The Real Value of Outsourcing IT in Financial Services

The outsourcing market has grown incredibly over the last several years. What was one simply the ‘smart option’ of a few large firms has become an inescapable trend throughout IT departments in financial services, changing the structure of IT staff from skilled in-house technicians to project and relationship managers who work with technical staff around the globe.

Are organizations able to truly reap the rewards of outsourcing? There are some stellar examples of where outsourcing has successfully reduced costs while maintaining or even improving quality. Those organizations that have been successful have been able to navigate pitfalls and develop practical best practices for leveraging their offshore relationships.

The Case for Offshoring

During the ‘dot com’ revolution, truly skilled technical resources were hard to find, and could demand steep salaries for their positions. Offshoring to India, among others, was an initial answer to this resource crunch given the availability of English-speaking, highly educated personnel at extremely low per-hour costs. Other countries like Russia and China soon entered the offshore race, and were quickly followed by smaller eastern European countries like Estonia.

The ultimate factor, however, that appealed to executives was cost savings. To stay competitive financial services organizations spend a significant percent of budgets developing and maintaining internal systems that service customers, grow prospects, and provide competitive market advantages. The lure of highly skilled labor at a fraction of the cost of internal resources - $10/hour vs. $40 - $50/hour fully-loaded cost per employee – was just too good to pass up.

Another reason organizations opted to move offshore was driven by business need. Because offshore workers are typically working when US workers are sleeping, offshore resourcing makes it possible to more cost-effectively provide 24/7 support. Companies were also enticed by the option of round-the-clock development, with offshore firms providing staffing in three, eight-hour shifts that could, at least in theory, enable IT development to continue several times faster than onshore resources.

Financial services organizations that were not tempted early on in the offshore evolution could find it hard to resist today. This is not simply a case of peer pressure. The cost savings seen by those firms that had successfully offshored IT projects became a competitive advantage not easily ignored by competitors with an onshore only presence.

Offshore resourcing is not without its challenges, and as the offshore model matured over the last several years, some issues have become more pronounced. Issues include: communication challenges driven by different time zones and even different languages; challenges communicating business contexts that do not easily translate across cultures; turnover rates of up to 20 to 40 percent due to recruitment from competing offshore firms; difficulties enforcing employment agreements and other contracts that protect against the piracy of sensitive business processes and trade secrets; and training of existing staff in new management skills for managing offshore teams.

The Path to Success

Here are five key recommendations to consider:

• Pick the right offshore vendor: Pick a vendor with experience in your industry, with proven experience managing skill sets, turnover, competition, and work hours to create the maximum possible overlap with your staff. Review their track record, and check references.
• Manage the communication process: Develop a communication strategy with the offshore partner that addresses work hours, holidays (which are not the same as US holidays), and travel policies between the offshore facility and your base of operations.
• Ensure projects are well-defined: The best projects start with well defined functional and technical design processes and specifications. Limit the amount of overlapping work between development teams, and schedule regular interactions when teams can test their individual parts in the context of the whole project.
• Invest in management training: Ensure your managers are getting the training they need to build skills managing offshore projects
• Maintain control of your knowledge assets: Ensure that you don’t outsource all of your knowledge capital. Look for ways to manage a combined onshore and offshore team, allowing internal resources to provide the ongoing continuity of knowledge of the project, functionality, and key decisions.
  

Conclusions

Offshore resourcing can provide a key competitive advantage to financial services organizations when integrated properly into IT strategy. As the offshore market grows, it will be increasingly difficult to compete without leveraging the cost savings and access to skilled resources that the offshore model provides. But, like most critical decisions, the decision to offshore work cannot be taken lightly. Vendors need to be evaluated, managers trained, skills developed. Does it make sense to consider or expand your offshore strategy? Can you afford not to? In the end, a properly investigated and managed offshore strategy can result in both cost savings and improved organizational productivity promised.