Sep 30, 2014

During the late 1990s and into the 2000s, banks made strategic decisions to relocate certain processing functions away from their traditional metropolitan hubs, into lower cost locations. These remote locations enabled the firms to benefit from a large well-educated workforce at a lower cost than their metropolitan teams. This relocation of functions is described as “off-shoring

Some organisations went a stage further. In addition to transferring the functions to low cost locations, they also transferred the management and responsibility of providing the function to a 3rd party utility. This complete transfer of responsibilities and management, in return for a fee is described as out-sourcing.

Both operating models have their benefits, but some years on and with organisations continually moving functions from one provider to another or one location to another, have the benefits been realised and more importantly are these the only two models available?

Many organisations struggle with the processing quality and operational control of their de-centralised functions.  Examples of the challenges include:-

  • Extended processing times (compared to its previous onshore function);
  • Higher error rates and more importantly, resolution of errors takes longer;
  • The vendor’s lack of specific business and processing knowledge in respect of the client; and
  • Higher attrition rates in the low cost location due to wage inflation and an illiquid experienced resource pool.

Whilst it is true that much of the above is due to vendor performance, in most cases, offshore hubs have adequate, often excellent credentials and expertise.  In most cases, banks have implemented detailed, disciplined transfer plans. For example, everyone in this space acknowledges that it makes no business sense to lift and drop poor, non-performing functions into an external vendor or location. It just moves the problem, it doesn’t correct the problem.

Over time, firms have become competent in offshoring and outsourcing functions. It is now relatively commoditised, but what happens when, like many others, you have tried everything? Regular meetings, detailed process reviews, effective communication. Why is youroffshore process failing? Organisations soon realised that there needed to be an alternative.

With businesses becoming more complex and many firms still coming to terms with increasing regulation, it is becoming apparent that there is not a “one size fits all” model. We believe the model needs to be a hybrid of different support structures. Outsourcing is perfectly set up to manage large volume, low latency, low error businesses. These functions are best placed with established outsourcingproviders and business examples include futures clearing, fixed income and cash equities.

Offshoring is best utilised where more “hands-on” support is required or where control must remain with the trading firm. Typically, banks have off-shored their vanilla OTC business support. OTC confirmations and settlements are good examples of slightly more complex functions, but functions that over time have become largely automated.

The final component of the optimised model is Nearshoring: Nearshoring is the relocation of tasks and functions away from the metropolitan location to another location either within the same country, or to a nearby country within the same time zone with a similar culture and similar language capabilities.