The industry’s savings have risen exponentially from around £250 million globally in 2003 as the average number of staff employed offshore has increased from 150 to 2700 in just four years, says Deloitte. Over the last year alone, this has led to the average proportion of group headcount in lower cost countries doubling from three percent to six percent.

Over 75% of major financial institutions now have operations offshore, compared to less than 10% in 2001. UK and US banking and capital market institutions are leading this shift - the UK financial services industry alone now saves up to £1.5 billion per year from offshoring, says Deloitte - but mainland Europe is showing increasing interest.

Deloitte’s research finds that more than half of all financial institutions are now saving more than 40% against their onshore costs for every business process offshored. In 2004, the figure was just 32%. However, the range of savings is polarising, and is now between 20% and 70% per business process.

Chris Gentle, associate partner, financial services, at Deloitte and author of the study, says: "Offshoring is maturing at a rapid pace but, in future, the best offshoring strategies will not, and cannot, be based on labour arbitrage alone. Financial institutions need to re-engineer business processes, or risk simply transferring offshore the legacy inefficiencies of older, onshore processes."

Financial institutions offshoring one or two business processes are saving 20% less, on average, than companies with over five business processes offshore, he says.
Offshoring has spread across nearly all business functions, with significant growth around transaction processing, finance and HR. Knowledge-process offshoring, such as investment banking analytics and research has also grown.

Chris Gentle adds: "The industry’s star performers have successfully deployed aggressive offshoring strategies, transferring more than 5% of group headcount offshore and achieving bottom line savings of over 40%. In some cases, the savings are equivalent to 3% of the total cost base. However, at the other end of the spectrum, institutions that have failed to adopt best practices are experiencing a decline in operational performance."

He says the gap between the best and the worst is widening, and that businesses should seek to relocate at least five per cent of the total group’s headcount offshore as a minimum.

"The best performing institutions offshore around 12% of group headcount and, on average, save 55% on each business process," says Gentle. "The companies whose offshoring programmes are suffering, offshore less than 5% of headcount and typically save 32% per process. The most efficient offshorers take just 15 months to migrate each process, compared to around 25 months for poorer performers."

The report is based on a survey of 36 financial institutions in eight countries, including six out of the top 10 banks in the world by market capitalisation.