Outsourcing Concerns - Taking a Quality Approach

As a subscriber to www.linkedin.com, I am increasingly finding more press about the impacts of outsourcing and offshoring.  I will share an article which outlines the risks for North American banking companies.

Bank Offshoring Article.

I personally take the position that, as with any enterprise, a quality approach to planning and performance will support the success of any endeavor.  The article below reveals several "red flags" associated with the assumptions and expectations of outsourcing, which would lead to disappointment and failure.

- Vague purposes for engaging in outsourcing, with non-specific expectations for cost savings ("Offshoring was going to save the banking industry millions. We just had to do it").
- Inadequate integrity of governance, status and tracking ("pretended everything was going to plan")
- Inadequate training and knowledge transfer ("Offshore staff was not as efficient and rework was common")
- Incompatible processes, tools, and approaches ("Offshoring was adding overhead to projects and processes")

The article below advocates the benefits of face to face interaction for product design and deployment, particularly if Agile design methodologies are used.  One term that is increasingly used is "Near-shoring" where lower-cost resources within the same geographical proximity are used.  This may be a more palatable approach to provide some of the cost and time advantages of offshoring, along with the closer connection of onshoring.

I will express that outsourcing includes controversial elements which can only be overcome with a deliberate quality management approach.

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Time to Bring Bank Staff Back Onshore
Michael Nuciforo
APR 24, 2013 12:00pm ET

When I first started working in banking, the industry was at the peak of its obsession with offshoring. All I ever heard about for the first three years of my career was offshoring this and offshoring that. If I wasn't working with a team offshore, I was working with a team that was about to be.

Offshoring had become something of an El Dorado for the industry – the myth had become so tantalising that any semblance of realism was lost. And much like the hundreds of explorers who succumbed to the temptation of looking for the lost city of gold, banking executives bought into the hype. Offshoring was going to save the banking industry millions. We just had to do it. Every other industry was. It made perfect sense. How could the talent locally compete with India or China? These countries had more students graduating with MBAs every day than we had students – period. Banks invested millions in setting up offshore campuses all over Asia. There were assimilation programs, training courses and cross-pollination of resources. Special two-way video screens were even purchased – it was Skype before Skype.

Banks tried ever so hard to make it work. In some cases they even pretended everything was going according to plan. But firms were taking one step back for every two steps forward. From a set-up perspective, the regulatory and cultural challenges were underestimated. On paper, employees were cheaper, but more were required. Offshore staff was not as efficient and rework was common. Frustration at home was further exasperated by having to deal with poor communication lines. The media was quick to jump on any negative customer experiences.

Besides not delivering the benefits expected, offshoring was actually adding overhead to projects and processes. There were challenges with communication as teams worked at different hours around the world. Local and offshore teams were suspicious of each other – both felt as if the other was slacking off. It also necessitated an overreliance on email messages and lengthy documentation. Offshoring also made it practically impossible to adopt more innovative delivery models such as Agile that rely on face-to-face interaction. The final nail in the coffin was the genuine appreciation that teams developed better products collaborating in the same environment.

Finally, it dawned on the industry: El Dorado didn't exist. Now, after many years of searching and coming up empty-handed, offshoring has lost its appeal and banks are starting to bring the work back home.

So why does onshoring make so much sense in banking? With both China and India growing year on year, the cost savings are less appealing. Wage growth in these regions means that the difference in salaries, compared to local talent, has become increasingly marginal. Banks are also more focused on the cost reduction opportunities offered by an increase in digital channel usage and a decline in branch activity. Regional branch closures are expected to grow again this year. There is also an acceptance that delivering quality technology now, more than ever, relies on face-to-face interaction. Having a team full of people co-located and empowered means not only an improvement in product quality, but a significant increase in time-to-market.

Whereas offshoring was once considered a competitive advantage, it is now considered the opposite. More and more banks are looking to bring jobs back home, and even analysts and investors are starting to ask questions. The key to the transition is to do it smartly. No more inflated business cases. No more forced changes. By onshoring too rapidly you run the risk of making the same mistake most banks did with offshoring. Have clear objectives so you can easily decide what roles or departments are going to grow locally.

With wage costs on the rise offshore, talent available in abundance locally, and new delivery models required to create exciting new products, the world has moved on. The sad irony is that for banks that are willing to pack up and abort the mission, the real gold is waiting for them right at home.

Michael Nuciforo is a mobile and digital banking consultant and the founder of Keatan who previously worked at Australia and New Zealand Banking Group Ltd. on the ANZ goMoney application and more recently was head of mobile banking at Royal Bank of Scotland managing the U.K. retail portfolio. You can follow him on Twitter at @TheBoldWar.