18 April 2014

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Graham Smith - Certeco

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IT Outsourcing Blamed for Tech Failures at Banks

12 February 2014  |  1505 views  |  8

 

 Lloyds has been the latest victim in a litany of banking technology failures that has dogged the financial services industry. Customers were frozen out of their accounts for a few hours, unable to make ATM withdrawals or payments using their debit cards, leaving many furious at what they perceive as gross incompetence. Lloyds blamed a problem with its servers.

This follows hot on the heels of an RBS failure before Christmas and a NatWest issue last summer.

So the question is raised – again – why does the UK banking industry have so many tech issues? With the resulting reputational damage, customer fury and shareholder dismay, you would think it was a priority for banks to sort out their tech houses.

But it isn’t quite as easy as it looks. We have spoken before about legacy systems and how they are affecting the UK banking sector. An industry article out this week puts the blame at outsourcing’s doorstep. A worker talks about how banks have become overly reliant on offshoring in particular and how it is being used for operations that are too critical, such as production support.

They cite one of the main problems as being when legacy systems are looked after by offshore suppliers – they are often not conversant in whatever ancient developer language that’s running the ship.

As we argue, the offshore model has its place – for banks to strip back overheads, it is possible to use offshoring for certain types of work, such as support or development – but banks should be looking to reshore more business critical operations. Using boots on the ground in the shape of a consultancy blend of experienced and young consultants could be an answer.

But the fact remains that the complexity of the UK banking infrastructure is at the heart of the issue. Collective acquisitive behaviour has led to a hotchpotch of systems that the banks run off. Added to this is the minefield of new technology – eager to appease customer demand for mobile applications and other technologies, banks have simply had to plug these on to their ageing infrastructures.

It’s been a Band Aid job and banks are doing their best. But it can’t last – systems will continue to unravel and customers will continue to be inconvenienced. Just how long banks can carry on patching up remains to be seen.

Comments: (8)

A Finextra member | 13 February, 2014, 17:12

Outsourcing is an issue but far from the primary problem.  Banks, over the last 8 years, have systematically squeezed IT Project budgets to the point that delivery projects are not as rigorously tested as they once were.  For example – one project I worked on approximately seven years ago insisted that regression testing only be carried out on transactions they believed to be impacted by the implemented change.  The consequence of this was the code was promoted to live and caused an issue.  Why?  Because the third party supplier had “modified” code outside their remit – nobody had performed a full line by line review of the updated release and subsequently the changes were not picked up.  Testing didn’t expose the changes as the transaction set in the testing didn’t exercise those regions of the code.  Net result: an emergency back out of the code and rollback to the original/previous release.  Caused a massive investigation which should have influenced more reasonable IT Project budgets: it didn’t(!).  A missed opportunity. 

 

A Finextra member | 14 February, 2014, 05:21

I agree with the above comment...In a project I worked on recently, the Project Manager was stuck with an unrealistic delivery deadline and resource crunch. The Code Testing was completely compromised in order to meet the deadline with limited resources. Instead of testing "all possible scenarios"...the testing scope was trimmed down to "most likely scenarios". I believe these individual compromises across multiple projects undertaken within banks have a big impact. It all boils down to delivery timelines, resource allocation and ultimately IT budget (...on both legacy & new tech initiatives).

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 14 February, 2014, 18:31

Deadline pressures lead to compromises on testing. Barring divine intervention, IT meltdowns are the result. This universal truth applies regardless of whether offshore vendors or onsite Big 5 consulting firms are involved in the project. So, let's not blame offshoring for IT meltdowns in banks. Lloyds's own CEO does not - in his tweet, he totally exonerated offshoring for his bank's recent IT meltdown and placed the blame on the failure of an HP Server right "here in the UK".

http://www.finextra.com/news/fullstory.aspx?NewsItemID=25653

A Finextra member | 14 February, 2014, 18:41 I'm sorry but the cold hard truth is that offshoring doesn't help in these situations. On paper it looks amazingly attractive to lay off experienced and well paid onshore staff and employ people offshore for a mere fraction of the cost. In the short term you will see massive gains because pretty much everything will stop whilst things will transition across. Eventually you productivity reduces significantly as more work has to be selectively QA'ed and reworked by onshore teams - normally due to communication break downs between onshore and offshore teams. A far better strategy would be to stimulate IT Apprenticeships - which work exceedingly well currently in Germany for example.
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 14 February, 2014, 19:21

Hypothetically, what about an onsite program manager giving short shift to testing in order to "secure" the deadline so that, again hypothetically, the bank executive's annual bonus is not impacted by slippage? How well does that help in these situations? Does offshore or onsite matter then? Offshoring didn't start yesterday. The cold, hard truth is that offshoring has proven its superior price-performance for nearly two decades. Like with anything else, there are ways of getting offshoring right and there are ways of bungling it. Now that the subject of Germany has come up, the apprenticeship model works well there because that's one nation that has forever succeeded in translating its higher input costs to manufacture high quality, value-added products for which the rest of the world is willing to pay a premium, as evidenced by its top exporter nation status. There's no reason why the same model shouldn't work in any other country that matches Germany on that count.

A Finextra member | 17 February, 2014, 14:21

What an unfortunately title to this article.  The content doesn't match the title.  Not all offshoring deals are outsourced and not all outsourcing deals are offshore.  It should be "IT Offshoring Blamed for Tech Failures at Banks."  The title leaves the impression that all IT Outsourcing is to blame when many IT outsourcing deals are for onshore resource.

Mark Mixter - GXS - Chicago | 20 February, 2014, 03:10

Perhaps I'm mis-reading, but it appears you're equating outsourcing with offshoring? 

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 20 February, 2014, 06:14

Of course outsourcing is different from offshoring in a general context. But, as I've highlighted in my previous comments, IT meltdowns can happen regardless of offshoring or outsourcing or insourcing, so the mixup in terminology is hardly material in this specific context. 

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