Onshore, Offshore, Nearshore?

February 17, 2016

First it was Dehli, then came Bangalore and Pune. Now, Eastern European cities such as Gdansk and Wroclaw are joining the offshoring party, with multinational banks, including Credit Suisse and UBS, reportedly opening or augmenting offices in Poland.

Banks that have traditionally moved back-office work to low-cost destinations, such as India, where the average monthly disposable salary is five times less than that of the UK, are now seeking to outsource more complex tasks and are reluctant to send such important roles so far away. There are also issues with high staff turnover rates and concerns about quality and levels of supervision, which together cast doubt on the benefits of traditional offshoring.

“One of the big challenges, once you look past the initial budget footprint advantages, was always going to be staff expertise, integration and retention,” says Dean Gammage, an Executive Director at Brickendon. “Unfortunately, the driving down of engagement costs, combined with the nature of the job market in the region and often travel restrictions in the hiring teams, were always going to make that a significant challenge.”

Still, the high salaries and rents paid in London mean that businesses believe there are cost savings to be gained if the quality can be managed by not keeping large processing teams in the UK. Up steps Poland, and the term offshoring is replaced with nearshoring. A lower cost economy – the average monthly disposable salary is less than third of what it is in the UK – but one that is a member of the European Union, is only a short flight from most of the banks’ western headquarters, and one that has access to a large talent pool with fewer cultural differences.

Gammage believes there are obvious advantages to the near-shore model, including more similar time zones and culture. “Anything that encourages a sense of teamwork and collaboration is a good thing,” he says, adding that the availability of low-cost short-haul flights makes it easier for senior managers to regularly visit overseas offices and also offers the potential to bring key staff to London for induction periods or training.

According to McKinsey, there is a growing trend towards so-called nearshoring, and banks are at the forefront of it. Outsourcing to Eastern Europe is growing three times faster than to India. A report published in 2012 showed 77,000 technology jobs were outsourced to Eastern Europe, with an annual growth rate of 17 per cent. Since then the trend has quickened, with many new banks and financial services institutions opening or expanding offices in the region. Separately, Poland’s Association of Business Service Leaders (ABSL) estimates that the country’s outsourcing industry has grown by an average of 20 per cent a year for the past five years. Its president, Jacek Levernes, predicted that as many as another 20,000 could be added this year, with around 5,000 of those expected to come from the financial sector.

There’s good reason for the region’s rise in popularity. In Soviet times education was highly focussed on scientific and technology studies, creating a ready-made pool of technology candidates – many of whom are also multilingual. The legacy of this continues as Central Eastern Europe is consistently found at the top of the world educational achievement rankings in maths, science and technology.

For the locals, the trend is also a positive one. Multinational banks are popular employers, and many of them have been hiring Eastern European candidates to work in London for years. Now that they are saving the cost of London office space by opening local offices – rents are on average 62 per cent lower in Poland than in the UK, according to data comparison website Numbeo – banks are able to attract good staff by paying salaries that are higher than the local average.

Late last year Credit Suisse’s chief executive Tidjane Thiam spoke of his plans to move jobs out of London in a bid to reduce costs, with one report citing him as saying the bank could save nearly €250 million a year if some back-office positions were moved to lower cost centres such as Poland and India. It has had a Centre of Excellence in Poland since 2007 and employs more than 4,000 people on two sites.

Poland has been a member of the European Union since 2004 and is central and Eastern Europe’s largest economy. It has enjoyed uninterrupted economic growth over the last two decades, but the average monthly wage is still only £503.31, according to Numbeo. This compares to a figure of £1,676 in the UK, while in India the figure is £330.70.

Still, Brickendon Executive Director James Aitken is not convinced. He believes the problems with offshoring lie in the execution rather than location itself. “Although there are also cultural and resource market differences to incorporate, the main reason offshoring has not yielded the expected benefits is that processes are typically not offshored properly,” he says. “When they are simple, well documented, and with few non-complex variations, it tends to work OK; when not, it is often disastrous and the offshore staff rely too heavily for too long on the onshore SMEs.”

According to Aitken, the only real benefits of Poland over India is the closer proximity, allowing cheaper, more frequent visits, and the time zone, with better aligned business hours. “You still have cultural and language issues, as well as different local regulations that affect your operations,” he says. “The main driver for offshoring is almost always cost, but we’ve seen the margin erode over the years as everyone goes to the same place, which drives up demand and wage expectations over time.”

One commentator likened nearshoring and offshoring to vertical and horizontal expertise. Horizontal functions require generic back-office skills, such as processing transactions or basic applications maintenance, while vertical skills are more linked to the idiosyncrasies of the business and can therefore be better provided by nearshore players.

Linguistic skills are also a consideration for some roles, making a move nearer to home preferable. There is basically a trade-off between cost, and the sophistication of services available, and for western companies Poland offers the chance to cut costs without losing as much of the expertise.

There is a range of destinations providing different levels or types of offering, each with its corresponding cultural and geographic challenges. At one end sit the more distant locations, such as India and China, with Eastern Europe in the middle, and – almost onshore but not quite – are others, such as Ireland and Scotland. Many of the large international banks already have alternative UK locations outside of London: JP Morgan has offices in Bournemouth and Glasgow; Deutsche Bank has a presence in Birmingham; and Bank of America Merrill Lynch has a base in Chester.

However, the main difference with this latest bout of offshoring, is that companies are doing the work themselves. Where previously they outsourced the work to consultancies overseas, this time they are opening their own offices and hiring the staff themselves. The question is whether this will make the process any more successful. The answer remains to be seen.

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