EquaTerra says tough economic conditions will contribute to annual spending rises of between seven and eight per cent in financial services outsourcing over the next five to seven years.

But the crunch won't be the sole driver of spending. Although in the short term banks will increase spending on outsourcing in response to current market challenges, in the longer term spending will be driven by the need for business process improvement and market innovation, especially as firms look to take advantage of globalisation.

"Financial services firms understand they need to reduce complexity across the board to lower costs," says Stan Lepeak, EquaTerra's managing director of research. "A growing need to customise new product and service offerings to capitalise on emerging markets is adding urgency for operational innovation."

EquaTerra says the majority - 64% of financial services executives polled for its survey, which was conducted  by the Economist Intelligence Unit, believe rising income levels in developing regions of the world are creating a lucrative pool of new investors, spurring new-market expansion. But this window of opportunity coincides with continued volatility in the global economy. EquaTerra says financial services firms will explore new outsourcing strategies to tackle both these challenges.

"Management and delivery of middle and back office business processes is a prime target for innovation" says John Boyle, financial services sector lead at EquaTerra. "Financial services firms could significantly benefit from alternative service delivery models like offshore captives or outsourcing to more efficiently and effectively deliver these services."

The EquaTerra research backs up a UK study released earlier this week which predicted the credit crunch will drive a wave of outsourcing and offshoring in financial services as cash becomes tighter and banks look to cut costs.