PA extract: But the trend may be slowing, or even moving into the opposite direction. "I am not sure there is now a consistent trend," suggests Jonathan Cooper-Bagnall, a Washington DC-based specialist in the subject at PA Consulting. "It has changed since the decision by JP Morgan-Bank One to pull everything back in-house."
The US Sarbanes-Oxley Act, sometimes cited as a driver for outsourcing, may turn out to be a barrier. "For the first time in the financial services industry, enterprise risk management has become important," says Mr Cooper-Bagnall at PA Consulting. "They are trying to assess their risk, and part of that is outsourcing."
He suggests that financial services companies have allowed departments to outsource functions on a case by case basis, often driven by cost savings. But without reference to a central strategy, companies may find they are carrying more risk than they realise. As businesses audit their outsourcing, this risk exposure, as much as any reputational pressure, may prompt companies to think again about outsourcing, especially for core business processes.
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Over the last couple of years, many in both the financial services and IT industries have assumed that the number of outsourcing projects would continue to grow apace.
In many respects, financial services is the ideal environment for outsourcing. The industry is already highly globalised, and with little in the way of a physical product, most transactions can be represented by a series of bits and bytes. This facilitates moving much of the processing involved in a transaction to a third party. Nor need that third party be based near the bank itself.
Some of this is not new: banks in the UK have had a shared, outsourced system for clearing cheques for some time; US banks clear credit card transactions through third parties.
It has been the decision to move financial services work overseas that has raised the profile of outsourcing, and given rise to opposition from unions and consumer groups both sides of the Atlantic.
Financial services firms moving work overseas is not new. Back-end IT work has been carried out in countries such as India since the 1990s, and companies such as Tata Consultancy Services (TCS), Infosys and Wipro have built large proportions of their business around IT work for European and US financial institutions.
Much of this work has consisted of programming jobs in either IT systems maintenance or applications development. Some financial services companies turned to India for help coping with the Y2K issue; others enlisted Indian and other overseas IT companies because of the skills shortage during the dotcom boom.
Customers, for the largest part, remained unaware of the trend and at a time when most financial services organisations were increasing their spending on IT, offshore outsourcing was not that important an issue for the unions.
But as banks and financial services companies have increased the number of tasks they outsource, the picture has changed. In some cases, customers noticed a lower level of service when call centres moved to third party providers, and not necessarily those based overseas.
And political pressure has increased, as the financial services sector has started to consider whether higher-value work, including once core areas such as financial analysis and mortgage application processing, could be transferred overseas and to external suppliers.
Cost savings, the ability to offer a round the clock service, and the fact that for the greatest part, the IT infrastructure needed to make it possible is already in place have driven boards to think about outsourcing a greater number of services.
But the trend may be slowing, or even moving into the opposite direction. "I am not sure there is now a consistent trend," suggests Jonathan Cooper-Bagnall, a Washington DC-based specialist in the subject at PA Consulting. "It has changed since the decision by JP Morgan-Bank One to pull everything back in-house."
While it is too early to say whether the JP Morgan decision will mark the beginning of the end of outsourcing growth in the sector, financial services companies are becoming more aware of the reputational as well as operational risks attached to transferring operations to third parties, especially those based overseas. In the UK, one bank, NatWest, has gone as far as to run a TV advertising campaign saying that its call centres are local, not in India.
But it does seem likely that outsourcing will remain a key tool for the financial services industry. Businesses will, however, need to ensure that they manage it well, and know the risks and how to mitigate them. They also need to find an outsourcing provider that can handle higher-value work or business processes, rather than support services. Not all can. And executives will need to convince the board.
"Three or four years ago, we were going around trying to convince people of the value of offshoring and outsourcing," says N Ganapathy Subramaniam, head of banking and financial services at Tata Consultancy Services. "There was very little skill involved. Going up the value chain means producing a model that makes the customer more comfortable with the work."
This means taking a more strategic approach to the outsourced relationship, rather than basing it solely on service level agreements. It requires outsourcing companies to be flexible about where they operate; increasingly, Indian-based outsourcing companies are opening up bases in eastern Europe, Ireland and lower-cost areas of the US.
Ganapathy Subramaniam sees growth coming from back office work that can be done offline, whether that is in an administrative area, such as mortgage application or insurance claim processing, or in work such as analysing company results. "You are able to send off an e-mail in the evening, and when you are back in the office, the work is done," he says.
This is one way that financial services companies can leverage the advantages of operations in other time zones. But not all outsourcing companies will be able to take on business process work rather than simply running IT services.
"Many of the companies who pioneered outsourcing are finding it very hard to get their existing vendors to do more high-value work. That brings them to the path of building their own captive centres," says Sheeroy Desai, chief operating officer of Sapient. Many of these may well be overseas, but management teams in financial services organisations may be more comfortable working with a subsidiary rather than a contractor. And the higher the value of the work, the more important that comfort factor is.
The US Sarbanes-Oxley Act, sometimes cited as a driver for outsourcing, may turn out to be a barrier. "For the first time in the financial services industry, enterprise risk management has become important," says Mr Cooper-Bagnall at PA Consulting. "They are trying to assess their risk, and part of that is outsourcing."
He suggests that financial services companies have allowed departments to outsource functions on a case by case basis, often driven by cost savings. But without reference to a central strategy, companies may find they are carrying more risk than they realise. As businesses audit their outsourcing, this risk exposure, as much as any reputational pressure, may prompt companies to think again about outsourcing, especially for core business processes.
