Towergroup: Increasing Risk in Offshore Outsourcing

A new ViewPoint from TowerGroup finds that global financial volatility and growing political instability are posing increasing problems for companies with offshore resources. TowerGroup believes last week's terrorist attacks in Mumbai have further underscored the interdependencies and vulnerabilities of markets, companies, and individuals working in outsourced locations.

The financial services industry has invested heavily in offshore outsourcing and continues to do so. Political risk has always been taken into account, but because of market volatility, individual governments now have increasing power, which will lead to conflicting regulatory objectives, according to the TowerGroup report.

TowerGroup expects that financial service institutions (FSIs) looking to reduce costs and gain access to skilled business and technology resources through outsourcing will face new demands for operational resilience and business continuity. TowerGroup suggests that FSIs with cross-border exposure will need to secure new centers of excellence around outsourcing expertise and management. Vendors that openly assist in improving visibility, transparency, and assurance of the quality of their services will find significant new business opportunity in FSIs.

"The challenge of effectively managing the risks of offshoring has been exacerbated by political events and terrorist attacks," said Guillermo Kopp, executive director and global research fellow at TowerGroup, in a press release. "Offshoring will continue to grow as global financial institutions seek to reduce costs, but the difference between investment from European and US FSIs will be notable," he added. TowerGroup anticipates that recent events in India will reinforce current sentiment against off-shoring by European FSIs. This trend is reflected in the growing influence of the UK and EU governments as a result of bank recapitalization. The story in the United States is different. "US FSIs grappling with a challenging economic climate are looking to drive cost efficiencies," said Rodney Nelsestuen, in the release.