Big Surge for Bank Offshore Outsourcing, Deloitte Study Predicts

Banks in the United States and other countries will dramatically increase the percentage of their IT budgets devoted to procuring technology services from offshore providers operating from low-wage countries, such as India and China, over the next three years, according to a new study from Deloitte. Offshore tech spending by banks will increase from the present 6 percent of the banking industry's $44 billion total annual IT budget to 30 percent by 2010, Deloitte predicts.

"Among larger institutions in particular, offshoring is not one available cost-cutting strategy -- it's become a basic necessity," the study says. Banks are moving well beyond outsourcing low-level application maintenance work and are increasingly relying on offshore service providers for help with more-sophisticated technology projects, the study continues.

Deloitte says banks can save 40 percent on most IT projects by moving them to an offshore service provider. The study also claims that media reports of rampant wage inflation eating into the cost savings offered by offshore outsourcing are overblown. According to Deloitte, 55 percent of the banking IT executives it interviewed expect their offshoring costs to rise by less than 10 percent this year, while 36 percent expect the costs to remain flat or decline.

Despite the advantages offered by outsourcing to low-cost countries, most banks aren't getting full bang for their offshore dollar, Deloitte notes. They need to do a better job developing the internal management skills and business processes needed to make offshoring as cost-efficient as possible, the consulting firm asserts. "If processes are not streamlined, more substantial savings will be lost, and it will be difficult to scale up offshore operations over the long term," the study says.

The increasing tendency by U.S. banks to outsource tech work to offshore service providers is helping to boost revenue at major outsourcing vendors, particularly those based in India. In its most recent financial year, Wipro reported that sales to the banking sector accounted for 21 percent of its total revenue of $2.39 billion. Rival TCS said sales to the financial services industry accounted for 38 percent of its $2.97 billion in total revenue for 2006. <<<

--Paul McDougall, InformationWeek
Courtesy of InformationWeek, a CMP Technology property.