Ask the experts: Demystifying the ‘shoring’ process

In an increasingly globalised world, the operations of financial services firms is no longer confined to one nation. Companies need to expand, near and far. Karena Vaughan, founder and managing director of Catalina Consulting, explains this process
by Jake Matthews

What is ‘offshoring’, ‘onshoring’, ‘nearshoring’ and ‘farshoring’? Offshoring is the process by which an organisation moves or relocates a business process or function from its home country to a different international location, while maintaining ownership and control over processes, work and function. It is very often confused with outsourcing, where work is transferred to a third party. 

Nearshoring and farshoring are both types of offshoring; the first involves transferring to a country that is nearby and, very often, shares a land border with the company’s domicile country, while the second involves moving work to a much more distant location. By contrast, onshoring refers to the relocation of a business process inside national borders. 
Why are companies doing this?  One of the reasons for a company to consider offshoring is the need to introduce cost efficiency into the business. 

A cost differential of at least 30% is one of the key criteria set by most global organisations that are shortlisting new business locations. One of my previous clients, a large global law firm, used this target to help define its initial list of city locations, ruling out those that would not deliver the desired cost savings. 

If we also consider Credit Suisse replacing more than 3,000 jobs in London and Switzerland with cheaper options in India, Eastern Europe and North Carolina in the US, BNP Paribas’ evaluation of Portugal, and Goldman Sachs’ expansion in Bangalore and Warsaw, then we see how the need for cost efficiency is driving offshoring trends. 

This is further borne out by an EY report that finds that organisations that offshore risk, control and compliance into a centralised operating model (of which offshoring is an option, covering multiple geographies and time zones in one location) see cost savings of 30%–50%. 

Furthermore, the report says that offshoring to locations such as India, South America and Eastern Europe “provides the additional benefits of wage arbitrage”.  
What are the current shoring trends in the investment sector, and throughout financial services?  The increased requirement for audit, compliance and monitoring and the widening risk remit has seen financial services organisations rethink their compliance and risk processes and their ability to implement and manage this change. As a result, the size and overheads of risk and compliance teams have increased and, for many, become burdensome. Across the last ten years we have witnessed major offshoring to Poland with an estimated 35,000–45,000 financial services jobs having moved from Western countries to Warsaw, Kraków and Wrocław. Goldman Sachs is seeking to add to its 500-strong Warsaw workforce with new roles in risk modelling, as is BNP Paribas.  

A 2017 Accenture survey fInds that 89% of financial services executives expect their compliance costs to increase over the next two years. The number of organisations spending more than 5% of their net income on compliance has gone up to nearly a quarter. Among the biggest compliance risks were cyber risk. A separate Accenture report concludes that half of executives predict their compliance spend to rise to 10%–20% of net income over the next two years. 

Therefore, audit and compliance functions are increasingly being offshored to reduce cost. We have seen Poland winning new investment as a result of this. Between 2004 and 2015, according to an EY report, the stock of foreign direct investment in Poland increased from €67bn to €204bn. Credit Suisse, for example, has set up in Wrocław, while HSBC and UBS have bases in Kraków. 

Another key trend is the rise of fintech. Trading technology, cyber security and big data all require specialist skills, which are in high demand and for which supply is low. Access to robust pipelines of both experienced and raw talent is of vital importance and is driving investment to cities such as Belfast, which has established itself as a leading investment location for US companies requiring cybersecurity expertise. California-based security-as-a-service company Proofpoint, web security specialist WhiteHat Security, also based in California, and Boston-headquartered cyber security solution Rapid7 have all invested in Belfast.  

When considering the shoring cycle, what are the challenges most frequently faced by investment companies? Unless a company has a dedicated location-monitoring function within its risk team, most will start out with three key challenges: what is the problem we are trying to fix? Where should we do it? How are we going to make it successful? 
About the expert

Ask the experts - VaughanKKarena Vaughan is founder and managing director of Catalina Consulting, a specialist adviser in strategic business development and location selection. Karena helps company leaders in financial and professional services, fintech and cyber security to find the optimum business location for expansion, consolidation or new customer acquisition, and has worked extensively for Northern Ireland entities over the years. 

The best results are when the evaluation and selection process isn’t narrowed too much, too quickly.
How is fintech making use of shoring?The current growth of fintech is predominantly driven by start-ups in Europe and Asia-Pacific.  

Fintech firms set up and grow in a given city or region, and then move in response to investor demands or to access new markets. Take the interesting developments in China right now. The tight regulatory environment is driving some of its most successful fintech start-ups, including its first online-only insurer Zhong, to launch IPOs overseas, where they can access both capital and skills. Zhong recently won approval for a Hong Kong IPO.

Initially they may take a more fearless approach to offshoring, but as they increase in size, we see them adopting fairly similar approaches to offshoring as traditional financial services organisations. 

Take FISTM, which began as start-up SystematicsTM and has grown through acquisition and further expansion to become the leading global provider of financial services technology. FIS has adopted a strategic approach to location selection, incorporating lower-cost regions where it can access quality skills in plentiful supply, with higher-cost locations offering niche skills and expertise, and global cities where it locates front-office teams. 
What does the future of shoring look like? Digital technology is enabling the financial sector to service customers on a global basis and scale, much more than we have ever seen in the past. In my view, in the future we will see a blurring of the traditional offshoring model to something much more flexible, responsive and dynamic. Consider Estonia’s eresidency programme, the first of its kind offering the freedom to easily start and run a global business. Since its inception, 3,877 new companies have been established by eresidents, who are not physically based in the country. That could be a route to offshoring in Estonia.

This article was originally published in the Q4 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.

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Published: 02 Jan 2018
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