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Financial Service Firms Outsourcing to India to Increase
si Team
Tuesday, July 8, 2008
Needham, Ma-based research and consulting firm Tower Group expects a big push in outsourcing by global financial institutions to countries like India and China.

In its report on Outsourcing in Financial Services, TowerGroup estimates that the financial services industry ‘s global IT spending on outsourcing services will grow from $27.8b in 2003 to $38.2b in 2006, representing a compound annual growth rate (CAGR) of more than 11 percent. The offshore component of this will grow 28 percent annually during the same time period, rising from 5.8 percent of the total last year to 8.9 percent in 2006.

The IT portion of offshore BPO (excluding general administrative BPO such as payroll, which does not come out of the IT budget) currently represents only a fraction of the offshore outsourcing market.But its estimated growth rate of 36 percent over the next three years indicates a strong commitment on the part of financial services executives to seek new avenues of strategic cost management and business efficiencies.

Two main factors are driving this trend. First, it’s cheaper. The fully loaded cost of hiring an experienced junior analyst in India is between $20,000 and $25,000, compared with between $85,000 and $90,000 in New York. Such savings are especially attractive now that banks are no longer subsidizing sell-side research with investment-banking fees.
Second, banks hope that by freeing senior analysts to concentrate on analysis rather than running numbers, they will produce better—and more—research.

“Maintenance costs will go down and more money will be available to innovate. Firms that do not view offshore outsourcing as an opportunity to do more, not less are missing the boat,” says Virginia Garcia, senior analyst in the Financial Services Strategy & IT Investments practice at Tower Group and the author of the research.

Most leading financial institutions have entered into contract with specialized offshore vendors for outsourcing activity. However, many leading firms now own and operate their own captive sites in India, which allows for better risk management and IT governance and thus a more confident transfer of riskier IT and business processes to low-cost destinations. “Some of the financial service organizations are hiring up to 100 people per month at captive sites abroad. They are growing very rapidly,” says Garcia.

In its report, Tower Group points out that there is a growing percentage of large institutions expanding their existing offshore IT outsourcing contracts to include critical IT and business processes. “The top 15 global financial institutions will increase information technology spending on vendor-direct offshore outsourcing by 34 per cent annually representing an increase from $1.6b in 2004 to $3.89b in 2008,” Tower Group said in its report.
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