Explosive growth in off-shoring may put pressure on wages and other costs in countries such as India, a World Trade Organisation report has said.
Off-shoring is not without its risks and costs to financial institutions. . .explosive growth in off-shoring may put pressure on wages and other costs in countries such as India, the recently-released WTO report on trade in a globalised world said.
According to the WTO, closely connected to rising labour costs are high turnover rates, which can affect the quality of off-shore operations and these issues can halt the further expansion of off-shoring.
Citing the example of the risk of a political backlash at home because of domestic job losses, the report said, in the US, a number of bills at both state and federal levels have been proposed to place restrictions on off-shoring practices.
This is a risk that is not unique to financial institutions but one common to all firms that off-shore a part of their operations abroad, the report said.
However, the risk that ranks quite high for financial institutions, according to WTO, concerns the need to ensure confidentiality and integrity of financial information.
Because of the cross-border nature of the transactions, off-shoring has the potential to transfer risk, management and compliance to third parties that may not be subject to the same set of laws and regulations as those applied in the country where the financial institution is domiciled, the WTO report said.
This has been recognised as an important or systemic source of risk to the extent that the Bank of International Settlements has proposed a set of principles to provide specific and focused guidance to financial institutions outsourcing and off-shoring activities, the report added.
Nevertheless, India remains the prime location for off-shoring with around two-thirds of global off-shore staff employed in the sub-continent, the WTO said.
A number of other countries have also attracted off-shoring activity. These include South Africa, Malaysia and the Philippines, where financial institutions can find the necessary skills and work quality, the report said.
China's role in off-shoring is less clear, the report said, adding that, Deloittes latest report states that China is becoming a more important destination for off-shoring, with one-third of financial institutions having back-office (mainly IT) processes in China.
However, a PriceWaterhouseCoopers (2005) report on off-shoring in the financial sector states that China has yet to gain extensive ground, partly due to its relative lack of English-language skills and partly because of concern about its laws on intellectual property and data protection, WTO report said.