Risk Off-Shoring, Should You Do It?

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Copyright (c) 2012 Ram Iyer

Risk Off-shoring is a task that banks carry out once they have a good understanding of their risk capital allocation. Understanding what can be off-shored is an even more important task than the actual process of off-shoring. If executed correctly Off-shoring unquestionably brings tangible cost benefit but brings even more valuable intangible benefit of building risk knowledge through Risk Centralization for the bank. There have been cases where banks have failed to execute this correctly leading to fault lines through which risk ownership has crept leading to regulatory fines (e.g. a global bank money laundering case). It is extremely important to set a central risk ownership and governance for every section of risk process and risk management, irrespective of the location where the work is executed.

Risk Centralization

Risk Centralization brings the risk knowledge across the bank under the administration of a single governance unit thereby upgrading the bank culture from indicative to predictive risk management. Risk knowledge involves building the cube view of the global bank risk - Industry risk, Sovereign risk and Products risk (financial & commodity) and enables the governance to proactively set limits, measure and track movement of risk capital from one section of the risk cube to another. Viewing the bank risk through this cube helps to determine which sections of risk need high onsite attention while which can be moved to an off-shore unit for regular routine risk management.

A similar separate spectrum should also be created for risk processes like Quantitative risk measurement, managing credit reviews, data entry, consumer credit modeling and monitoring, ALLL calculation, consumer products collection and dialer strategies, structured credit deal structuring etc. Different banks have gone to various extents in off-shoring work to high-talent populous low-cost nations, English-speaking (India) or not (China/Philippines/Africa).

Risk Management performs two types of tasks, Flow-based tasks and Deal-based tasks. In general flow-based task (such as risk measurement, monthly risk reporting, annual reviews etc) could be easily off-shored. A good understanding of the bank's risk guidelines and procedures will help determine which sections of deal-based work can off-shored (analysis, reviews, modeling, DG and LGD generation).

Once the bank has performed its assessment on which sections of risk does not need onsite risk presence, Risk Off-shoring takes various forms, each having its level of cost. Risk Partnering is an most risk-effective but relatively less cost-effective way (30% efficiency) of On-shore-Off-shore risk efficiency model that ensures control over quality of work, maintaining bank culture, maintaining employee morale and thereby satisfaction & retention.

There are three ways of risk offshoring 1) Using External Agency - Low Cost, low investment - Usually this is the first step in trying offshoring and Bank's adaptability to working with offshore units.

2) Separate off-shore Business Unit within the Bank: Relatively low cost; this is next stage when bank is willing to bring a broader domain of tasks offshore

3) Risk Partnering: This is the final stage; At this level intangible benefits are enormous and the bank seeks continous productivity with 24-hour work efficiency for the bank using high skill employees at both on-shore and off-shore locations.

Irrespective of the type of Risk Off-shoring model the banks will face challenges in the areas of

1) Work Schedule Alignment: It is common for work to take several days due to limited time-zone overlap, some onsite units overlapping more than others. Setting expectations on each assignment is very critical to obtain satisfaction at both ends.

2) Out of Sight, Out of Mind: Off-Shore employees get morally de-motivated relatively quickly due lack of onsite executive leadership presence. Regular Web seminars, intermittent executive visits and performance gifts (points) help in maintaining motivation for the local staff.

3) Culture difference: Asian culture has a tendency to refrain from open healthy confrontation on topics of work, especially where there is a difference in opinion between on-shore and off-shore units. This is viewed and disrespectful by the Asian community, however lack of an open discussion is viewed as uneducated and ignorance by the West. Fortunately several professionals now have returned back to Asia after decades of experience in America or Europe and should be hired to head units within risk. This ensures healthy discussion is maintained across geographies while also coaching the Asian employees on the expectations of the West.

4) People Management: Asian offices tend to hold 7X ? 10X more people than the size of any US/Europe based operations. People management takes further more precedence in Asia than in any Western office. A Strong team of Human Resources personnel is required to address issues pertaining to managing and keeping a motivated team.

5) Competitive Demand for Risk Professionals: Risk professionals hold the center-stage in this high regulatory environment. Banks as well as Advisory firms are setting up risk off-shoring units in Asia. This has increased the demand for good risk professionals locally. Companies tend to hire twice the amount of people needed for the job as the attrition rate remains high. Also, with the developed infrastructure in Asia many onsite risk professionals now agree to move to Off-shore locations.

Although every company has taken their unique approach in setting up their off-shore units, the challenges they face are similar. One winning strategy that has worked for all successful firms is in accepting the culture of the land where they operate while maintaining their global vision and strategy.

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