Changing the Offshoring and Outsourcing Equations

Changing the Offshoring and Outsourcing Equations

An article in Time Magazine of 22 April 2013 describes how manufacturing is making a comeback in the USA. It describes the characteristics of the jobs that are returning and reasons for their return. The reasons are:

  • The cost differential between skilled workers based in the US and skilled workers in traditional outsourcing countries like India and China has narrowed significantly;
  • The cost of transporting goods from the countries of production to consumers has increased and has approximately doubled in the last 3 years.
  • New manufacturing technologies such as 3-D printing and robotic production lines have been developed. These substantially reduce the need for manual human labour.
  • Greater use is being made of processors and sensors embedded in their products which can diagnose problems and communicate these via the internet to users and to the factory thereby facilitating the development of improvements.
  • Companies can react much more quickly to customer needs when they are connected with and close to their customers.

The characteristics of the jobs are:

  • They have a significant high tech aspect;
  • The employees are graduates and are well paid; and
  • The factories where the staff are employed are highly automated.

Whilst the Time Magazine article focuses on manufacturing, there are strong parallels in the financial services industry and similar changes are taking place there. Certain relatively complex tasks in IT, finance, accounting, actuarial science and marketing that were outsourced to low cost countries are returning to the US, Europe, Australia and other developed countries. As in the manufacturing industry, technological changes, communication challenges and changing cost differentials are driving the changes.

Technological developments include a huge increase in the number and capability of End User Computing tools. These are programs or applications that users rather than programmers can configure and use in conjunction with data readily sourced from the user’s company or the internet. They range from simple apps on iPhones, iPads or other smart phones and tablets to automation and analytical tools used by professionals on their PC’s. These tools enable users to automate repetitive tasks and provide analysis without having to program them or require the company’s IT department to set up large and expensive projects to develop data warehouses and supporting systems.

The reasons for the shift back from offshore or outsourced solutions for many more complex tasks in the financial services industry are similar to those for the changes taking place in manufacturing:

  • The cost differential between professionals in the US, Europe and Australia and professionals in India and China is closing rapidly. The cost of a programmer working for a multinational bank in India is now approximately 1/3rd that of a programmer in the US up from 1/10th a decade ago. According to Bundeep Rangar, the CEO of IndusView, an advisory firm, the total cost of IBM’s employees in India used to be about 80% less than that of employees in the US but the gap has narrowed to 30-40% and is reducing fast.
  • Rapid turnover of staff in outsourcing firms has led to additional costs and quality issues, especially where more complex tasks are involved.
  • New technologies have been developed that significantly reduce the time required to program or configure IT systems. These include cloud computing, End User Computing tools and applications and process automation tools. These can be configured and used very quickly (e.g. in days rather than months). This reduces the labour component required to set up, automate and maintain processes by 70 – 95%. By configuring these themselves, subject matter experts save significant amounts of time through not having to communicate requirements and specifications to others located offshore or deal with time zone and communication barriers;
  • Being web-based, and often provided on a Software-as-a-Service basis, these technologies facilitate the communication of problems to technology providers and the rapid resolution of these problems by the provider along with the provision of enhancements.

This does not mean that offshore or outsourced IT, finance or accounting functions will become redundant. As with manufacturing, there are many functions where the cost differentials and nature of the tasks will mean that it still makes sense to perform these tasks in that way. There are limits to the capabilities of technology and humans must still perform many tasks, but these are reducing. It does, however, make sense to utilise some of the new tools to automate processes, provide analytics and facilitate the workflow of processes that are complex to communicate, change periodically or can be configured in days rather than months.

Examples of processes in the financial services industry that may warrant on-shoring again are:

  • Data warehouse development and management;
  • Accounting and consolidation of financial information in multiple general ledger systems;
  • Travel and expense approval and payment;
  • Actuarial valuations and statistical analyses; and
  • The preparation of client reports.

For smaller or mid size organisations that do not have offshore or outsourcing arrangements in place, the new technologies provide companies with a highly cost-effective means to match or better the  efficiencies that only big multinationals could previously achieve through the scale or these arrangements.

For example, it is now possible to achieve widespread automation of company-wide reports, build a data warehouse and provide management dashboards in less than 3 months and a third of the cost of building these using traditional tools in offshore IT organisations.

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