BRAXXON News - Off-shoring
The Asian tsunami, arguably the world's greatest natural disaster in terms of loss of life, struck on the day after Christmas 2004. The tidal wave created by the shifting of geological plates off shore devastated northern Sumatra, a great stretch of Thailand's west coast and the eastern seaboard of Sri Lanka while causing relatively moderate damage and a lesser number of casualties on the Indian coast. But nobody can ignore the advice of seismologists that another similar disaster remains a distinct possibility.Whilst the United Nations and individual governments of the stricken countries have resolved to put in place warning systems to protect their peoples from this type of disaster, the measures envisaged will not be operational in the near future, rather, it may take several years.
Whilst a primary concern must be to provide protection through coastal warning systems for coastal populations there are developing financial centres that, when humanitarian needs have been satisfied, will have to be considered. For example, the city of Chennai is growing rapidly in importance as a thriving off-shoring centre for operational banking, IT operations and call centres.
In the most recent disaster,Chennai was thankfully spared total devastation but even so a number of lives were lost. So what is the relevance for the off-shoring global financial institutions that have relocated their operational centres to these far-flung outposts that are subject to such awesome power of nature?
Off-shoring is the process of transferring work overseas, usually to low-cost locations. It has been a regular practice in manufacturing for many years and has more recently started to be adopted by the services industry with the Financial Services sector taking the lead. IT was the first function to be widely off-shored but increasingly back-office clerical processing work is now being considered.
There are two types of off-shoring. One that keeps the off-shored facilities as part of the organisation (known as a 'captive' site) and the other that transfers control and ownership to a third party (that is, outsourcing). The reasons why off-shoring has been adopted recently by so many organisations are basically twofold:
1. The technology to allow global access to system applications has become robust and affordable.
2. The cost differential between the traditional financial market locations (for example, London, Tokyo and New York) and the developing world is huge. Why pay £25,000 per annum for a data-entry clerk when English speaking fresh graduates are available for £4,000 per annum in Mumbai or South Africa.
Of course, there are inherent risks in this approach. Getting the location right is essential; a city where the property and new English speaking graduate supply is more than sufficient to meet the demand; a country where the legal system is reliable and data can be protected to the satisfaction of the regulators.
The risks of operating in a tropical or sub-tropical location may not be subject to the same level of terrorist threat as are the established financial centres in Europe, North America and Asia, although even this cannot be ruled out once a location is established and it is realised that it is potentially a soft target. Whilst the cost of operating in locations gaining in sophistication is attractive from a purely commercial standpoint, comprehensive Business Continuity Planning and Disaster Recovery are essential to protect the business and its workforce. The vulnerability of centralised offshore operations has been brought into sharp focus by these recent tragic events.