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 consulting firm Deloitte.
Offshore tech spending by banks will increase from the present 6% of the banking industry's $44 billion total annual IT budget to 30% by 2010, according to Deloitte.
"Among larger institutions in particular, offshoring is not one available cost-cutting strategy, it's become a basic necessity," says the study, which was released Wednesday. 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 says.
Offshoring tech work offers big savings as programmers in India, for example, are paid anywhere from 40% to 80% less than their U.S. counterparts.
Deloitte says banks can save 40% 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. Deloitte says 55% of the banking IT executives it interviewed for the study expect their offshoring costs to rise by less than 10% this year, while 36% 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 says. They need to do a better job developing the internal management skills and business processes needed to make offshoring as cost efficient as possible. "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," says the study.
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% of its total revenue of $2.39 billion. Rival TCS said sales to the financial services industry accounted for 38% of its $2.97 billion total revenue for 2006.
Paul McDougall is a former editor for InformationWeek. View Full Bio