Savings Galore

If you suspend for just one moment the belief financial concerns are what matter most in the business world, it seems those looking for grounds to outsource part of their operation offshore do have other reasons. They are, in fact, the same reasons other companies use to reject such a strategy–quality, flexibility, and the opportunity to grow–according to a recent study prepared by Deloitte Consulting.

Now we'll return to reality. The financial factors actually far eclipse any other reason for turning to offshore facilities, according to Peter Lowes, partner and global leader of outsourcing advisory services for Deloitte.

In the insurance industry, the average savings insurers get across all the operations they are moving offshore is 36 percent, states Lowes. The range of typical savings is in the area of 30 to 50 percent, he indicates, adding the average expected cost increase for outsourcing services heading into next fiscal year is estimated at 5.5 percent. This increase actually is the lowest of all three financial sectors–insurance, banking, and securities. "The reason for this is insurance is skewed more heavily toward IT outsourcing, which is a much bigger marketplace, and therefore it's less susceptible to wage inflation than some of the other areas," he explains. "If you are saving somewhere in the range of 30 to 50 percent and your cost base for the foreign operations is inflating only by 5.5 percent and you think about what the local inflation rate is going to be–somewhere probably in the three to five percent rate–the comparative cost advantage is going to be sustainable for a long time on that basis."

Many business people are concerned about wage inflation in outsourcing nations with the concern inflation will eliminate all these savings sooner rather than later. Lowes doesn't believe that is a reason to hold off on outsourcing offshore, though. "Everything we've done to research this tells us that ultimately will be the case, but we calculated that's not going to happen any time soon," he says. "In India, you are looking at least 20 maybe as many as 30 years before you reach wage parity with the U.S. That gives everybody plenty of time to exploit many years of cost efficiency before formulating what their new strategy needs to be."

But what about the aforementioned difference in opinion regarding nonfinancial reasons? Lowes asserts it's partly due to a lack of education that respondents to Deloitte's survey cited the same reasons to be for and against outsourcing. "Misunderstanding and misperception on behalf of those who haven't yet gone out and dipped their toe in the water," he says. "The other part is it depends on what kind of a business you already run. Some businesses are well aligned with the kind of services you can run offshore. Other parts of the industry don't have the capabilities yet and may never be there."

Insurance is significantly trailing banking and securities among the financial services in terms of adoption of offshoring over the last three years, Lowes claims. "Insurers tend to be doing things today those other two sectors were doing about three years ago," he says. "That's not necessarily a good thing or a bad thing; it's just the way the insurance industry's natural point of equilibrium has been."

Lowes reports India continues to be absolutely dominant in the offshore arena. "Right now, of all the companies we surveyed that have an offshore presence, 72 percent of the headcount of that community is in India," he says. "The next highest concentration is China at four percent. It's an extreme differential between India and anywhere else."

Lowes contends China is the only other country that will play serious catch-up with India's dominance in this sector. "China is big enough to produce enough skilled workers to make any kind of a dent on India's market share in this area, but [China] is constrained by its language skills. Over the next decade, we are going to see that change as China is focused on training its next generation of workers in English. A decade from now, we'll see China making some big headway from a competitive standpoint."