What effect does outsourcing to india have on a lender’s operations?

Opinion is divided on offshoring and our experts believe tight control must be maintained closer to home to reap the benefits

Companies must have the freedom to choose where to locate to maximise their competitive advantage.

The financial services industry has been in the vanguard of the trend to outsource to the sub-continent. When HSBC first outsourced some of its call centre operations to India chief executive Keith Whitson claimed overseas staff provided a better service than UK workers. Is he right? I don’t think so and I’m not alone.

A TowerGroup study challenges claims that US firms which outsource mortgage processing to centres in India will cut costs by up to 50% and predicts lenders offshoring loan origination processes will be able to cut costs per loan by just 6% by 2008. The research shows firms will not perform true end-to-end loan processing in India. In the origination process, firms will offshore data entry, document and data verification and quality control. In the servicing process, customer support and collections are likely to be offshored.

TowerGroup says cost savings may be possible for individual sub-processes but the creation of new facilities, additional overhead costs and offshoring of only a percentage of loan processing will limit average savings to far less.

According to Deloitte, companies quick to participate in outsourcing are now bringing operations back inhouse after realising they could be provided better – and in some cases at a lower cost – internally. Expected cost savings did not materialise for almost half the respondents to its survey.

And even after taking all that into account a critical problem remains – security. No matter what measures are put in place the problems associated with transferring banking details in a secure fashion to and from offshore centres is fraught with danger. Outsourcing is the fashion of the moment and you know how fickle fashion is.

Many organisations have found that by outsourcing certain activities they can better concentrate on their core business and their key strengths.

There are many examples of outsourcing initiatives that work well. If outsourcing can add value to the customer, that must be a good thing. Outsourcing of mortgage administration can work well as information can be scanned and sent overseas at the end of each day, then sent back to the UK the following morning, thereby leveraging international time differences. However, enhancing the customer proposition is not always the primary reason for outsourcing. Cost management has been at the forefront of outsourcing, especially with call centres.

Indian call centre operators earn the equivalent of 2,200 per annum compared with about 15,000 in the UK.

But offshoring does not mean ‘out of sight, out of mind’. Companies must have the right procedures and management structures in place. Offshoring should not be considered a short-term profit margin boosting solution. It should be a medium to long-term business process with every eventuality thought through.

In the case of an offshore process, a high degree of control must be maintained in the UK so if anything goes wrong, processes can be pulled back onshore with minimal fuss.

India is in the process of formalising its equivalent of the Data Protection Act but Lloyds TSB came under fire by unions for an allegedly breaching the Data Protection Act by outsourcing work there. In the meantime, Indian companies are falling over themselves to demonstrate compliance.

It fair to say security breaches are more likely to occur when a firm is outsourcing across the globe as the more geographically diverse the organisation, the greater the chance of internal controls being breached.