For over a decade insurers have viewed the offshoring of
business services as a major part of their cost reduction
strategies.
However, boom-times enjoyed by foreign outsourcing services
suppliers could be over, warns international professional services
body the Chartered Insurance Institute (CII) in a study undertaken
in conjunction with the Royal Institute of International Affairs
(RIIA).
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In particular, commented Laurence Baxter, head of policy and
research at the CII, the outlook for offshore business service
suppliers has been dealt a blow by the global economic
downturn.
In the joint study Outsourcing: Continued prosperity despite the
global economic crisis? the CII and RIIA argue that advanced
economies are becoming more cost competitive, at least during the
recession, reducing the incentive to offshore.
Increased cost competitiveness in advanced economies has narrowed
the cost advantage enjoyed by foreign service suppliers who are now
themselves facing rising costs.
Highlighting the swing in cost advantages, the CII and RIIA made
reference to a recent comment made to London’s the Financial Times
by Ian Cramb, COO of Citigroup’s consumer business in Europe, the
Middle East and Africa.
“Whereas [offshoring] might have been 50 percent of the cost [of
in-house] five years ago, that number is currently only 15 percent
cheaper because we have made ourselves more efficient at home,”
said Cramb.
“There is a lot of excess fat that has been trimmed off
organisations. They have made themselves more efficient and will
continue to make themselves more efficient and things will come
back.”
Significantly, Cramb pointed out that there are certain parts of
the US that are now cheaper than India from an information
technology perspective.
“Companies are not going to be looking at the same countries as
before,” he stressed.
In addition to a narrowing of the cost advantage, offshore service
suppliers also face the impact of radically altered public
attitudes in the US and Europe which has put governments under
increasing pressure to protect domestic jobs and industries.
The CII and RIIA noted that even without direct government controls
or barriers, in the current climate, offshoring business activities
to overseas locations may prove too politically sensitive for
companies, suggesting they will hold back from moving more jobs to
cheaper locations until the recession is over and a recovery is
firmly established.
Of most relevance to the UK insurance sector, noted the CII and
RIIA, is India – whose outsourcing industry, the world’s largest,
is estimated to be worth $50 billion in revenue annually.
In the five years from 2002 to 2007 India overtook Singapore and
South Korea to become the fifth-largest exporter of commercial
services and in 2007 its offshoring sector grew by 35 percent.
However, growth has slowed with forecasts for 2009 ranging from 4
percent to 7 percent, according to the study.
India has also begun facing competition from other destinations,
noted the CII and RIIA, with destinations in Eastern Europe in
particular offering more politically and socially acceptable
low-cost options within the European Union.
However, under current economic conditions even Eastern European
countries will battle to sustain growth in their services
outsourcing sectors, believe the CII and RIIA.
