Financial services companies are currently capturing less than one-third of the potential cost savings offered by offshoring operations, according to a study by Deloitte Touche Tohmatsu (DTT).

The study found that the most effective offshorers among financial institutions have 6.7 percent of their global headcount offshore, well ahead of the study average of 3.5 percent. If all surveyed companies that offshore were to reach this headcount ratio, they could reduce their collective annual cost base by US$16 billion ﾖ more than tripling their current reported savings of US$5 billion.

However, the DTT report argues that too many financial services companies remain less than fully committed to offshoring, and therefore may not reach this higher ratio.

ﾓOffshore operations that aggressively expand their scope and scale typically deliver much higher returns,ﾔ said Chris Gentle, a Director at Deloitte Research and author of the study. ﾓ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 message is clear: donﾒt dabble ﾖ stay home if youﾒre not committed.ﾔ

The study concludes that expanding both the scope and scale of offshoring operations is key to realizing these unclaimed savings.

ﾑOffshore Fatigueﾒ
The study shows that the best offshoring results are often achieved during the first few months of operation, before declining through the first year as financial services companies confront the learning curve and struggle to increase scale. This trend reverses through the second and third years, with performance steadily improving as companies gain offshore experience.

However, according to the studyﾒs findings, many companies encounter an alarming drop-off in cost savings and quality after the third year.

ﾓRelentless margin pressure and intense competition have made offshoring a competitive necessity for most large financial services companies. However, offshoring should not be viewed as a simple cost savings tactic, but rather part of a wider drive for operational efficiency,ﾔ said Peter Lowes, the leader of Deloitte Consulting LLPﾒs Outsourcing Advisory Services practice. ﾓMany organizations are beginning to experience ﾑoffshore fatigue,ﾒ as the initial excitement wears off and the original operational managers return from their ﾑtour of duty.ﾒ It is vital that they are replaced with top managers of equal talent. It is also critical that some of the savings reaped in the early years are reinvested in the ongoing development of expanded offshore services.ﾔ

Other key findings:

Scale - cost savings rise significantly as organizations expand the scope of their offshore operations to multiple functions or full service. Financial institutions that move a single function offshore typically report average cost savings of 20 percent. Companies that offshore multiple functions enjoy savings of more than 45 percent.

Growth - offshoring is expected to continue growing. Financial services executives estimate that 20 percent of their total cost base will be moved offshore by 2010, a rise from the 10 percent expected in 2006. Similar trends are expected in relation to headcount, with 10-20 percent of financial services employment expected to be offshore by 2010.

Scope ﾖ nearly a quarter of offshoring institutions surveyed have only one business process currently offshored.
Deloitte Touche Tohmatsuﾒs third annual offshoring study is based on interviews with 62 global financial services institutions ﾖ including 8 of the top 10 by market capitalization ﾖ based in 12 countries. Of the 62 institutions surveyed, 33 are currently operating offshore, 9 are making plans to offshore, and 20 currently remain purely onshore. The full report is attached below.