June 18, 2008

It's a sensitive subject-- especially when firms are laying off U.S. employees by the thousands. But despite domestic job losses, offshore IT outsourcing is alive and well on the Street. More than 75 percent of major financial institutions send IT work offshore, according to Deloitte, and the consulting firm estimates that offshore technology spending by banks will increase by 2010 from the present 6 percent of the industry's $44 billion total annual IT budget to 30 percent.

Although the weakening U.S. dollar and rising wages in India are shrinking the benefits of wage arbitrage, India and China -- and even small countries such as Romania and Hungary -- produce engineers and software programmers faster than the U.S. And labor still is cheaper in many of those countries than it is here. The average cost of labor in India, for instance, still is just 48 cents per hour, according to a report on Forbes' Web site (although skilled developers make much more than that).

But while offshore outsourcing remains an important part of the industry's sourcing strategy, its offshore destinations are changing. A few years ago, most of Wall Street's offshore IT and operations work was sent to India-based companies. Today, however, Wall Street firms are becoming true worldsourcers. "All the major firms have a captive facility in India, and many are debating a list of other countries, such as the Philippines because English is easily understood there," notes Adam Schneider, Deloitte partner. For example, UBS, which has a large offshore captive facility in India, is about to open a major processing center in Singapore.

Further, in addition to sending IT and operations work to China, Singapore, the Philippines and Eastern Europe as well as India, financial firms also are stepping up their nearshoring -- sending more work to lower-cost parts of the U.S., such as the South and the Rust Belt, including Dallas; Buffalo, N.Y.; and Des Moines, Iowa.

Case in point: Two years ago, Merrill Lynch developed a global support model for core infrastructure services, designed to be agile, scalable and capable of withstanding market gyrations, according to company executives. The model relocated certain IT functions to lower-cost facilities in Singapore and Jacksonville, Fla. (Generally, the Southern U.S. region has a lower cost base than New York City, and Merrill already had a site in Jacksonville that could be expanded for this purpose.)

Still, there's no need to pity the India outsourcing giants that have dominated the offshore outsourcing industry -- such as Tata, Infosys, Wipro, Satyam and HCL -- just yet. For one thing, there's plenty of work to go around. "The demand for these resources is growing very fast, and even India, with its large number of graduates, is having difficulty keeping up," says Sunil Subbakrishna, partner in the strategic IT and operations practice at Oliver Wyman, noting that the demand is helping drive salary increases in India.

In addition, the India outsourcing providers are globalizing, too. "The Indian firms have significant operations in China, Mexico, Argentina, Brazil and Eastern Europe," relates Subbakrishna. "Companies in the U.S. and Europe might find themselves hiring an Infosys or Wipro, but getting resources from Latin America or Eastern Europe."

So what types of IT work is Wall Street worldsourcing? Application development and support desk functions, the classic work of Indian outsourcers, continue to be offshored. And increasingly, back-office functions, such as maintaining security masters, securities reconciliations, night-time pricing and valuation (after the U.S. markets close), online systems maintenance, and research analytics all are being sent abroad.