Jack Ribeiro, managing partner of the Deloitte network’s Global Financial Services Industry group, said: ‘In future, the best offshoring strategies cannot be based solely on financial gains from labour arbitrage. Otherwise the legacy inefficiencies of older, onshore processes may simply be transferred offshore.’

Deloitte issued the warning in its 2007 Global financial services offshoring report, which detailed a study undertaken by the firm’s financial services industry practitioners.

It highlighted a surge in the practice by financial services powerhouses. Less than 10% of major financial institutions had moved processes offshore in 2001, but by 2006, over 75% of major institutions had shifted overseas.

The group also reported a huge spike in offshore headcount with an estimated 18-fold increase in the average number of staff that each financial institution has employed offshore over the last four years, from 150 in 2003 to 2,700 in 2006. In the last year alone, this has led the proportion of group headcount in lower cost countries to double, from 3% to 6%.

This offshore push has propelled the sectors’ cumulative cost savings. During the past four years, farming out operations has seen more than half of the institutions in Deloitte’s poll saving more than 40% for each business process offshored. India remained the hub but was ‘likely to lose share in the future’, Deloitte said.

Deloitte added: ‘Most organisations have taken advantage of offshoring, but the key challenge is to optimise operations. In other words, they need to progress beyond pure labour arbitrage benefits by re-engineering business processes to make them world class.’

‘In some instances these savings have been equivalent to 3% of their total cost base. Other institutions, that have failed to apply the best practices have, in some instances, experienced a decline in their operational performance.’

COMPANY REPORTS

US proposal threatens PE tax rules

Financial rewards earned by private equity partners should in part be subject to income tax, according to a senior US finance official. Peter Orszag, director of the Congressional Budget Office, told Congress that ‘most legal and economic analysis suggests that carried interest represents, at least in part, a form of performance-based compensation for services undertaken by the general partner.’ The analysis will add fuel to the private equity tax debate raging on both sides of the Atlantic.

Orszag warned that as long as there was a difference between the tax rate on income and capital gains, people will try to turn income into capital gains.

KPMG warns on M&A market peak

Mergers and acquisitions have reached their peak as the number of new deals is forecast to slow, according to KPMG. ‘Global activity is about to peak, certainly in terms of deal volume, and we foresee a continued fall in deal numbers during the course of 2007,’ said Stephen Barrett, KPMG’s international chairman of corporate finance. During the first six months of the year, the volume of M&A activity worldwide increased by 50% to reach $2,780bn (£1,390bn), according to M&A analysts Dealogic.

The average deal size also rose by 58% to $298m, the highest on record. KPMG said that, while several large finance deals for leveraged buy-outs had been put on ice due to turmoil in the credit markets, the rising valuations were proving a ‘headwind’ for other deals.

Favourable conditions tempt private sell-offs

Experts have said that the market for selling private businesses is at a ten-year peak as many are being sold for multiples of 15 times earnings.

According to UHY Hacker Young, the gap between the 14.8 times post-tax profits ratio used to calculate private company’s value and the 15.8 times earnings at which the stock market currently values quoted companies is at an historically low level.

Chris Lowry, corporate finance partner at the firm, said: ‘Five years ago, companies listed on the stock market were being valued at an average 22.4 times their after-tax profits, compared with just 12.2 times for private company sales. For owners who are looking to “cash out” and feel that getting a stock market listing is not for them, the alternative of putting their business up for sale is tempting.’