Moving jobs to developing nations, already fairly common among U.S. financial services companies, is expected to increase dramatically in the next three years.
Though much criticized during last year’s presidential election campaign, “offshoring is not dead,” said Paul Horowitz, a partner at PricewaterhouseCoopers and the U.S. leader of its technology and outsourcing services.
Quite the contrary, according to survey results the company released last week.
It had asked 156 banking, insurance, and real estate executives around the world what percentage of their organizations’ “head count” was offshored and what they expected the figure to be in three years.
One quarter of the respondents said they offshore 11% to 20% of their jobs. Nearly half said they expect to be doing the same in three years.
The figures were much lower for banks. Of the retail bank executives polled, only 2.6% said their companies have offshored 11% to 20% of their jobs — but 12.5% said they expect to do so in three years.
The figures were similar for the U.S. executives among the respondents, Mr. Horowitz said. By “offshoring” his firm meant all employees in developing countries, including those of joint ventures and providers of outsourced services, he said.
Offshoring does not yield huge savings immediately, Mr. Horowitz said. “It actually costs more the first year or two,” he said. “This is all about a long-term plan.”
Many financial services companies are already pursuing multiyear plans for moving certain business functions to lower-cost locations, especially India.
IndyMac Bancorp Inc. of Pasadena, Calif., for example, began an offshoring program last year, engaging Indian vendors to handle certain mortgage-processing and software development functions. The company projected in May 2004 that it would have 1,500 jobs offshore by 2008.
“I insisted we would not displace one single U.S. employee to offshoring,” said Ashwin Adarkar, the executive vice president of corporate strategy and marketing at IndyMac and the chief executive officer of its consumer bank and corporate development, in an interview Tuesday. Indeed, while the company now has 450 workers in India employed by vendors that supply IndyMac, it also has increased its domestic employment by 20% in the past year, to 5,300 jobs, he said.
“We’re not focused on offshoring. We’re focused on productivity improvement,” said Mr. Adarkar. “We invested a lot of time in developing a strategic plan,” deciding what processes to move offshore, in what order, and with a keen eye on selecting the best vendors to provide specific services.
The online lender E-Loan Inc. of Pleasanton, Calif., said in February 2004 that it would offer its customers a choice — the company could send their loan applications to India for processing in 10 days, or customers could choose to have their loan applications processed in the United States, which could take 12 days.
Tiffany Kelley Fox, a spokeswoman for E-Loan, said that since the program was introduced, 87% of customers have allowed their loans to be processed overseas.
“It’s remained pretty consistent,” said Tiffany Kelley Fox, a spokeswoman for the Pleasanton, Calif., lender. “Customers don’t seem to have a problem with it.”
But as more jobs are shifted to other countries, careful planning and long-term discipline are necessary to manage workers who may be halfway around the world. “Companies have not been as strategic as they ought to be,” said Madhavi Mantha, a senior analyst at the research and consulting firm Celent Communications LLC of Boston. “In the past companies would take a narrow function that might not have been run particularly efficiently and would throw it over the fence to a third party. It was very much tactical.”
That is changing because the Internet makes information available to workers wherever they are, Ms. Mantha said. So companies are looking not only at lower cost locations, but also at the “domain expertise” of the providers they work with. “Sometimes the right location may be Topeka. Sometimes the right location may be Chennai,” she said.
Wachovia Corp. of Charlotte has taken a measured approach to its Indian outsourcing projects, after announcing in January that it planned to cut $1 billion in expenses by 2007, eliminating up to 4,000 jobs in software application development and maintenance.
Doug Caldwell, a Wachovia spokesman, said Wednesday that the company may shift some jobs by the end of the year. “Wachovia is taking a very methodical, deliberate approach to this process,” he said.
Indeed, banking companies have in some ways led the way in using workers in developing nations to gain cost advantages. Citigroup Inc. of New York and its corporate predecessors have been active in India since at least the 1980s, and ventures that it spawned, now known by names such as i-flex solutions ltd. and Polaris Software Lab Ltd. have grown to become globally competitive vendors.
Other banks have taken different approaches. When ABN Amro Holding NV announced plans earlier this month for a five-year, $2.2 billion technology outsourcing project, it selected three Indian vendors to reduce the number of providers it had to manage.
As Lars Gustavsson, Amro’s chief information officer, said at the time, “We decided to direct more volume to fewer vendors.”
