April 27, 2004

When financial services executives and chief information officers sit down to discuss the topic of offshore outsourcing, the emotionally charged debate often centers on sending high-skilled IT jobs to low-wage countries such as India, China and Russia. But the second issue being discussed is security - data-security risks and privacy concerns, and how these issues can be mitigated.

The financial industry is used to taking precautions to mitigate the risk of hackers and intruders stealing data and unauthorized personnel viewing sensitive data within corporate headquarters. But when applications are developed overseas and code is developed through interfaces with the host company's network, Wall Street firms have less control of their data and, to a large extent, are relying on another company's security measures and data-access policies.

The most obvious risks revolve around the access, storage and transfer of data. And compliance with regulations and U.S. privacy laws - such as Gramm-Leach-Bliley, which requires financial-services companies to protect the privacy of customer data and prohibits them from sharing it with other entities without permission - are driving firms' efforts to secure their data.

But is offshore outsourcing any more prone to data-security risks than domestic outsourcing? Are the fears over data security being overblown by the media because of the political backlash against lost jobs? "[U.S. companies] have been outsourcing for 20 years and no one was screaming [that] there were security issues," says Rita Terdiman, vice president and research director for Gartner, the technology research and consulting firm in Stamford, Conn.