key benefits of this model, along with access to available talent, since banks who choose to onshore or nearshore may not be competing with every other large company to attract the best local talent (for now).
Above all else, modern investment banks need to have the ability to improve their business agility and to alter their working practices very quickly, especially when it comes to complex development projects that require high levels of communication. Instead of worrying about misinterpreted requirements, missed milestones and the need to deal with problems from afar, banks that choose to include onshore and nearshore partners as part of their global team will find that frequent, real-time communication can help to deliver the operational efficiency that they seek.
About the Author
Andrew Marshall is a partner at Crossbridge (www.crossbridge.co.uk), the financial markets consultancy. Andrew specialises in risk management and large-scale change initiatives that span organisational boundaries. Andrew’s recent client work includes a major technology cost-efficiency programme with a significant offshore element and the setup of a captive offshore IT management training facility.