Offshoring, as offensive as the term might be to some, is not going away. A survey by Deloitte Research showed a 38% increase from a year ago in the number of global financial companies offshoring information technology and customer support functions. Furthermore, the consulting firm estimated that the top 100 global financial companies with market caps of more than $10 billion each will offshore an average of $2.1 billion of their operating costs next year. Clearly, it's time take a harder look at the financial implications for these companies from an investor's perspective.
The study indicated that these companies will save an average of $700 million. That means a cost reduction of 33% on the operations being relocated to lower-wage countries. Deloitte also expects that by 2010 -- remember, that's only five and a half years from now -- these companies will have offshored 20% of their operations, reducing costs by 37%.
Of course, a particular company's savings will vary depending on many factors, including the extent to which the firm relocates its operations abroad. But it's helpful to look at how the average expected savings for next year might affect the bottom line of some leading financial companies that are known to be actively offshoring operations.
Analysts' estimates of future earnings may or may not be accounting for this factor. So a more telling measure is to see how much the savings would have affected the last full-year earnings. For example, if Goldman Sachs
Similarly, for the $80 billion JP Morgan Chase
Those are pretty rough estimates, but it's plain to see that the potential cost savings from offshoring are very significant. And given that these companies have been in a slump recently due to concerns about rising interest rates (which I think are overdone), the long-term contrarian and value-minded investors should be salivating about now. This is like getting double coupons at the grocery store.
Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.