Hybrid, Nearshore and Offshore: Choosing the correct post-covid working model

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By Oliver Geiseler, Partner at Capco

Since it was first identified in late 2019, COVID-19 has claimed tens of thousands of lives and has caused significant operational and commercial disruption for companies worldwide. However, financial services were better positioned than most industries to weather the initial storm. Digitalization initiatives were in many cases already underway, and institutions were accordingly able to pivot quickly to accommodate remote working arrangements for most of their employees, ensuring a relatively high degree of business continuity.
The financial services industry is now focused on the journey towards a post-COVID ‘new normal’. Financial institutions that grasp the opportunity to reassess, reengineer and reimagine working models in a proactive fashion will be best placed to reap the benefits of increased efficiencies, productivity and ultimately a significantly lower cost base. In this paper, we detail the four working models available to firms and examine the pros and cons of each.

WORKING MODELS, PRODUCTIVITY AND COST SAVINGS

There is a clear recognition that alternate working models have both proved effective from a productivity perspective and offer the potential for cost savings. Current remote working environments and collaboration models have been defined rapidly to address the challenges posed by the pandemic. This has reopened the debate over what constitutes the optimal shoring model. In the current environment, near-shoring elements of your operations certainly appears compelling – but which processes or functions should you choose? In reality, a hybrid operating, multi-sourcing model combining the different options set out below will in almost all cases prove the most effective approach. At the same time, finding the right balance between them is a challenge, being dependent on individual operating models, technology infrastructures, the status of digitalization programmes, and organizational flexibility.

FOUR DIFFERENT WORKING MODELS
Today’s COVID working environments and collaboration models were by necessity rapidly defined and implemented, and that abrupt change has served to recalibrate perceptions about future working paradigms.

There are four different options to consider: onsite, remote, nearshore and offshore. Every location model has its pros and cons:

1. Onsite remains the preferred environment when dealing with sensitive and confidential information and for optimizing collaboration. Regulations also require that some functions or activities be based onsite in the local jurisdiction. However, it is often also the most cost intensive option
2. Remote or home working can offer a quieter environment than an open plan office space, and has additional benefits for employees in respect of travel and childcare, while for employers it can reduce real estate-related costs (if they choose to reduce office space). However, it is generally felt to have a negative impact on collaboration and teamwork due to a lack of in-person interaction.
3. Nearshore can generate cost savings while maintaining similar cultures and time-zones, but there may be differences around ways of working

4. Offshore maximises cost savings but minimises available collaboration time and will require greater recognition and accommodation of cultural and language differences.
Onsite
Working onsite has long been the standard for most companies. The advent of the internet and advances in telecommunications have seen a gradual but over time tangible change to office working practices
Benefits
• Teamwork and collaboration
As the author John C. Maxwell famously noted: “Teamwork makes the dream work.”4 When working onsite, a strong bond and connection between colleagues and teams typically develops, lines of communication and feedback loops are cleaner, and it is the optimal environment to foster collaboration to achieve common goals and complete tasks.
• Motivation and productivity
When working onsite, employees are on hand to boost one another’s morale. Teammates can literally step in to help each other if a colleague is stuck on a solution to a certain problem. Their physical presence allows for much more instantaneous communication and feedback than through virtual means.
• Direct control
If there is a problem, onsite allows for direct control via ‘hands on’ involvement of key personnel, and fast access to other experts outside the team.

• Confidentiality
When dealing with client data, it is usually required to work on secure premises and within certain hours to ensure client confidentiality.

• No digital disruption
Onsite allows for easier monitoring and management of employees’ activities.

• Centralized infrastructure and support system
Being onsite offers a more efficient work setup, for instance a fast and stable internet connection, powerful workstation, additional monitors, and access to printers. If you have a problem with hardware or software, IT support can typically be contacted in person rather than just addressing the issue over a dedicated helpline.
Challenges
• High utility costs
Maintaining a furnished, equipped and staffed physical space to house your employees is not cheap; an office location is a significant fixed cost that generates further costs that ultimately negatively impact a company’s bottom line.

• Commuting
In contrast to onsite working, home working saves a significant amount of travel time and reduces associated costs, especially for those employees with long commutes. Commuting is particularly associated with significant psychological and social costs, which is why many would agree that eliminating the daily commute is beneficial in reducing stress levels.

• Distractions
An office, especially one with an open plan layout, can prove a distracting work environment, with plenty to disturb an employee’s concentration and detract from their performance.

• Health
There is an increased risk of contracting infectious diseases when travelling by public transport7 or having direct contact with others in an office setting.8

REMOTE WORKING
Remote working – whether or not it has been at the top of the agenda for some organizations to reduce their footprint, lower their overhead and ultimately increase profitability – has become a necessity for most organizations to protect the health and well-being of their employees and to prevent the further spread of COVID-19.
Benefits
Moving from daily onsite office work to remote working can yield a number of benefits for employees and their managers.

• Lower utility costs
Remote working opens up considerable cost-saving potential for financial institutions, as it enables them to save a significant proportion of their fixed costs related to the rental of office space and equipment, as well as other operating costs calculated per employee that may have a negative impact on a company’s overall profitability.

• Less time spent commuting
Working from home saves the time spent commuting and reduces the associated costs, particularly for employees with long commutes. Many would also assume that avoiding daily commuting is beneficial in reducing stress and increasing job satisfaction and thus the well-being of their employees.

• Elevated concentration and productivity
If employees work from home and were previously used to working in an open-plan office where their concentration was disturbed and their performance impaired, they are likely to experience increased productivity.13 In addition, they may spend less time in unproductive meetings and
concentrate much more on completing their actual tasks and projects.

• Health protection
As the crisis has impressively shown us, social distancing and thus remote working reduces the risk of contracting infectious diseases when travelling by public transport
or having direct contact with other people in an office environment.

• Talent acquisition
Remote working gives institutions access to a wider pool of applicants by enabling them to recruit qualified new talent irrespective of their actual geographical location and possibly in places where it has not previously been possible to seek or attract such talent.
Challenges

The transition from daily onsite office work to remote working can pose a range of challenges for employees and their managers.

• Presenteeism and face-to-face management should become less important, as remote working shifts the focus from hours spent in the office to the delivery of specific objectives. This requires outcome- based management of employees alongside new rules for communication, collaboration and feedback.

• Creating a responsive technology to manage remote work. It is not purely about having adequate equipment and infrastructure to access required applications and information, but also the infrastructure in the new home working environment, ranging from high-speed internet access to setting up multiple monitors, webcam and headsets.

• Infrastructure needs to be secure. Working remotely increases cybersecurity risks, so appropriate protection measures are crucial. The simplest solution is to use a VPN to secure both data and online connections. For financial institutions, it is particularly important to stipulate two-or multifactor authentication to secure client data, and also to monitor its use to ensure compliance.
• Remote working devices should be managed by institutions. A client’s financial data is the most valuable and sensitive asset to a firm. Applications for monitoring remote workers activities can now check if the client’s information is being manually copied to a computer or printed.

• Remote working expenses and tax must be considered. Additional remote working expenses, such as gas and electricity charges, internet access, and furniture costs need to be taken into account. Any impact on income tax should also be considered. Extra payroll tax registration should be in place in the event of remote working from a different country when meeting thresholds relating to income generated or time spent.

• Regulatory compliance must be adhered to. The financial industry is a highly regulated sector with very strict requirements around the security of data and technology networks. Organizations will need to ensure that their employees remain compliant with the rules in a remote working environment.

NEARSHORE
The practice of locating services and people in a country or countries closely neighbouring your own, nearshore outsourcing today offers a range of benefits.
Benefits
• It lowers the cost of certain services. A key reason why nearshore outsourcing initially became popular. Delegating a range of tasks to specialists in a nearby country with lower labour costs can significantly lower a firm’s expenses.

• Hiring talent at a competitive price. Nearshoring countries can offer specialists with a higher education and at least several years of experience in the related field, but who are less expensive than employees in the home location.

• Time-zones are closely aligned. Nearshore outsourcing allows you to operate across locations within the same
or similar time-zones. This has benefits in terms of communication, working hours and travel times.

• Fewer cultural and language barriers. If nearshoring to the closest country to your own, there will be less issues
around cultural alignment, and language differences may be less of an issue.

• Greater legal and regulatory alignment. Nearshore outsourcing within a bloc like the European Union, for instance, means firms can take advantage of a greater harmonisation of laws and regulations.

• Entering a new market. Nearshoring can also be a first step to entering and competing locally within a foreign market.

Challenges
Despite the benefits that nearshore outsourcing offers, there are also some challenges to consider.

• Higher costs than offshoring. Although nearshoring may be less expensive than conducting business and software development operations in-house, it is usually not cheaper than offshoring to countries located further away.

• Lack of trust and perceived lower quality of work output. Some business owners are reluctant to trust lower- cost companies in neighbouring countries on the basis that the quality of their work and delivery will also be lower.

• Confidential information and sharing of sensitive data. A nearshoring relationship will typically require the exchange of confidential information when delegating business processes. Companies that do not wish to share such confidential information may accordingly reject outsourcing; those firms working with sensitive client data will want to be even more cautious, as the sharing of such client data with entities – particularly those located outside the home market – may not be permitted.
OFFSHORE
True offshore operating models, relocating work to locations with high-quality talent pools but significantly lower labour rates such as India, the Philippines and China, are a well-established and proven business strategy. Government support programs and financial incentives, plus access to an educated workforce with good language skills mean many companies have been prepared to countenance potential cultural challenges, geographical distance and often major time-zone differences.
Benefits
Offshoring has become for many financial institutions a vital part of their global operations strategy. Over and above costs savings, it enables additional team scalability, the ‘follow the sun’ principle can unlock 24/7 support options, the impact of geopolitical risks can be reduced and new cultural diversity can be injected into project teams.
Challenges
• Not all processes and activities are suitable for offshoring. Thorough scoping of proposed offshoring activities is essential, and should begin with a thorough analysis of potential benefits and limitations, including the identification of business critical and non-business critical processes, the need for face-to-face contact and/or physical presence on the job.18
• Underestimating the complexity of an offshore transition. This can be difficult to evaluate in advance but drawing upon the knowledge and experience of offshoring specialists and external consultants will help planning and prioritisation.

• Managing regulatory and legal risks. With offshore operations, it is key to fully understand all the regulatory and legal implications, and what specific obstacles or challenges may be involved.

• Data safety regulations and governance. The increased push for cross-border data protection over the past two decades (e.g. GDPR in the European Union, Cyberspace Administration of China) needs to be taken into account.

• Increasing offshore costs. One of the biggest drivers behind offshoring has been price. In the past, it was enough to have offshore centers in one location, which was growing over the time. Nowadays companies need to consider different geographical locations for increasing size of offshore centers, or setup smaller centers in multiple locations to mitigate dependency on local market situation


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