When it comes to offshore outsourcing, the field is changing rapidly-in more ways than one. No longer is offshore just the playground for tier one, gigantic financial companies, and is it not just about saving money either. Faced with ongoing IT budget cuts and pressure to manage operating costs, mid-sized (tier two) insurance and financial services companies are joining their big brothers that have already gone offshore for application development and legacy maintenance. Moreover, both tier one and two companies are ever-more aggressively pursuing more complicated outsourcing contracts, such as business process outsourcing (BPO), according to a new study from A.T. Kearney (Chicago), an EDS company.
"Until recently, it has only been the tier one institutions that have ventured into offshore outsourcing," says Stephan Spohr, principal, Financial Institutions Group, A.T. Kearney. "But in order to stay competitive, the regional banks, P&C insurers and other 'next-tier' institutions will have to move certain processes offshore."
According to the study, 93 percent of global financial services executives that it surveyed are interested in offshore outsourcing to reduce cost. In fact, over the next few years, financial services companies have the potential to save close to $30 billion by migrating approximately 500,000 jobs offshore, according to Andrea H. Bierce, vice president and managing director, Financial Institutions Group, A.T. Kearney. "While reducing cost may be an initial motivation, improving productivity and service quality are quickly moving up the list," Bierce says. Sixty-four percent of respondents cited improved productivity and 42 percent pointed to enhancing service quality as reasons why theirparticular company outsources.
"Clearly, everyone is going for the cost cutting, but it is interesting to see that many are also focused on improving productivity and quality through outsourcing," Spohr says. "For the longest time, outsourcing has been focused on the maintenance of legacy applications. Offshore outsourcing to places like India for legacy applications is a mature market, but recently we are seeing that other parts of the financial services organization are looking at offshore outsourcing for business processes, such as accounting, customer support, marketing, creative services and desktop publishing.
"But," Spohr adds, "when it comes to some of the more advanced areas, especially for BPO, it is an immature marketplace. After application development and transaction processing, companies are now moving to analytical services, such as data mining and in some cases underwriting and credit scoring."
Even though 64 percent of respondents said that their companies have already started to implement BPO, many challenges were cited. For instance, the greatest impediment is "protecting turf and employees," followed by "getting functional areas to work together," "securing management support and buy-in," and "understanding potential value"-all equal as the second-biggest obstacles.
The most common business process to outsource is transaction processing, according to the study, followed by analytical and technical services, customer contact, finance and accounting, human resources and procurement, in that order.
However, only nine percent of financial services executives polled by A.T. Kearney say that their offshore activities are very effective, with 41 percent responding effective and 32 percent citing somewhat effective. "Many companies move to offshore outsourcing with a sense of urgency to cut costs," Spohr says. "They are not putting metrics in place, and as a result their initiatives may not be as successful as they had hoped. If you do not manage it well, you will not get the results."
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio