FINANCIAL SERVICES | Krisana Gallezo-Estaura, Singapore

What does it mean for Singapore that jobs are being moved back to the EU as it is cheaper?

Banks are switching back office roles to European countries as salaries in Singapore are two to four times more expensive.

The recent move by some banks to switch back office roles such as IT and credit risk to cheaper locations like India and Europe came as a surprise. Credit Suisse for instance just recently shift dozens of back office jobs from Singapore to India and Poland.

Last month Morgan Stanley moved 80 back office positions from the country to India and Hungary.

RBS-owned insurance provider Direct Line, is also set to cut jobs as part of a plan to make £100 million in cost savings by 2014.

Market speculates that RBS will follow suit in relocating back office jobs.

Singapore Business Review interviewed some experts to get their thoughts on what does this switching move mean for Singapore. Here are the views:

Pan Zaixian, General Manager, Kerry Consulting

It is not a new theme for banks and companies to be constantly looking for cheaper locations. If you refer to the Wealth Report 2012 by Knight Frank and Citi Private Bank, Singapore is the richest country in the world on a per capita basis, while that is flattering to the Singapore government, it also equates that the country is not a low cost destination. Over the years, Singapore has also become a more expensive location for staffing which is made up of both salary and rental costs.

For example salary inflation over the boom years in banking hiring from 2004-2008 and through the later post GFC recovery in 2010 where pay premiums to move between employers average about 18% on a compounded basis over a number of years. In addition the strength of the Singapore dollar (ie. since 2004, the Singapore dollar has appreciated about 27% to both the US dollar and Euro, 38% to the British pound) have contributed to the country’s higher cost of employment. Rental costs have also gone up altogether during the earlier property boom years.

For the same reason that China is the world's factory for goods and sundries as it has scale and cost advantages, there will be other countries in Asia and emerging Europe that are competing to ''factory produce'' banking services. For European banks, there could also be unspoken political overtures to prefer certain jobs to within the European Union.

Despite all these, Singapore has never competed on the cost front. While there are banks moving headcount out of Singapore, there are also those who are relocating select roles into the country. Infrastructural advantages, regulatory climate, stability, low taxes, quality of living, geographical and time zone proximity and continued government incentives such as preferred company taxes have been the bigger draws for companies to move and stay here.’’

Sebastien Normand, Managing Director, Resources Global Professionals

It is important to keep in mind that the trend is not new. It is a structural phenomenon that started already 2 decades ago in many other industries and which was launched in the financial services industry in Europe several years ago. However, considering the debt crisis in Europe, and the constraints imposed by the monetary authorities worldwide, banks have to change the way they do business. Since a lot of them will decide to refocus their activities on less profitable – but more stable - ones like retail and corporate banking, it seems obvious that cost containment will become a priority, even more than before. In this respect, there will be a constant search for ways to reduce back office costs through automation, more efficient systems and organization. For the latter, transferring or opening back offices and shared service centers in cheaper places will be a must and therefore the recent shift will continue. This is despite the fact that growth will come from Asia, including places like Singapore, especially since time difference and cultural differences are probably easier to absorb for back office functions.

This “new” trend will definitely affect the market and maybe re-balance the power between employers and employees. Today, Singapore is definitely an employee market due to the shortage of resources for the kind of roles we are talking about. With the transfer of activities to other countries, many employees will be searching for new opportunities and the market may cool down a bit.

The challenge for Singapore to reverse this trend, like for any other developed country with high average salaries, and this applies to any industry, will be to be able to reduce the proportion of labor costs versus the total costs incurred to run a business.

According to our information gathered from our different offices, for a similar role (e.g. admin clerk), salaries could be 2 to 4 times more expensive in Singapore (SGD 2 to 2.5 k/ month) than in India. Of course, this does not include the impact in terms of productivity.
When working on cost and benefit evaluation during due diligence, a lot of clients find it attractive on the surface to proceed to the off shoring of their back office activities, but after go-live and in operational stage, different set of issues arise (no proper knowledge transfer, scope/expectations not addressed properly, quality issues, continuity with BPO due to turnover...).

Salary for the SCC in Poland is approx. 50-70% of the Swiss employment salary and in India 35-50%.

As an example to share with you, one of our client in Switzerland currently centralizes all their financial and IT functions globally. They have outsourced Accounts Payable with CapGemini to India, since these are tasks which can be processed with only English speaking people. All Finance processes which need to be adapted from time to time or discussed with local teams have been outsourced to Poland. This has the reason that in Poland usually more educated people work in SSC and they are able to employ people with different language skills for a reasonable salary. The employees in India change their jobs frequently whenever they have a better offer with higher salary in another SSC. Indeed these resources are much “cheaper” than the local resources in Germany, Switzerland and Singapore as well.

Chris Siem, consultant at Resources Global Professionals Singapore

Singapore does not feature in the top locations for back-office functions. One leading survey, the AT Kearney Globalization Index, shows India, China, and Malaysia as top locations (1).

2. Push factor - Two major cost components of back-office functions involve real estate and staff.

* Singapore real estate
- In 2007, Citi announced migration of support functions from Tampines to Changi Business Park, due to significant surge in office rents. OCBC, DBS, and UOB already had their support functions in lower cost areas such as Chai Chee (2).

* Wages
- Back-office functions typically see a higher than average staff churn which tends to drive wage inflation.
- Whilst churn trends in locations such as India and Poland may be higher than in Singapore, the base wage level is still lower due to cost of living.
- Additionally, BPOs in India enjoy a healthy supply of staff as undergraduates in India appear to consider back-office jobs as a stepping stone to junior managerial positions (3).

3. Pull factor - Offshoring of back-office functions is not new, neither to finance services nor to other industries.

* In the case of banks, the bulk of back-office functions involves IT-related activities such as application development and maintenance, testing, and similar.

* India
- Whilst Singapore has no shortage of talent, India is the base for leading ITO players such as Wipro, Tata, and Cognizant.
- Such large players continue to enjoy scale advantages, as well as supply of IT-savvy staff (see previous paragraph).
- Additionally, these players are developing BPO locations in rural areas (4). Whilst capabilities are still limited due to talent availability and business recovery, India may have an advantage to farm out simpler activities across small rural BPO outfits.

* Poland
- Whilst not among the top locations, Poland has been a popular offshoring location together with Hungary and Czech Republic. Note: current leaders include Latvia and Estonia.
- Given their popularity, cities such as Krakow have developed into locations with good accessibility, infrastructure and talent availability - three key criteria for both captives and BPO players.
- A survey by KPMG even shows Poland as more attractive offshoring location than India, whilst one of its offshoring focus areas appears to be in IT and finance/banking. (5) 

James Leong C.Foo, CEO and Master Trainer of VisionsOne Consulting

Doing more for less: Keeping costs down.

In a weak global economy and low interest rate environment, banks face volume pressures and margin squeeze. Reducing costs is critical for survival. Developing and populous countries with a large educated workforce offers an irresistible solution to the problem: the ability to do a one dollar job in a home country for say, 30 cents offshore. Perceived cost advantages are overriding factors for moving operations abroad.

Matching aspirations: Moving up the value chain. For business continuity, it is essential that staff turnover stays at a manageable level. Due to rising aspirations of Singaporean workers yearning for rapid career progression and financial recognition, a back office admin job might just be a short-term career stepping stone. This could result in high churn, which is undesirable for operational stability. Offshoring to a country where such jobs aredeemed as highly desirable could provide a stable platform for the behind-the-scenes transactional processing function of the business.

Offshoring is likely to continue in an increasingly borderless planet. Enhanced world connectivity through technological and communication advances has made the case for a globalised workflow footprint.

For an open economy like Singapore, those jobs may not return to shore. On the other hand, aspiring young Singaporeans may not want those jobs, given a choice. It is important that Singaporeans take the initiative to upgrade our skills to perform higher value-adding jobs. At the same time, Singapore must continue to be an attractive place of business for higher value-adding industries to provide the right jobs for our people.

When this happens, it would be a win-win-win situation for all- where employers know Singapore as the place to get higher value-adding work done, Singaporeans get their career aspirations fulfilled, while other countries are being uplifted by the economic opportunities created by offshoring.

Justin Fong, Principal Consultant/Trainer, CW Fong & Associates

I believe that such moves are inevitable as Info Comm developments have made it possible to tap on "talents" at the global level. Asymmetries of economic developments and the rising educational levels of third world countries have therefore made it possible to locate back office functions in less costly locations with similar service levels.

The impact for Singapore business is huge as the competitive edge where we provided the lower cost option has all but eroded. In my opinion, it is a matter of time before more of such companies re-locate.

For Singapore to survive, we will need to re-invent ourselves and provide a new value proposition. Our value proposition can no longer be the cheap quality workforce, but a workforce that 'thinks', 'adds value' and 'creates'. A look at the shifts in our education policies reflects this shift in thinking. Unfortunately, in my opinion, I believe that we are slightly behind the curve on this one as transforming the way a generation thinks takes time.

The solution? While I will likely get flamed for this, but I believe the use of Foreign Talents as a bridge while we re-tool our workforce is the only option availale for Singapore.

Paul Heng, Founder/MD of NeXT Career Consulting Group, Asia

This is a not a new phenomenon - for at least 8 years to a decade already, businesses have been moving supporting roles out of Singapore, primarily because of cost reasons. As Singapore society continues to mature, businesses are finding it increasingly challenging to attract applicants for some of their more back-room supporting functions. Besides costs, language is the other key consideration, and this is one of the reasons why China is losing out as the English language has yet to become a key competency of the majority of the Chinese workers. I foresee this trend to continue and there is absolutely no way to reverse this as Singapore continues to move forward towards a high-tech (versus high-touch) society. With education level and personal career aspirations on the rise, it is inevitable that back-room jobs will have to move out of SIngapore)

We do not track salary data, but I would probably not be too far off to guess that compared to the other three countries, job incumbents here probably are paid 3 - 4 times their counterparts

Adrian Tan, Managing Director RecruitPlus Consulting Pte Ltd

This isn’t surprising. Our cost of business (land/people) is rising rapidly and with all manpower policies are pointing to an event where labour costs will be a huge portion of company expenses. The high level of competition doesn’t help. So if the additional cost of service cannot be passed to consumer, it has to be reduced.

We don’t even need to look far. Just compare a Malaysian customer service agent. They make about RM1,500 a month. A local CSA makes about the same but in SGD.

Innovation remains the key and it should be a key emphasis to create a conducive environment where Singapore business can innovate. Back office (or manufacturing) don’t have to be here. Just look at Apple. All manufacturing are outsourced but the brains are at Cupertino. But to get there will take a huge cultural/educational mental shift. The time will come when parents start encouraging their kids to become an entrepreneur instead of a lawyer or doctor.

The salaries of talents in India, Hungary and Poland depends much on exactly which part of the country. Broadly, a receptionist in India cost about 205 EUR a month. A receptionist in Poland cost about 300 EUR and Hungary about 550 EUR. A entry level receptionist here cost at least SGD$1,700 (1,077 EUR). So you can just apply the same discount factor over other positions to give an idea how much it cost for other positions.

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