Banks Beginning to See the Light Of Distant Shores

Although U.S. financial institutions are still wary about jumping into offshore outsourcing deals, spending on IT services in other countries by U.S. firms has increased, analysts say. Banks are overlooking the political and social burdens of offshore outsourcing to take advantage of cost savings, according to a recent study by Needham, Mass-based TowerGroup.

"We saw a lot of companies send a lot of strategic work overseas, like mortgage processing and underwriting," says Virginia Garcia, senior analyst, financial services strategies and IT investments practice, TowerGroup, of the growing trend. "A lot of functions that are important to [banks'] businesses were sent with success."

Though companies are increasingly sending IT functions offshore, U.S. financial institutions still aren't spending as freely on offshore outsourcing as their non-U.S. counterparts, Garcia notes. TowerGroup estimates that U.S. financial firms imported a total of $1 billion in software application development and $300 million in IT services from offshore providers. That is considerably less than the amount spent by non-U.S. firms to outsource here in the U.S., according to Garcia. "These international companies are coming to the U.S. and bringing jobs and money here," she says.

But financial services firms are becoming more comfortable working with overseas vendors, Garcia continues. "Contract value is increasing now, and we are seeing long-term contracts in the millions [of dollars]," she notes, adding that, by setting guidelines within the contracts, IT services traveling offshore can be smooth sailing.

"Institutions need to understand that they have to have effective IT governance to understand these contracts well," she says. "If they can do that, these deals will go a long way."

Bank customers are also more comfortable with offshore outsourcing arrangements, Garcia notes. "Customers don't care so much about where the transactions are processed because they don't see it, hear it or feel it - unless something goes wrong," she says.