India gets the green light

The case against offshore operations in India is starting to look thin. Recent FSA feedback on the subject is as close to a shining endorsement for offshoring as one is ever likely to get from a regulator.

Not only does its report indicate that the risks of offshoring in India appear well controlled, but that the advantages go beyond the obvious commercial gains.

The survey, which included 10 visits to offshore operations in Mumbai and Bangalore, and is the most comprehensive regulatory study to date, set out to consider the perceived regulatory risks of offshoring.

Supporters of the notion that "companies are going for a quick buck at the expense of service", such as trade union Amicus, must have found it hard reading.

The sceptics' claims of concentration of risk, compromised service levels, high staff turnover and questionable security are squarely rebutted. The report notes that "quality checks and customer satisfaction surveys show that service level agreements are either being met or exceeded."

For those firms brave enough to make the first leap to offshoring in India, the challenge has been to show that it is possible to cut costs, improve service levels and enjoy tax benefits.

Now that the concept has been proven, we can expect to see a more rapid move towards the growth predictions of 2003 which foresaw a rise to 6,000 call centres by 2008 from a mere 40 in 1999.

In the rush to secure some of the low cost, 2.5 million English-speaking graduates a year in India, firms, especially the smaller ones, must embrace due diligence and risk management techniques.

Firms who think that offshoring is the answer to their cost-cutting, market share winning, ambitions should take time to consider why those at the vanguard of the movement have made it work. The truth, as identified by the FSA, is that the complexity of achieving suitable management oversight and control from a distance is the main risk faced by offshoring firms. It has worked because firms have recognised this and made the necessary investment in developing enhanced risk management systems and controls.

Competitive saving
The current economic climate is squeezing providers' margins more than ever, both through increased cost of compliance and competitive pressures.

While offshoring may seem like the panacea for combating these challenges, firms considering this route should also view the shift offshore as a perfect opportunity to tackle patchwork legacy systems and inefficient processes, and in so doing, to make some real competitive savings. This will also help companies when it comes to maintaining adequate risk management checks and controls.

There are doubtless important lessons that can be learned from the last few years. Both well-established and new offshore operations must ensure that they achieve and maintain well-run management information systems, that they scrutinise information properly and engender in themselves a keen eye for risk.

Those firms looking to offshore now and in the future should take advantage of external expertise to review their processes and to ensure that adequate systems are in place.

Failure to do this will at best result in the need for costly remedial action and, at worst, the removal of permission from the FSA to conduct the relevant regulated activity. Firms now need to shore up their offshore operations by following up their success with effective audit, risk diagnosis and risk management control frameworks.

This process will invariably result in the need to remedy the weaknesses identified, which if dealt with proactively by the firm, will be viewed positively by the FSA as part of the journey toward achieving a mature offshore risk management culture.

This journey is not for the faint-hearted. A recent FSA speech by Andrew Proctor, the former director of enforcement, contained a stark warning. "You may observe that no senior management were taken to task in those cases, which is a very critical point to focus on. We cannot allow that to continue to be the model," he said.

"In our view, when we see [similar] situations, we will have to take very direct action against the senior management who are responsible for the failure to put in place a proper compliance culture, proper training and proper standards of competence."

Being held personally responsible by the FSA should concentrate the mind. Approved persons should take the view that, as it is still relatively early days in the offshore movement, they still have much to learn about offshore related regulatory risk.

Independent audi
Part of that ongoing monitoring framework must include regular independent third party audit of offshore operational risk management systems and controls.

In particular, approved persons should instruct third parties to examine recruitment practices, training and competence, complaints, management information flows (especially breach information flows and analysis) and look for evidence of the undeterred identification and remedy of risk.

The prize for those who make it will continue to be more competitive pricing for retail customers and added market share for firms, which in a world of ever shrinking margins, can only be good news.

As for the sceptics, unless the FSA has been led up the proverbial garden path, it is time to acknowledge that the evidence shows that in India, they do it cheaper, faster and to higher service levels. IT

' Andrew Wheeler is senior consultant at Huntswood