Impact of offshore outsourcing goes beyond cost cuts - TowerGroup

Impact of offshore outsourcing goes beyond cost cuts - TowerGroup

Wall Street firms are investing heavily in offshore outsourcing of both IT and operations functions and while cost reduction is the motivating factor, the trend will have far reaching consequences for the financial services industry, according to research by TowerGroup.

The research shows that North American brokerage firms spent $417 million on offshore contracts in 2002 and will spend $1.31 billion by 2005 - a compound annual growth rate of 46.4%.

With low labour costs, Indian vendors top the table as providers of offshore outsourcing to the US securities industry. TowerGroup predicts the country's share of outsourced work will rise in 2003 to 94%, but will settle at 84% by 2004 as other offshore locations, such as China, gain ground.

The offshore shift will also have a significant impact on staffing and TowerGroup estimates the number of staff at US brokerage firms replaced by offshore workers to triple to 3109 in 2005.

But the research suggests the real impact will be the way offshore outsourcing will change the IT function and decision-making process. TowerGroup believes that firms will start prioritising core activities to keep in-house, versus non-core activities to be outsourced offshore.

Dushyant Shahrawat, a senior analyst in the TowerGroup securities & capital markets practice and author of the research, says CIOs and managers will spend less time dealing with non-core activities like maintenance and staff management and devote more time to strategic issues like next-generation architecture.

Shahrawat adds that the single biggest factor that could derail the offshore train would be the failure of a major offshore deal.

"Despite all the gains so far, this remains a new technology model and firms are still apprehensive of its success - especially in areas like business process outsourcing where institutions need to have tremendous trust in the vendor's knowledge, ability and commitment," he says.

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