Trayport Contigo ETRM / CTRM
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The latest trends in near shoring / Human Capital

At a recent gathering of CIO’s from some of the commodities traders it became clear that ‘near shoring’ is again the flavor of the month.

Falling commodity prices over the last year across almost all major asset classes are making an impact. CIO priorities are going through a rationalization with the killer question on everyone’s lips “what is most important for the business”. OPEX budgets seem to be hit on average by a 10% – 15% reduction and CAPEX has seen further reductions.

The common reactions seem to be:

  • How do we maintain efficiency and service quality and reduce OPEX spend, utilization of cloud technologies seems to be the most popular
  • CTRM systems, I sense a swing back to ‘buy’ away from ‘build’, primarily because currently it is not about reinventing the wheel but delivering systems more quickly and effectively for the business and integrating ‘home grown’ functionality.
  • Also there is a widespread feeling that is very difficult to control ‘build’ costs in most cases. Another mood that I sense at the moment is that CTRM is seen by many an IT Leader as a mature technology and as a ‘commodity’ and for this reason investment can be capped and invested in other areas.
  • There is some ‘build’ activity in some of the big players in major, highly profitable asset classes where creating competitive advantage is still the appetite of the business. In most cases the mood here is that the decision to ‘buy’ would be the decision to take on board yet more legacy technology, as the plumbing of most of the major CTRM vendors is antiquated. The decision to build is no small undertaking but driven the motivation of ‘why buy a VW Golf when you could have a Tesla’.
  • The trends in the ‘build’ world right now are using neat / lower costs technologies such as Event Sourced Architecture, Open Source technologies, mobile technologies and hosting in the cloud.
  • Innovations that disrupt huge amounts of business process and anything relating to data, better data and trader decision support are where I see an increasing amount of investment going in the future.

The other headline cost saving as always is Human Capital. In recent months we have seen commodity traders reduce headcounts in prime locations such as London, Geneva and Zurich. Everyone is doing different things when it comes to near shoring and destinations such as India, Prague, Tallinn, Leeds, Barcelona, Madrid, Lisbon, Dubai and Montevideo are becoming increasingly popular.

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There are a number of different strategies in play. Ranging small teams of Developers being assembled through to full back office / operations shared service centers being created. At the other end of the spectrum companies are building co-located teams in India.

Broadly speaking I see 3 x Human Capital Strategies in place; these largely reflect the working style of the CIO size and profitability of the business:

High Cost / Prime Location

Recruit key functional skills (Business Analysts, Architects) and Developers in high cost locations. Often this is the ‘change’ areas of the business where the future business / IT strategy is being delivered. The rationale here is that these people are building ‘business critical ‘ applications that are the ‘crown jewels’ of the business, lets hire the best people where the skills are readily available rather than compromise on quality. The ‘arbitrage’ is in the support operations where legacy systems, support services and application support areas are often off-shored to medium / low cost locations or outsourced. This is very much a bi-modal IT strategy.

Medium Cost / Near Shore

This area has seen explosive growth in the last 2 – 3 years as many CIO’s aim to build co-located IT functions for both support functions as well as software development team. In many cases these strategies have been driven by both cost pressures but more importantly by the short supply of world-class technologists / software developers in Switzerland. Recruiting and retaining a world class team with the very best talent in such short supply in not as sustainable in Switzerland as it is in the UK.

A short commentary on growth hubs:

Estonia / Tallinn – with software taught in most schools for the age of 6 years old. It is little surprise that this is a hotbed for great software developers as evidenced by Skype and Playtech’s commitment to the location. Developers here can be secured for approx. 30% of a prime location like Geneva or London.

Czech Republic (Prague)

The Czech IT population is supplied by a very strong academic sector via Universities such as Charles, Czech Tech and Cornelius for Computer Science and the STEM disciplines. The last 5 years has seen Barclays, Deutsche Bank, Skype, Fastfill and Deutsche Bourse set up significant IT / software development functions. This growth has seen costs of recruiting staff here increase in the last 18 – 24 months. What was 20% of the cost of hire in a prime location has risen to 35 – 40% in some cases. The devalued currency and new entrants to the market has driven up competition, churn and increased candidate ‘promiscuity’.

Spain (Barcelona)

In the last 2 -3 years Barcelona’s attractiveness as a near shore location have grown significantly for a number of reasons.   Firstly, there is a strong SSC culture with Colt, Citibank, HP, King, Avanade and Bayer all having set up what are mature operations. Secondly, Barcelona is the MWC 4th smart city in the world. Thirdly, the high tech sector is in a phase of explosive growth with 2,400 starts ups in the ‘District 22’ area and a huge amount of public and private support. So what does this mean for labour costs? With low currency risks and low wage inflation Barcelona is seen as a safe haven for a near shore strategy with the cost of hire being circa 25% of a high cost location.

Mass Offshoring / Shared Service Centre’s

It goes without saying that the global market leader over the past decade has been India with it’s multiple hubs (Bangalore, Hyderabad, Mumbai, Pune, Chennai, Kolkata, Mysore, Hyderabad).

The reason for India’s dominance in this area of the market are twofold, cost and scale. However getting it right in India is not simple. Competition for staff is high and benefits can only be properly realized with significant investment of time and resources. This is a strategic, long-term play that is not about a simple ‘arbitrage’ opportunity. Getting it right means this has to be a full shared service center commitment, will involve a great deal of senior management time and in setting up, relocating and embedding with the teams in India. Staff swaps between hubs are also a common way of making the operation feel like ‘one team’. Finally with level of competition in India attrition rates will be high unless you develop the business, vision and career paths along the same lines as in any other location. Without this level of commitment you will be out-thought by the countless other global super brands building ever more mature operations in India. India’s dominance looks set to continue with increased competition from China and LATAM.

It is clear from the huge variance in these human capital strategies that it really all depends on the size and scale of the business, larger firms tend to have more mature and portable business processes. Medium size high-growth commodity traders have real motivations to drive transformation and innovation, this comes at a cost. The higher cost strategy seems to work for those trading higher profit assets classes (Oil, Metals). The medium cost strategy is being utilized by those in lower profit asset classes (Ags, Power, Gas).

The question is which of these strategies will deliver in the long term. Markers, sentiments and CIO decision-making can be ephemeral and change momentarily. Many voices in the industry see high / medium / low cost options equalizing in the next 10 years and believe that advances  in IT Innovation and Automation will also have a significant part to play in the bi-modal IT Human Capital Strategies of the future.

To be continued…

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