Deloitte issues cheap labour warning

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.’