In Search of Savings

As a depressed economy continues to tighten purse strings, firms are literally looking far and wide for cost savings.

In good times, many companies love to tap good-old American patriotism by boasting that their products are made in the U.S.A. In bad times, however, the location where a product is made takes a backseat to how much it costs.

When cost is king, like now, financial institutions find themselves under enormous pressure to lower their bottom line while still delivering the best possible service. Toward that end, firms are increasingly embracing the offshore outsourcing of application development and maintenance.

Embarking on such an endeavor, however, is complicated. First off, a firm must decide which types of projects it intends to outsource. Does the firm want to outsource new application development or the maintenance of existing systems? Are executives comfortable letting go of mission-critical functions, such as trading applications, or just ancillary processes, like human-resources-related functions?

Secondly, a firm must select the structure it will employ to oversee the offshore outsourcing.

Deciding on that structure presents financial institutions with some difficult choices. For example, a firm may decide to work with a vendor/consultant, like Infosys or Wipro (both based in India) or decide to go to Bearing Point's (formerly KPMG Consulting's) newly established center in China. If, however, an institution is confident enough to go it alone, then a location must be selected: India, China, Mexico, Canada? Each has its advantages.

Selecting location is a huge part of laying out an offshore-outsourcing strategy. India, with its significant experience, friendly laws, and high degree of proficiency in English, is a favorite choice of many firms. However, Judy List, senior vice president of the services solutions group at Bearing Point, says that inflation in India caused her firm to select China as a prime location.

List explains why some outsourced functions are better suited for one country than another. "If you are looking to move a call center offshore, then I would suggest moving to India because of the language skills, but if you are looking for software development then China is cheaper than India."

John McKinley, chief technology officer, Merrill Lynch, says that offshore outsourcing is a cost-saving technique he has endorsed for some time.

To that end, he has established an internal structure, the Alternative-Development-Center (ADC) Program, whose function it is to "tap into the global labor pool," says McKinley. Much like a hedge fund, he says firms may want to have strategic relationships in a number of countries so that they can engage in "labor arbitrage" moving projects around the globe, looking to get maximum cost savings. The ADC's main function is to establish and maintain relationships with strategic offshore partners. It currently has two people located in India and several in New York City.

Merrill's partners include India-based TCS, Covansys and SSIT. These vendors, says McKinley, perform a combination of new systems development and ongoing maintenance to support some of Merrill's applications and systems. "We have started off with the strategic partnership model and I think we will look to evolve that over the next 12 months."

What that might evolve to is Merrill owning and operating its own offshore center, much like Fidelity, which initiated its first offshore venture in Ireland in 1995. For Fidelity, however, the jump wasn't all that far, as it had a base of operations in the United Kingdom. The company hired a local Irish manager to start up the operation, which was then staffed with local people.

Fidelity is repeating the same strategy as it looks to open an outsourcing facility in India. In this case, the firm will move an Indian employee, currently working in the United States, to India for a few years. When the employee has the Indian operation up and running, the executive will return to the United States.

Fidelity, however, won't only go it alone but will employ a dual strategy of establishing its own operations centers and working with third-party providers to build a solid offshore presence.

Merrill's McKinley says that this dual approach could be a perfect fit for some firms. "You may decide to do both," he says. "We might do something that in structure would be much more Merrill-owned, but that doesn't preclude me from using a strategic partnership model for other things," says McKinley.

Bearing Point's List says that firms should dip their toes into the offshore game in 2003 by first outsourcing non-mission-critical applications, such as mainframe application maintenance or human-resources systems. Call center functions, she says, are also a prime function to move offshore.

"I think the cost savings is too dramatic to miss," says McKinley. 'The wait-and-see people will be sorely pressed to justify inaction going forward. The savings is too compelling."

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Capability Maturity Model for Software (SW-CMM)
Many firms check a vendor's level of CMM certification before signing on the dotted line. Bearing Point's Judy List says her firm's China center will start out with a CMM level 3 certification. She hopes, however, to achieve level 5 status in the near future.

The Capability Maturity Model for Software (CMM or SW-CMM) is a model for judging the maturity of the software processes of an organization and for identifying the key practices that are required to increase the maturity of these processes.