When Indian-born US business executive, Vikram Pandit, resigned several weeks ago from the Citibank, an important question cropped up: Will his departure have any impact on the thriving practice of outsourcing, which has long been a vital back-office for US financial firms? Outsourcing companies in India agree that it has been increasingly difficult to get contracts in the US but they disagree that the US banks will cut back on outsourcing or move their captive units to onshore or nearshore destinations.
Their argument seems to be backed up by a recent announcement by Wells Fargo – the fourth-largest U.S. bank by assets – to move some of its jobs to India as part of a cost-cutting program. Also supporting their argument is a research report from Everest Group, which found banking, insurance and financial services firms are outsourcing more and more jobs to low-cost destinations. The volume of outsourcing from financial firms, in terms of number of contracts, increased a record 61% in the second quarter, according to the report.
IT and Banking
IT companies in India derive a significant portion of their revenues from the banking sector. According to an independent estimation, the country’s top three IT companies earn close to 30% of their revenues from western banks.
These days, according to analysts, western banks have added several more services capabilities – like mobile banking and loan processing – to the list of jobs outsourced to captive units.
After the US government made it compulsory that merger transactions be completed in 18-24 months, more banks have come under pressure to outsource non-core activities.
“Vikram’s departure will have no impact whatsoever. He cannot help us just because he is from India,” said civil servant-turned IT executive Vivek Kulkarni, who founded Brickwork India, an IT outsourcing firm.
When the recession hit the United States, Indian outsourcers bought several captive units of foreign financial firms to bolster their positions. Cognizant snapped up UBS’ back-office captive for $75 million along with a five-year outsourcing contract worth up to $442 million. Similarly, in October 2008, TCS bought Citigroup’s Indian back-office operations for $505 million.
“Why financial firms have continued outsourcing despite growing concern over data security is because they have understood that they can focus on more moneymaking programs if they outsource their back-office works to low cost countries,” Manjunath Hegde, an independent BPO consultant.
Kulkarni says that the only hurdle he is observing is the lack of domain expertise among Indian IT professionals. “We have a huge army of IT professionals, but they don’t have enough knowledge of commerce or banking. They need to have knowledge both in banking and information technology for handling contracts from financial firms,” he said.
Another challenge, according to analysts, is the new trend in multi-sourcing – using different vendors to provide different elements of IT need.
But Indian outsourcers are confident that multi-sourcing will not last long as that may force banks to hire more people to oversee their entire outsourced portfolio. Hiring more people increases cost and turns out to be a drain on the bank’s balance sheet.
But Dennis O’Neill, an independent IT consultant based in New York City, says outsourcing may decline if the banks automate some portion of their work with the help of new technologies like “workflow” software and cloud computing.
“Two good examples of this trend are the Web 2.0 organizations – Amazon and Esurance. They have pioneered the use of both workflow and the cloud to decrease the use of any human involvement in their business,” O”Neill pointed out. But BV Naidu, chairman of Sagitaur Group of Companies, says he does not believe automation will directly harm the outsourcing industry.
“We have always proved that we are capable of turning problems into opportunities. How we made the most of Y2K bug is just one example,” Naidu said.
“Neither the lack of domain expertise nor the increasing use of cloud computing will hold us back,” says Naidu. “We have training centers where we teach employees what they need to know for handling contracts from financial firms. So long as we have talent, we will continue to flourish.”
Training is the Bedrock
Infosys has a huge training school in India’s bottom town of Mysore to train its employees in financial matters. Similarly, almost every outsourcing company has in-house training school.
“We have also set up an academy to train employees in financial things. We have about 35 students undergoing training currently,” Kulkarni added.
In the meantime, Indian outsourcers are aiming to climb up the value chain by offering consulting and software integration services. And they are increasingly moving away from lower value back-end functions like call centers and simple data processing. Infosys’s recent acquisition of Swiss technology consulting firm Lodestone Holding is an example.