Offshoring in Banking
The practice of offshoring is becoming increasingly popular among the international business community. This process implies the relocation of the entity business processes from one country, most popularly from the country where the entity is typically registered, to another country. Both manufacturing and the supporting processes like legal services, accounting or auditing can be conducted on the offshore basis. Nowadays, even the national governments are reported to ubiquitously use this option of business optimization.
The main economic logic behind the offshore operations is to reduce the overhead expenses incurred by the business entities in the business cycles. Initially, the practice of delegating specific business processes offshore was strongly associated with the relegation of the informational technology services because typically the domestic costs of such services in Europe, the USA and in Australia were comparatively higher than the costs of similar services conducted in India, Pakistan or China.
The objective of this report is to provide a detailed analytical review of the offshore operations in the banking sector of Australia, with the illustrations taken from the practice of Western Pacific Australian bank and financial service provider located in Sydney, Australia. The report is structured into three parts. Part A provides an insight into the conceptual definition of offshore, illustrates the peculiarities of financial services of offshoring in the Australian financial sector, outlines the driving factors which impel the financial institutions to go offshore, speculates on the available viable alternatives to this practice and concludes on the most efficient and effective alternative.
The second part of the paper analyzes the key requirements which are necessitated by a financial institution to succeed in the implementation of the offshore business delegation. In particular, this part links to the analysis of the processes and resources required to operate on the offshore basis, it analyzes the key risks associated with doing business this way and outlines the financial issues involved in the process.
Part C of the paper discourses about the decision-making process. More specifically, this part explains the key difficulties typically encountered by the business owners and top management of the financial institutions while deciding to relegate some business processes to the offshore country. Another message of this part is the options that are available for the company owners to measure the successfulness of particular offshoring operation. The final part of this chapter concludes on the most effective method of decision-making procedures.
The report is culminated with the conclusion analyzing the effectiveness of the offshore operations currently launched by the Australian banking sector.
The Concept and the Practice of Offshoring
Conceptually, offshoring is defined as the relocation of the company business processes from one country to another, where the particular elements of the business environments are more favorable for the needs of such processes. The main objective of offshoring is cost-reduction, also known as labor arbitrage. Typically, this practice leads to the creation of the new job in the destination country, whereas the layoffs are usually observed in the domestic country. Such practice demonstrates that the overwhelming majority of the European companies are less willing to implement offshoring strategies in the business cycles than their counterparts from the United States and Australia primarily because of the existing legal limitations and enormous cultural barrier between them and the major offshoring centers.
Currently, massive dismissals and salary package diminishment in the developed countries have sparked unprecedented criticism to the rising practice of offshoring. Australia is not an exception to the statistics. The overwhelming majority of the financial experts vigorously argue the fact that the quality of the newly created jobs in the developed countries are of considerably lower level than those that have been relegated to the developing countries, not to mention the decreasing pay . Moreover, the openings of this trend actively speculate on the fact that the national governments extensively follow the practice of currency manipulation, and their central banks deliberately generate the differences in labor, hereby making an illusion of comparative advantage creation.
The unanimous opinion of economists that the so-called safe jobs, meaning those in research and development, technology, scientific research, mathematics and engineering, have become especially imperiled in the developed countries, since the qualification and experience of the workers in offshore countries are reported to be of adequate level.
The anonymous survey conducted in Australia illustrated precisely that approximately 12% of the interviewed certified public accountants reported that their employer delegated some types of accounting of financial activities to offshore countries. All four major banks that currently operate in Australia reported to follow the similar practices. Nowadays, finance and accounting are reported to be the second mostly offshored activities, trailing the dynamically developing informational technology sector. To illustrate, 15% of the questioned practitioners reported that their employer delegated information and technology functions to the overseas partner. Apart from these activities, manufacturing, call centers, product design, research and development, and human resources were reported to be among the most popular activities as well.
Several comparative studies conducted by the sword and scholars suggested precisely that the Australian companies offshore the large amount of their business activities to the developing countries. However, with regard to the financial services, offshoring the Australian business entities are reported to lag significantly behind the United States and European competitors.
The overwhelming majority of the activities are offshored to Japan, the countries of Western Europe, the United Kingdom and the United States. As far as the banking sector is concerned, the United States remains the most trusted partner for the Australian banking institutions.
Offshoring in Banking and Finance
With regards to the banking sector in Australia, specific remarks should be raised before the paper is advanced further. Firstly, off to the eruption of the recent global financial crisis, the banks become additionally protected by the free deficit insurance guaranty, making them immensely profitable institutions. Recognizing the fact that a huge portion of the staff has been dismissed because their functions have been outsourced to India, the United States or to the countries of Western Europe, the chief executive officers become remunerated at very high levels, including hefty corporate bonuses and other payments. This practice seems to be in direct violation of the bank institution's social responsibility functions.
The economists anticipate that more than 7000 banking jobs in Australia can be lost within the upcoming two years, as reported by Westpac bank. It may happen because the huge amount of banking operations are moved to India, to the Philippines, to Malaysia or other countries, where the services are cheaper and of sufficient quality.
Nowadays, the company is reported to serve more than 12 million customers in Australia and New Zealand, being considered one of the largest branch networks in Australia. More than 3000 automatic teller machines are located throughout Australia for the needs of the customers. It is the second-largest Australian bank in terms of assets owned.
In November 2011, the bank officials recognized that specific portion of the banking operations will be pushed offshore with the objective to reduce the operational costs and to increase the productivity of the institution.
Controversies and Concerns
After the analyses of the recent financial crisis repercussions, the unanimous opinion of the academic and business communities of the Western countries attributed the heavy public criticism unleashed on the offshore companies. In accordance with the public viewpoint, the auditing, informational technology, legal and other companies operating in India significantly worsened the financial environment in Australia, making the companies unwilling to engage in such operations. A number of surveys conducted in the United States of America revealed the fact that 90% of the Americans were strongly opinionated that the practice of outsourcing and outstaffing leaves more and more people unemployed. European countries are known to explore the practice of offshoring less than the United States or Australia because of mandatory government restrictions and cultural barriers.
Moreover, it is vigorously debated that supply chain management becomes more vulnerable, and companies lose control and visibility if outsourcing procedure is initiated. A number of polls conducted among the Australian companies illustrated explicitly that in 41% of the cases the company operational managers reported the loss of control and functions if overseas offshore services provider becomes involved into the business cycle of the entity.
Secondly, it is vigorously debated that the delegation of specific responsibilities is invariably connected with the transfer of knowledge and professional expertise outside the country. This practice is likely to lead to the emergence of the new competitors to the regional companies. For instance, the Woody's Chinese producers are now reported to distribute commodities among the overseas customers directly, without the intermediary services provided by the domestic partners as it has been done previously. In 2006, the Chinese producers, which have been previously contracted by the United States companies to manufacture specific elements of the vehicles, announced that they start their own competition with the United States producer on the domestic market.
To recapitulate this message, the professional expertise is voluntarily given to the overseas partners, and the banking institution is reported to be among the most vulnerable in this regard. Simultaneously, with the increase of production in the foreign market, experience and qualified domestic employees are automatically forestalled their occupations. In Australia, the overwhelming majority of them are reported to lose interest permanently, either changing their professional profile or taking premature retirement. Therefore, the domestic market becomes automatically dependent on the stability of the foreign market in terms of offshored commodities or services. To illustrate, if the state authorities of Philippines impose specific restrictions on the way the financial services providers operate, it will invariably affect the Australian market.
The Reasons to Go Offshore
The fact that the companies go offshore is undisputed nowadays. The main objective of this part of the paper is to analyze why such decisions are taken by the company owners and what effect can be expected from them.
The primary motive behind such decisions is typically cost-reduction. To be more specific, the pay rates in Australia are comparatively higher than in the outsourcing centers. To illustrate, a typical credit risk officer in India is expected to receive approximately AU$6,000 per year, whereas a professional with the similar qualification is expected to receive AU$60,000 per year domestically. These cost discrepancies provide a persuasive rationale to push this type of financial services offshore from Australia. Moreover, the dramatically developing informational technology industry makes it possible for the business units to outsource job activities, while no extra expenditures are needed to cover the transaction and communications needs.
Secondly, considering the fact that more financial resources are economized because of the use of overseas workforce, which is considerably cheaper than the professionals employed domestically, the company can consider new investment opportunities (Keating et al, 2008). To be more specific, high-profile specialists can be hired to reinforce the week departments of the company, or larger dividends can be shared among the shareholders. Another opportunity available includes the possibility of hiring more professionals, therefore significantly increasing the productivity and profitability of a typical bank institution.
Secondly, the overwhelming majority of the practitioners who operate in offshore jurisdictions classify themselves as tax neutral. In other words, the operations that are subjected to the highest rates of taxation in Australia are in no way taxed in the offshore jurisdiction. That means that the company is automatically exempted from the high financial obligations to the state, and therefore larger amount of financial resources become available.
Thirdly, some professionals may not be available on the domestic market, or their costs can be extremely high or even unaffordable for a particular financial institution. Offshore labor centers therefore become at lucrative option for the companies operating in the different fields of the financial sector. Furthermore, the practice demonstrates that sometimes the services that have been outsourced to the offshore divisions of the company are performed more professionally and speedily, although it sounds paradoxical. However, the specialists located in India, the Philippines or somewhere else become exceptionally professional in a specific industry, suiting effectively the needs of those certain contractors and the employees hired domestically.
Besides, it is important to accentuate the fact that the professionals hired in India, China, the United States and in the other major outsourcing development centers are typically more dedicated and committed professionally than their colleagues who operate domestically. This fact is primarily attributed to the fact that Australia is ranked among the most developed countries, and the working habits and job expectations of the Australian employees are significantly higher than of those who currently reside in the developing countries. This fact implies that the outsourced professionals are ready to work extra hours without extra pay, which is especially important in the financial sector. For instance, the unanimous opinion of the scholars and practitioners is that sometimes the banking institution is requested to work overnights. For the majority of the Australian employees, this practice signifies 200% payment bonus in accordance with the Australian financial and labor legislation, while for the professionals who reside in India, average rates should be paid and the time is of no importance. That means that the financial resources needed for unforeseen operations can be substantially minimized if the financial work is outsourced somewhere to India or to the Philippines.
One of the major external advantages that urge those certain companies to hire overseas partners for the completion of specific financial activities in the offshore jurisdiction is the possibility of simplified dispute resolution. To illustrate, the process of dispute resolution in Panama or in India is considerably more simplified than if the litigation takes place in Australia. Therefore, hiring the overseas contractor can help the company to circumvent legal difficulties which arise with the domestic customers. To illustrate, for an Australian citizen to litigate the case dealing with his financial deposit in the Australian bank in the arbitration institution located somewhere in Mumbai or in Calcutta is expensive and not reasonable financially because the course of litigation may exceed the amount of the claim.
The Alternatives Available
The most viable alternative currently available to the Australian business community is continual process improvement. In other words, in contrast to the popular practice of offshoring and outsourcing, it is proposed to invest in the development and enhancement of the currently implemented business practices (Chang 2007). To illustrate, the existing staff can be additionally trained and their salaries can be reduced subject to their assent. Surely, this practice is likely to be opposed by them, but in the long run, this perspective seems to be more ready for the Australian professionals than the imminent layoffs and dismissals because of the decision to outsource specific financial activities to India, Philippines or other countries. Moreover, this practice is found consistent with the promulgated social responsibility and corporate responsibility policies of the leading Australian financial institutions.
From the legal perspective, continual process of improvement is regarded as more favorable opportunity than offshoring and outsourcing. Indeed, in order to outsource specific activities, sometimes, the approval of the financial authorities is required, whereas continual improvement processes are in no way connected with the obtainment of such permissions.
Moreover, the financial community has many times expressed their concerns that improving domestic quality is more beneficial than hiring overseas professionals because the process of quality enhancements can be effectively monitored and intervened if necessary, hereby ensuring the compliance with the customer's expectations. On the other hand, the overseas partners typically complete the order services in full accordance with the order description, signifying that under specific circumstances the needs of the clients can be overseen by them. Moreover, other types of risk associated with outsourcing, such as poor quality of the product, product fabrication, delays and nonperformance of the order, also imperil the ultimate execution of the business cycle.
With regard to disadvantages associated with the continual approaches of quality improvement, the need to incur significant financial expenditures is positioned as the highest. Indeed, their payrolls cannot be curtailed; otherwise, the protests and other forms of opposition from the labor unions and other employees’ rights activists are likely to spark.
As far as processes and resources required to implement the discussed outsourcing to the offshoring country's strategy are concerned, a lot of resources are needed to implement the strategy from the practical perspective. Typically, these resources are classified into the financial and nonfinancial categories.
Financially, the money is needed to outsource specific financial activities. It is important to mention the fact that the financial costs needed for the procedure are in downturn classified into two groups, the direct and the consequential expenditures. Direct expenditures are those financial payments which are to be exercised to the banking accounts of the contracted parties, i.e. this payments are their fees. In order to make a particular outsourcing operation profitable, these fees must be significantly lower than the payments offered to the conventional employees hired on the territory of Australia. To illustrate, hiring a typical financial consultant with no previous work experience costs about AU$45,000 domestically and approximately AU$5,000 if such a professional is hired and trained in India, in the Philippines or other outsourcing destination. If the outsourcing financial services provider has been decided on meticulously and with due care, it is reasonable to expect that the quality of the delivered services will be consistent with the expectations of the Australian customers.
Secondly, the group of consequential expenditures involves the financial resources needed to cover the payments connected with the choice of the proper outsourcing partner. The problem of choice is positioned among the cornerstone problems faced by the Australian business and financial communities in terms of financial outsourcing. The statistical evidence is explicit in this regard, demonstrating that if business negligence during the process of horses’ partner selection took place, the delivery of the high-quality services becomes automatically endangered. Practically, in 17% of the cases the delivered product was not fit for the use of the Australian companies, which has resulted in future financial losses incurred by the institutions. This problem is typically encountered by the financial community when the discussed consequential financial costs are economized and the overseas partner is hired on the ad hoc basis, meaning that the professionals are not involved in the process of selection, but the partner is decided on by the company management team.
The Need for Sophisticated Performance Management
However effective the performance of this business unit may seem to be, the need to incorporate brand-new management and performance evaluation measurement solutions became evident in the 90s. To be more exact, with the rapid growth of the company’s managerial procedures, the performance monitoring and evaluation has become excessively resource and time-consuming. It was estimated that approximately 22% of the company revenues were spent to cover these expenses, while this practice is considered inconsistent with the existing business standards. For instance, Microsoft spends 3% of the company’s accrued revenues to meet these needs, while international legal giant Baker and Mackenzie is reported to allocate 5% of the annual revenues for those needs. Moreover, with the advent of technological revolution, the competition has been greatly intensified, and sales strategies developed and utilized by the firm required additional financial resources which should have been reallocated from the managerial section. Addressing the most effective solutions in this context, computerization and simplification of measurement process is strongly advised by the company counselors. Following this guidance, Balance Scoreboard system and Six Sigma project have been integrated into the business cycles of the discussed commercial unit (Mankiw & Swagel 2005). Overall, it is reasonable to recapitulate that this paradigms condition the emergence of those projects within the company framework. First and foremost, the need to control the efficacy of financial resources utilization became a dogmatic issue. Although strategically the resources were spent properly, on a tactical level, the management was reported to be poorly performed. Secondly, the use of technology generated the second reason of the discussed solutions integration. To be more exact, multiple technological tools were proposed the company engineers for subsequent implementation, and it is necessary to identify which ones were successful and which ones were not. The discussed balanced scoreboard system enabled the managerial staff of the company to analyze this information on the basis of six things and provide reports, which integrated financial and nonfinancial findings in a single form, and therefore the opportunity to take prompt business decisions became available.
The Measurement of Success
Balanced scoreboard system is one of the most modern solutions integrated into the business paradigm of the company. After intense deliberations in the company’s board of directors, the decision to implement this performance measurement system into the company business cycles was taken in 2005, before the global financial recession. A particular point of contention was whether it was necessary to develop customized software or to replicate the existing ones. Having analyzed the situation, it was ultimately decided to contract a software company for the development of the customized solutions; in 2007, the company management successfully launched the system into implementation with the help of international software development company Data Art.
Financially, new report and system enabled to control financial flows more effectively and to identify pecuniary leaks, namely, the expenditures which can be reasonably reduced or totally eliminated. To be more exact, several advertising partners of the company were dismissed primarily due to the fact that their advertising campaigns practically brought no results, since the sales were not increased as a result of their promotional activities. Secondly, in-house promotion campaigns were also diagnosed profoundly and respective conclusions have been made. In particular, it was found out that web-based advertising was more effective than conventional tools. 67% of the company’s sales could have been reasonably attributed to Internet-based marketing, while the remaining ones are linked to traditional advertising techniques. The survey conducted by the company in 2009 revealed that 71% of company sales are conducted online, and approximately 32% of the company customers are attracted to the company distribution units by means of online marketing. However, it is necessary to highlight that this practice differed significantly across various countries. The most technologically advanced was the population of Germany, where about 81% of all transactions are connected to the Web directly or indirectly. The most conservative was the population of China, where successful online marketing advertising campaigns contributed to 11% of the successful transactions. Overall, it can be reasonably recapitulated that in condition of diversified online marketing, the business results can be highly impressive. In the context of this paper, it is necessary to highlight the fact that the entire Internet-based advertising and marketing activity of the company is analyzed and aggregated by the Balance Scoreboard system and the results in the succinct and concise form, but detailed reports are submitted directly to the management.
Moreover, it is necessary to point out that the resources management and control has been profoundly positively affected. As far as human resources paradigm is concerned, it is necessary to accentuate that the individual performance of an employee is monitored more effectively with the application of balance scoreboard system, namely, monthly reports are automatically generated and submitted for the analysis of the company managers. Upon the receipt of such report, the manager can make conclusions whether the employee meets the standards of the position he occupies and what enhancements and professional growth procedures can be taken in order to increase his personal productive capacity. Besides, it is relevant to highlight that these solutions will be positively acclaimed by the company employees, while nowadays their personal evaluation forms are easily accessed. In other words, an employee can analyze his professional performance him- or herself, adjust to the needs of the company, and therefore solidify his or her particular professional skills and extend the knowledge on specific subject within his or her competence.
The application of Balance Scoreboard system was positively received by the critics and by the competitors of the company, who immediately started to imitate the solution. The critics and multiple domestic and international analysts have remarked that with the launch of effective measurement and control system, the company managed to increase its revenues by 3% annually. Irrelevant workforce was laid off, while specific specialists required to augment the areas of the company activity were hired. In particular, a number of in-house software developers and optimizers have been employed to intensify online-based marketing of the firm. The need to reinforce this area of merchandising was an identified help of balance scoreboard performance measurement system. Although the opinions in this regard vary significantly, it is reasonable to assume that these policies contributed significantly to the effective tackling techniques used by the company to weather their 2008-2010 financial storm. It was reported that the company revenues declined by 2% during the financial recession, and it is legitimate to speculate that Internet sales virtually saved the firm from further layoffs and other cost-reduction procedures.
Six Sigma Implementation
Six Sigma-based technologies were implemented to the company operational framework in 1995 and gained extreme popularity among the company managers immediately (Farey-Jones, 2010). The technology primarily targeted top management and middle scale company managers. Practically, customized software was developed by the company informational technology partners, which enabled to collect the relevant business data both domestically and from overseas points of the company’s location and distribution. Geographically, the company’s operation was divided by regions. Upon the collection of the findings from European, American, Asian, and African markets, the general report was submitted to the Board of Company Directors in Australia and respective managerial decisions were taken. The problem was formulated as whether the company’s presence in this region was sufficient. The necessary task force for the implementation of the project was assigned and the research conducted. Having accrued the data from the stores that had been already opened in Germany, it was eventually found out that it was necessary to launch a new store in the capital. The entire operation took 23 days, while traditionally it could have been finalized in no less than three months. This case evidences precisely the efficiency of the discussed Six Sigma performance measurement solutions.
Overall, the global positive impact of this toolkit implementation is tremendous. Within the period of 10 years of this program implementation, the revenues of the company were increased by 59% annually. These figures were insignificantly staggered by the repercussions of the recent financial recession 2008-2010, but the company managed to recuperate effectively, leaving its major competitors behind. The company reports manifested that within two recent years of this program implementation, the company increased its accrued revenues by 7%. Overall, it can be legitimately recapitulated that the financial performance of the company has been greatly improved since the Six Sigma system was introduced in 1995.
The second area of positive contribution can be identified in the fact that resource consumption has been greatly reduced. In particular, raw materials necessary for the production of furniture have been curtailed by 11%. This practice has slightly deteriorated the relations with the company suppliers, but in the long run, the revenues of the company increased significantly. Moreover, in 2001, the relations with the major suppliers have been stabilized due to the fact that the average quotas were normalized, while the output produced by the company was increased by 7%. The utilization of this system has exercised tremendous positive impact on human resources policy of the company. This staff has been curtailed by 3%, while the same productive capacities were demonstrated. Naturally, the critics have vehemently spanked this policy, since it was found completely inconsistent with the company’s ethical regulations and standards developed by the International Labor Organization. However, judging from the business perspective, the policy was a success, since the reduction of the staff increased the monetary influx. The dividends increased, and automatically, the shareholder satisfaction and trust to the company management was greatly solidified. Practically, a significant number of last line managers were laid off, due to the fact that concise but very informative reports generated automatically were considered sufficient by the middle-line management team, and therefore no last managerial activity was required (Farey-Jones, 2010). Previously, the company employed versatile outsourcing analytical enterprises to evaluate current business performance, while nowadays this process has been absolutely automatic, and therefore the funds were economized and turned into profits.
Specific divisions of Six Sigma team had been assigned to monitor the existing technological environment. Brand-new solutions elaborated by domestic and international research units are analyzed and immediately integrated into the business cycles of the company if found effective. To illustrate, cutting-edge software replaced the existing one in the company assembly lines in Denmark. The assembly line software was replicated from similar institution in China. With the help of the Six Sigma research team, the license was granted by the Chinese colleagues and the quality assurance and supervisory procedures standards have been enhanced greatly. Practically, it resulted in quality increase and therefore customer satisfaction and loyalty solidification.
However, the most important impact is to be located in time resources section. For instance, an average market evaluation operation lasted from 15 to 17 days, while nowadays it is carried out in 4 to 10 days, since previous experience on these markets is automatically analyzed and integrated into the reports. It is necessary to accentuate the fact that market analysis procedures have become insignificantly more linked to professional manual operations, since ultimate decisions are made by the humans. Extra analytical departments have been hired in order to process the automatically aggregated information, and this policy was highly favored by the labor unions.