IT Challenge

The Russians aren't coming-at least physically. Nor for that matter are the Indians, the Israelis, the Romanians, or any one of umpteen other nationalities involved in the burgeoning overseas IT outsourcing market. While some have started to open small offices in the U.S. to provide local representation, their main development teams remain firmly on their home territory-in labor markets where skilled programmers are cheap, plentiful, and don't job hop every ten minutes. That's just as well for Wall Street's CIOs, who have had a difficulttime competing with the dot-com bubble over the past two years for suitably qualified staff. Though the demise of many e-businesses has seen some skilled personnel drifting back to capital markets, the U.S. IT labor market situation remains tight and CIOs are increasingly turning to overseas outsourcing shops to meet the challenge of completing projects on time-or even at all.

A recent survey by the Information Technology Association of the U.S. IT labor market reveals why. The study found that 850,000 IT jobs were unfilled as of last April, with that figure expected to increase to 1.6 million by April 2001. "Though split figures aren't available specifically for capital markets IT jobs, it's safe to say that the shortfall between U.S. college output and Wall Street IT personnel requirements is substantial," says Mirko Dakovic, v.p. for international programs at World Research Group. "A 2001 total allocation of 107,500 H1-B visas for immigrant workers isn't going to help much either, nor will its reversion to the original 65,000 limit in 2002."

The International Securities Exchange, the first entirely electronic options exchange in the U.S., has made considerable use of both U.S. and overseas outsourcing companies. The exchange selected Swedish vendor OM's CLICK Exchange System as its electronic trading system, but wanted to make substantial modifications to the system. This was because of the ISE's choice of market structure. "We created an agency-auction market in a screen-based system, which is unique to the ISE," says the exchange's president David Krell. "So we provided OM with the specifications and they made the changes to the base system."

At the time the project started, OM didn't have an office in the U.S., so all the outsourced work was carried out in Sweden. "We considered doing the project in house, but decided it would be quicker, more efficient and less expensive if we outsourced to a firm with special expertise," says Krell. Interestingly, geographical location was not an issue for the ISE when awarding the outsourcing contract to OM. "We consider the outsourcer's location when awarding a contract, but we are more concerned about their ability to support us on an ongoing basis," says Krell. "We certainly wouldn't exclude an outsourcer purely on the basis of location, in this age of technology it isn't particularly important-for example we can get support from OM at 3 a.m., both their time and ours."

In fact, time zone differences seem to play very little part in clients' decisions whether to outsource overseas or not. In most cases this is because many larger outsourcing companies work a 24x7 shift system to ensure overlap, while others move the working day to accommodate the time zone in which the majority of their clients are based. For example, specialist financial IT outsourcer Egar Technology, which has the bulk of its 80 programmers based in Moscow, operates a 10am to 10pm working day there. "While some clients are initially concerned about the time difference, we've found that those working hours, which gives us a five hour overlap with New York work very well," says Ravi Jain, Egar's CEO. "We can discuss issues with clients until 2p.m. their time and then by the time they reach their desk the following day another batch of code can be ready awaiting their inspection. If we didn't adopt these hours we'd always be losing a day, which would concern clients a lot more."

"When we considered using Egar, we were initially concerned because of their location about separation of control and the resulting quality," says Jim Gosselin, CEO of market maker Midland Trading. "However, in practice the whole relationship has worked out very well and the geographical differences have had no effect." Nevertheless, Gosselin considers some form of onshore presence for overseas outsourcers desirable. "I'm not sure we would have gone with them if they hadn't had a representative New York office," he says.

Language differences, rather than physical location, seem to be of more concern for clients and are one reason that India has proved so successful in this market. For Russia and other countries where speaking fluent English has generally been less of a priority, outsourcing shops either have to specify the language skill as a job requirement or make other arrangements. (Egar, for example, runs intensive English courses for those staff not already up to speed.)

Two big factors for CIOs looking to outsource projects are cost and speed, with the latter becoming increasingly critical in order to maintain a competitive edge in areas such as financial e-commerce. Both are areas in which overseas outsourcers typically have the onshore opposition cold. Estimates vary widely, but for high level programmers, with experience on sophisticated financial projects, U.S. rates will typically be in the $100-125 per hour range or even higher-figures that many offshore shops can better by 50% or more without compromising quality. This was certainly the experience of volatility arbitrage fund, The Prime Funds, when engaging Egar to build it a new risk management system. "We had outgrown our previous system that we had built in house and needed a bespoke replacement," says Prime Funds partner Richard Zack. "The lower cost was certainly a factor in selecting Egar, but the product they built for us was also absolutely second to none."

Being certain that you will have sufficient programmer resources to complete a project on time has been an increasing headache for financial project managers, as U.S. based IT staff (especially those with less than five years experience) have been notoriously mobile. This was also an important issue for Prime Funds' Zack. "We needed the project completed very quickly," he says. "Knowing that the outsourcing company had depth of resource capable of delivering that makes a big difference, especially when compared with the hassle of recruiting and managing IT staff locally yourself. The result has been seamless-no delays and tight timeframes that have always been met or bettered."

That sort of experience may partially explain a change in attitude that Anand Birje, director of business development and product strategy at ITsquare, detects among capital markets CIOs. (ITsquare matches IT outsourcing clients and vendors as well as selling a software tool for IT services procurement.) "Financial houses have traditionally been very wary of outsourcing mission critical applications and have only usually outsourced mundane maintenance work or building of peripheral systems," he says. "However, that has started changing as Wall Street has seen other business sectors outsourcing important applications successfully. Another factor has been the way that overseas outsourcing vendors, no longer interested in just non-core financial projects, have made a determined push up the value chain, and have strengthened their outsourcing capabilities to the level that CIOs can regard them as an extension to their in house IT division."

This is reflected in the demographic of the Carnegie Mellon/US Defense Department CMM (Capability Maturity Model), which measures quality in software development. The highest CMM score possible is five, which to date only thirty-nine companies worldwide have been publicly recognized as attaining. Some twenty of these are independent outsourcing companies, with roughly half of them being based in India. (The remainder are mostly subsidiaries of major U.S. corporations, such as Motorola).

However, it's not all roses-outsourcing projects do go wrong, though the location of the outsourcer is not necessarily a factor in this. "We've had what you might call a mixed experience with outsourcing," says the ISE's Krell. "Some relationships, such as OM, have been terrific, but others have been less than satisfactory, with problems usually manifesting themselves initially as a lack of responsiveness to our requests-though these were no more prevalent among overseas outsourcers." Despite these bad experiences, Krell has every intention of continuing to use outsourcing companies, as does Midland's Gosselin. Prime Funds' Zack is even more specific. "This was our first outsourced project and based on the experience, there's no question that we'd be happy to use an overseas outsourcing company another time," he says.