Financial Services & IT: Heading for "Shore"
Security and cost concerns are driving more financial services and IT companies toward offshore and small-market "near-shore" locations.
For financial services, business process operations (BPO) such as customer service centers, shared service centers (accounting), and insurance claims processing are being set up in smaller U.S. cities or overseas. The same thing is happening in the IT industry for BPO, as well as tech support, software development, and data centers.
"Business continuity is a very big deal," says Mark Gibson, director of corporate real estate for Ernst & Young. "Because of 9/11, companies have been leaving Manhattan to set up redundant or mirrored centers elsewhere."
Mark M. Sweeney, senior principal with McCallum Sweeney Consulting, agrees. "It's been a slow, almost parochial reaction to 9/11," he says. "More and more companies are realizing that having so much concentrated capacity in one city is high risk. It's taken a while for them to get out of the New York Metro mindset - in the first few years they thought they could mitigate that risk by moving to uptown Manhattan or New Jersey, but that's not safe enough."
Many major financial services players have moved data centers out of New York City and set up mirrored centers in Connecticut or New Jersey. Others have moved data processing completely away to places like Florida, Wyoming, and Texas. If you're wondering why you haven't heard about these relocations, it's by design. "For security reasons, companies are trying to keep low profiles by not providing a lot of press," says Sweeney.
Even though security is the biggest driving force for moving out of big cities, another is simply cost. Rents in New York City (and other international financial centers such as London and Hong Kong) are about $140 per square foot, which makes it very expensive to maintain back-office operations in these cities.
A new trend is that it's not just the lowest levels of processing or transactions that are being offshored anymore - more "brain-powered" work is being outsourced as well. "A greater variety of services are being relocated," says Matt Jackson, consulting partner with Cushman & Wakefield. "They're starting to move up the value chain. At first it was just low-value transactions, but now an increasing number of higher-value transactions are going offshore."
Some co-shoring is coming to North America, mostly Canada, from India. "These companies need facilities in North America," says Gibson, who indicates they want lower costs than in the United States. Canadian hotspots are Calgary, Manitoba, Toronto, and New Brunswick.
A number of Indian outsourcers are also setting up operations in Europe to provide near-shore services to their European customer base, in their local languages. For example, India's second-largest outsourcer, Infosys Technologies, has established a customer-service center in Brno in the Czech Republic.
Staying in America
Even though offshoring to lower-cost countries is still very popular, a number of companies are finding big cost savings in smaller towns across America. "For these industries," says Donovan, "site selection in the U.S. is probably as robust as it has ever been. This is impressive when you consider the amount of offshoring going on."
"Mid-sized metropolitan areas have been the preferred sites for these companies," says L. Clinton Hoch, managing director of location services for DCG Corplan Consulting. "Ranked by frequency of inclusion on the short list are Tampa, Charlotte, Des Moines, San Antonio, Phoenix, Indianapolis, Greenville, and Knoxville. Among our latest 25 major projects for clients in the financial sector, all but four have landed in the Southeast or Southwest."
A newer trend is financial services and IT firms setting up back-office operations and data centers in second- to fourth-tier metropolitan areas in the United States. They are looking for places with abundant qualified labor, cheaper electricity, lower overall business costs, and minimal terror/natural disaster risks. The trick is not hunting with the pack and trying to find relatively undiscovered areas with a good supply of untapped labor. "Generally speaking, all these locations are labor-driven," says Donovan. "They want sustainable advantages - if they can find good quality labor in smaller cities, they can save 20 percent or more on their labor costs."
One of the smaller cities on the radar is El Paso, Texas, which recently landed a sizeable back-office operation for ADP, providing high-end business-to-business customer solutions. Albuquerque, New Mexico, and Knoxville, Tennessee, have several major accounting, customer service, and payroll shared-service centers. Fresno, Merced, and Modesto, California; Colorado Springs, Colorado; Kansas City, Kansas/Missouri; and St. Louis are all attracting attention.
Oklahoma has also had success attracting BPOs, especially for Google, which will build a $600 million data center at MidAmerica Industrial Park in Mayes County. EDS, a top global technology services provider, recently announced it will more than double the square footage of its service management center in Tulsa to a total of 440,000 square feet.
"What really pays off is the collaboration between financial services/IT companies and the two- and four-year community colleges to develop talent banks," says Donovan. "This is reflected by the success states like Oklahoma, North Carolina, Florida, and Missouri have had in attracting this kind of investment."
For companies that build data centers, reliable and lower-cost power is a key site-location factor. Data centers tend to be high-priced - usually $100 million or more - and require expensive equipment. "Incentives can make a big difference in attracting data centers, especially breaks on power or infrastructure," says Mike Hickey, president of Hickey and Associates in Minneapolis. "Smaller third- and fourth-tier cities can be competitive by offering creative incentives packages.
There are also entire regions that aggressively court back-office investments, such as northeastern Pennsylvania. This part of Pennsylvania received many of the companies that left Manhattan in the first wave after 9/11. "This area is far enough away from New York City to be considered free from terrorist effects, including fallout from a dirty bomb, but still close enough to technically commute," says Sweeney.
More than 20,000 people in that region work in the financial services and insurance sectors, handling back-office functions, data processing, software development, customer service, and sales for big companies like ALLTEL, Bank of America, Blue Cross/Blue Shield of NEPA, CIGNA HealthCare, Guard Insurance Group, Prudential Financial, Met Life, and Sallie Mae. Labor costs are 22 percent below the U.S. average and as much as 40 percent less than northern New Jersey and New York City.
Financed by a $40 million initiative, the organization Wall Street West promotes the goal of making northeastern Pennsylvania the total backup solution for New York City financial institutions in the event of disaster. It recently announced it will build a fiber optic network connecting lower Manhattan with northeastern Pennsylvania that will enable redundant, instantaneous data transmission between the two areas.
Large financial services firms and IT firms are continuing to deploy BPO sites around the world. Smaller financial services companies are starting to follow their lead, "although they have been fairly slow at adopting offshoring," says Jackson. "Retail banks are adopting near shore/offshore relocations more readily than investment banks, like Merrill Lynch and Lehmann Brothers, but these investment banks are starting to look."
• United Kingdom: Financial-sector firms have been locating in London, Sheffield, Manchester, Dublin, Belfast, Glasgow, and Edinburgh. In fact, the financial services industry is the fastest-growing sector in the Scottish economy-it grew by 55 percent from 2000 to 2006. Morgan Stanley is currently expanding its operations in Glasgow and will add 600 more workers, especially in operations, IT, and financial analysis.
• Eastern Europe: "Companies that want lower risk and higher security are locating operations in Eastern Europe," says Gibson, adding that they can find excellent skill sets and language capability. Popular destinations are Croatia, Hungary, Romania, and the Czech Republic. "Many financial services and IT firms already have some sort of presence in Budapest," says Jackson. "There is also a lot of activity in Warsaw and Bucharest." Clinton reports an increased interest in Poland, Russia, Slovakia, and Latvia.
• South America/Caribbean: Popular location sites in this region include Chili, Uruguay, Argentina, and second-tier cities in Brazil. EDS has been growing there at a rate of 25 percent a year. Its two data centers in Sao Bernardo do Campo and Alphaville handle credit card processing, e-security solutions, and other services. Because of its long-term BPO presence, EDS has also evolved into Brazil's second-largest provider of IT services. "In the Caribbean, Barbados is the most popular destination," says Clinton. "The main reasons for this are fluency in English, high literacy rate, business friendly government, low crime rate, excellent legal system, and frequent air service." Jackson adds that Panama will soon emerge as a choice offshore site because of "its huge financial talent pool."
• India: Of course, India has been the leading offshore destination for over a decade. Although it continues to dominate the outsourcing of call centers and data processing, India is growing less attractive as a destination country because of rapidly-escalating labor costs and high turnover. With the fierce competition for skilled workers in first-tier cities, many experts feel the Indian market is becoming saturated. "Financial services and IT companies have increasing levels of concerns about operating in India," says Jackson. "Demand is starting to outstrip supply. Some companies we have talked to report turnover rates that exceed 100 percent annually." For these reasons, new support operations are being located in developing second-tier cities in India, such as Pune and Jaipur, where there are more workers and lower operating costs.
• Middle East/North Africa: "We're also starting to see a migration of financial services and IT/technology firms to Lebanon, North Africa, Egypt, Morocco, and Tunisia," says Jackson. "This trend really hasn't hit the news yet - one of the biggest advantages of this region is the highly skilled work force that can speak French, English, and other languages. Microsoft, Oracle, Ericsson, and Nokia already conduct IT engineering, back-office processing, and customer service-related activities in North Africa. AIG has also invested in Morocco in a big way, creating thousands of jobs." Another example is Ericsson, which recently opened a new global service delivery center in Beirut, Lebanon. Beirut is attractive because of its strategic location, pro-business climate, and cultural affinities across the Middle East and Africa. Lebanon's 17 universities produce highly-skilled, multilingual professionals who are willing to work globally. Ericsson plans to hire over 100 engineers and other professional staff for systems integration, network and technology consulting, and managed services.
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