Outsourcing Research by ValueNotes - Banking And Financial Services Offshoring: From Transaction Processing To Analytics

Banking And Financial Services Offshoring: From Transaction Processing To Analytics

Friday, 21 July 2006

Financial Services Offshoring Is No Longer An Option

When JP Morgan Chase merged with Bank One in September 2004, it called off a $5 billion IT outsourcing contract with IBM, bringing its information technology processes back in-house. But in November 2005, the firm announced a doubling of headcount at its Indian captive center to 9000 by 2007, with plans to offshore thirty percent of its back-office and research functions.

With maturing financial markets world over, increasing competition, declining margins and more stringent regulatory stipulations, the banking and financial services (BFS) industry is undergoing a transition. Institutions are restructuring their business processes to achieve ever-greater operational efficiency. For most of the larger BFS companies, the non revenue-generating support functions have attained the status of an organization in itself. In the wake of rising cost and competitive pressures, financial institutions are questioning the need to maintain huge back-office establishments and IT support staff. Moreover, firms are at the risk of losing focus on their core competence areas, which can have implications on customer satisfaction and productivity.

Valuenotes Releases A New Report

In an attempt to understand the nuances of offshoring in the financial services vertical, ValueNotes in its report "Banking and Financial Services Offshoring: From Transaction processing To Analytics", has studied the offshoring (BPO) preferences of the global financial services firms, their offshoring initiatives, destinations and drivers.

Offshoring in this vertical started two decades ago, with relatively low-end services. Today, services that are being offshored include a range of activities from transaction processing to research and analytics (R&A).

India Dominates, As A Preferred BFS Offshoring Destination

Large players and niche specialists are best positioned to exploit the large opportunity:

Captives of MNC banks and financial institutions such as Morgan Stanley, JP Morgan, Goldman Sachs, Lehman Brothers, TSB Lloyds, Scope International
Third Party Vendors

Large multi-service companies like Genpact, EXL Service, WNS
Multi-service BPOs with IT parents such as Wipro BPO, Progeon, MphasiS BPO, iGate
Large KPOs such as Evalueserve, OPI, Integreon

There are about 30 captive centers of the global financial service firms in India. Moreover there are hundreds of large and small third party vendors in the country. Close to 125,000 people in India serve the banking and financial services segment, and this is estimated to grow by 350 percent to touch 435,000 by FY2011.

Offshoring by financial services firms to India is estimated to grow to around $6.5 billion by FY2011 from the current $1.83 billion. ValueNotes assumes financial services offshoring to India to grow annually at the rate of 35 percent for the next two years, and then taper off to an extent thereafter.

The Changing Opportunity

The ValueNotes study estimates research and analytics offshoring to be a growth driver in BFS to India and is expected to grow to around $800 million by FY2011. The share of R&A in the Indian BFS BPO revenues will accordingly reach 12 percent from the current 8 percent during the period. Arun Jethmalani, CEO of ValueNotes says, "Growth in Indian offshore revenues from the BFS vertical will outpace overall BPO growth, driven by expansion into higher value services, especially research and analytics".

The ValueNotes study found an increasing hybridisation of the offshoring model adopted by financial firms driven by disaster recovery management concerns, cultural issues and skill availability. Typically, functions or processes with a greater degree of data confidentiality concerns are handled by captive centers, or near-shored while other generic functions are offshored to third party centers. Other model variants like joint ventures, BOT, shared services will gain wider acceptance as more and more regional players embrace offshoring on a global scale.

Ribhu Ranjan, ValueNotes analyst and co-author of the report expects that going forward, regional and mid-tier financial firms the world over will adopt a multi-location, multi-vendor offshoring model, signalling a preference for global sourcing.

"Banking and Financial Services Offshoring: From Transaction Processing to Analytics "
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