Outsourcing: the benefits don't always add up

Lloyds TSB is to expatriate 750 jobs, but some companies won't be following suit

The fear that Britain might become a "nation of hairdressers" - voiced by white-collar union Amicus in response to the apparent flood of IT and call-centre jobs out of the UK - intensified yesterday when Lloyds TSB became the latest British employer to succumb to the attractions of outsourcing. The bank said it would close a call centre in Newcastle and move 750 jobs to Bangalore, southern India.

While outsourcing has become a popular word in the lexicon of UK plc in general this year, the trend is most pronounced among Britain's financial services companies. Banks' physical assets are few and there are huge potential cost savings from moving the mountains of processing they have to do to countries where the wage bill is about a sixth of what employees earn in the UK.

HSBC has been the most prominent British banks so far to embrace the controversial issue, saying it would transfer 4,000 jobs to Asia by the end of 2006. But Lloyds' announcement yesterday comes as Barclays admitted it was considering a similar move and Abbey has signalled it may also be gearing up to outsource jobs. Across the Atlantic, Bank of America, which earlier this week agreed a record-breaking $47bn deal to buy rival FleetBoston Financial, slipped out another announcement that it would set up a 1,000-strong centre in India.

However, there are a growing number of banks and other professional outfits coming to the conclusion that despite the obvious cost savings, outsourcing has too many drawbacks.

One prominent banking executive who is a sceptic about outsourcing is Fred Goodwin, chief executive of Royal Bank of Scotland. Mr Goodwin, nicknamed "Fred the Shred" for his enthusiasm for cutting costs, has decided it is not in the business interests of RBS to go down the outsourcing path. The bank has put on record its view that, provided the regulatory and fiscal environment remains favourable, it would continue to use its call centres dotted around the UK.

While RBS might have a particularly bloody battle on its hands if it embarked on closing call centres in Scotland, where they have provided much-needed employment in depressed areas, the bank also questions whether outsourcing is as attractive as it appears.

Its view is that cost savings could turn out to be short-term only. This is partly because wages may be staggeringly low in India and elsewhere now, but that is likely to change.

More importantly, in Britain's fiercely competitive banking market, RBS is trying to mark itself out by offering customers service and choices that they might not find elsewhere. That includes allowing customers to telephone their branches directly - a practice scrapped by most of its rivals in favour of centralised call centres. The bank also believes customers who do phone its call centres actively want them to be based nearby.

RBS, which has some of the lowest cost-to-income ratios in its sector, can afford to make that choice. HBOS and Northern Rock, also low-cost operators, have also declared they will resist the outsourcing push.

The substantial number of HSBC customers who have apparently contacted rival banks to open accounts after their own lender announced its job transfers may be proof that many people are not keen on intimate financial details being winged electronically across the world. The fear that account details could fall into the hands of fraudsters looked more real this week, after a data inputter in Pakistan threatened to post the medical records of patients at a California hospital on the internet unless she received more money.

The reality is that, in most cases, doing your banking via a call centre in Delhi is not more dangerous than dealing with someone in Bradford. Nigel Roxburgh, co-founder of the National Outsourcing Association, which advises companies which do want to move abroad, said: "Companies whose customers are here have to comply with the Data Protection Act, so they have to obey all the same rules and regulations." While handing over certain functions to companies based in India may seem risky, the desire to entice as much business as possible away from Western software giants such as IBM has also driven local companies to be as vigilant with data as possible, Mr Roxburgh added.

However, for some UK banks - especially the smaller ones - establishing their own operations in India or working out watertight contracts with Indian outsourcing companies can be an unnecessary cost. A spokesperson for Alliance & Leicester, which controls about 3 per cent of the current account market, said: "We are a UK-based, UK-focused organisation. We believe that trying to manage our operations at long distance would be more difficult and add a layer of costs."

Perhaps surprisingly, the City is also not piling on pressure for aggressive outsouring. Most analysts welcomed HSBC's decision to shift jobs because the bank has extensive experience of working in Asia and its operations are so large that the potential economies justify the extra costs and upheaval.

Peter Toeman, an analyst at Morgan Stanley, added that the outsourcing trend reflected the fact that "capacity for cost savings in the domestic market is now limited - 10 years ago, banks had 40 or 50 per cent more staff than they do today. There has been a steady loss of headcount and increasing automation."

But he added that banks have "different schools of thought" on rolling out the outsourcing process, pointing out that RBS, for example, believes it has a "competitive advantage" in keeping its telephony services close to customers.

Outsourcing experts also point out that companies do not always appreciate the true cost of shifting jobs offshore. While wage costs are much lower in most developing countries, there are inevitably other costs. According to the National Outsourcing Association, salaries are 70 per cent less in India than in Britain. But "telecommunications and the need for have relationship managers and other overheads reduces the saving to about 30 or 40 per cent of employing someone in the UK," Mr Roxburgh pointed out.

Another possible downside comes from the fact that outsourcing to far-flung locations often means having to set up shop in politically unstable areas. Mr Toeman said: "The upside of outsourcing is reduction in wage costs. The downside is that companies could find themselves in the middle of a war."