Offshoring of Bank IT Jobs Looks Likely to Rise in 2009

Amid the financial crisis, banks are likely to dial up their use of offshore outsourcing. But cost cutting isn't the only driver.

"Offshoring" is a word feared by financial technologists, increasingly with good reason. According to Jerry Luftman, lead researcher of the Chicago-based Society for Information Management (SIM), "offshoring" has become the favorite buzzword of today's bank CIO, replacing "reengineering" from 10 years ago. (For IT staff, either can amount to being laid off.)

Having crunched SIM's latest survey numbers, released in November, Luftman has reversed an earlier assertion that "Offshoring is greatly exaggerated." SIM's June survey of its 3,600 CTO/CIO members, one in six of whom are in financial services, asked participants how much of their IT budgets they planned to allocate to offshoring. "It's increasing from 4 percent to 5.6 percent," reports Luftman, "which is a big jump, considering it's been flat for about six years and was, in fact, down last year."

This confirms what BS&T has been hearing frequently from bankers and vendors: Offshoring and outsourcing are on the rise -- as one might expect when there's an acute need to cut costs. However, as reported in last month's issue, there are those who predict that the new presidential administration might limit offshoring practices, as President-elect Barack Obama promised during his election campaign.

There's also some debate as to what is even meant by "offshoring." Luftman, who is also a professor at and executive director of the Stevens Institute of Technology in Hoboken, N.J., says "offshoring" typically refers to a company employing its own staff overseas, as opposed to "offshore outsourcing," in which the company uses third-party services abroad. According to Luftman, this has emerged as "pretty accepted" terminology.

But Margaret Pitt-Jones, a London-based managing consultant with Alsbridge (Dallas), a consultancy specializing in outsourcing, used the terms "offshoring" and "outsourcing" interchangeably in a recent report. While she could not be reached for clarification, Pitt-Jones, citing U.K. research firm FS Outsourcing in her November report "Overview of Finance Services Offshoring," values the 2007 U.K. financial services outsourcing market at close to US$37 billion and anticipates what she terms "phenomenal" growth of between 25 and 30 percent a year.

Since offshoring began in the 1990s, banks have barely changed their outsourcing practices, Pitt-Jones wrote, "with IT and back-office areas still [accounting] for over 80 percent of the market." "Increasing cost and resource pressures," however, will make even risk-averse banks view offshoring not just as an efficiency play "but to ensure these organizations stay in the game," she added.

London-based Barclays Bank ($2.027 trillion in assets), one of the world's top 25 banks, has expressed a commitment to offshoring. It announced earlier this year that it would cut almost 2,000 technology jobs, including high-level positions, in the U.K. and move them to Singapore, India and Hungary. U.S. banks -- including The Bank of New York Mellon (New York; $205 billion in assets), J.P. Morgan Chase (New York; $2.3 trillion in assets), SunTrust Bank (Atlanta; $180 billion in assets) and Union Bank of California (San Francisco, $60 billion in assets) -- also tell BS&T of likely plans to extend their offshoring.

To Offshore, or Not to Offshore

The drivers behind moving tech jobs overseas can vary. And there are stories in the industry of offshoring efforts backfiring -- proving too much to manage from afar.

"The decision to [go] offshore is not either/or, but case-dependent," says Jim Greene, VP of Cisco Systems' global financial services practice. Cisco re-designated its own headquarters from San Jose, Calif., to both San Jose and Bangalore, a year ago.

"Dealing with remote resources is a particular skill set, and that's whether they're in the next town or 13 time zones away," adds Ron Hoffer, VP and senior audit manager at Union Bank of California. "I don't think it's one-size-fits-all. To consider outsourcing you need to have a significant number of people involved. I don't know what that number is -- 20, 50? It depends on the bank."

Hoffer says that while Union Bank started offshoring in 2006, it really focused on the strategy in 2007. "We're not looking to have X many offshore [positions]," he reports. "It's more about ROI."