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Offshore Score

Not saving enough money with your outsourcing strategy? Try sending application development offshore.

Financial institutions, feeling the crunch of lower trading volumes and reduced commissions, are using every trick in the book to cut costs and boost profits. Offshore outsourcing is the latest answer to reduced technology budgets.

More and more, when executives at U.S. financial institutions find newspapers plastered with headlines about heightened tensions between Indian and Pakistan, and the nightmarish threat of nuclear war between the long-feuding Asian neighbors, they not only consider what such a conflict would do to the people of the region but also to their businesses.

That's because U.S. firms are increasing their involvement with offshore outsourcing: the practice of either establishing an application-development and maintenance facility in another country or hiring a third-party provider to build software based on established specifications. Offshore outsourcing is on the rise and reaching new levels of popularity because the economy, lower trading volumes and reduced commissions are putting a hurt on the financial-services industry.

The only way to relieve some of that pain, until the market picks back up again, is to cut costs. Offshore outsourcing can help a firm do that because, in certain countries around the world, technical expertise is just as high while compensation is much lower.

"In 1999 and into 2000 it was difficult to recruit," says Dave Pett, senior vice president/division executive, Fidelity Investment Institutional Brokerage Group. "It will get that way again in the long term. The U.S. technology market isn't growing as fast as the demand, so we have to tap into other markets for talented people."

Compensation, however, isn't the only area where firms can save money by going abroad. Real estate, including facilities, is also often cheaper elsewhere.

As one would expect, offshore outsourcing is most popular in countries with a high degree of proficiency in English, such as India. Any language barrier, in addition to the barriers of communicating highly technical computer and business processes, may be too much to bear for the offshore-outsourcing newcomer.

One firm that certainly has its feet wet in the world of offshore outsourcing is Fidelity, which initiated its first offshore venture in Ireland in 1995. For Fidelity, however, the jump wasn't all that far, as it had a base of operations in the United Kingdom. The company hired a local Irish manager to start up the operation, which was then staffed with local people.

Fidelity is now repeating the same strategy as it looks to open an outsourcing facility in India. In this case, the firm will move an Indian employee, currently working in the United States, to India for a few years. When the employee has the Indian operation up and running, the executive will return to the United States.

Fidelity, however, won't only go it alone, says Pett, but will employ a dual strategy of establishing its own operations centers and working with third-party providers to build a solid offshore presence.

Right now, Fidelity is in the process of receiving about 12 requests for proposal that it has solicited from third-party offshore-outsourcing providers - firms like Infosys, Tata Consultancy Services, Accenture, IBM Global Services and Wipro.

Nandan M. Nilekani, chief executive officer, president and managing director, Infosys, says that offshore-outsourcing providers should not only be evaluated on the basis of cost but also in terms of the high-level software-development work they provide. He says that whether it be application development, package implementation or integration, companies like Infosys can help bring a project in on time and on budget, something U.S. firms must deliver now more than ever.

"In the past, financial institutions could spend millions and millions on technology projects - not today," says Nilekani.

Once concern with sending development work overseas, says Principal Consultant with the Investment Management and Capital Markets Consulting (IMCAP) group at PricewaterhouseCoopers Blair Kanter, is that foreign-technology providers will not truly grasp the business functionality that the software should provide.

"Business-analysts types of people have to translate the functionality and system requirements into specifications that foreign programmers need in order to develop the system," says Kanter.

Nilekani says that Infosys has people in just that role, called domain consultants or management/technical consultants, whose job it is to make sure a project is being developed in line with a firm's mandate. Also, Infosys has a team of customer-facing salespeople who highlight the vendor's "detailed-project methodology," adds Nilekani.

Pett says that Fidelity will examine the RFPs it has received from 12 vendors and select somewhere between two and five to work with. That will be a considerable reduction from the almost 20 different offshore-outsourcing vendors that different branches of Fidelity contract work out to today. Pett explains that different branches of Fidelity are at different levels in their development. Some, he says, are almost like startups, while others are more mature. The vendors selected as a result of the RFP solicitation will function as a small stable of pre-approved offshore-outsourcing providers which Fidelity businesses can turn to for service.

Since Sept. 11, one of the main focuses of financial institutions has been business-continuity planning. When it comes to offshore outsourcing, it is even more important to make sure a firm, or the third-party provider it has chosen, has sound disaster-recovery plans in place. Nilekani says India-headquartered Infosys touts its BCP plan when speaking with prospective clients.

"We have a very high level of business-continuity planning," he says. "If something happens, we can move from one development center to another. We have comprehensive business-continuity plans which we share with our customers." Infosys does most development work at its headquarters but also has offices in Toronto, Chicago and Dallas.

Nilekani says that about 30 percent of the project-development work, comprising initial assessment and final implementation, is done at a location near the customer, while the other 70 percent that takes place in between those stages, is likely handled in India.

Many agree that, as with outsourcing in general, the best types of projects to send across the seas, or at least to Canada (Pett notes that Canada poses no significant language, cultural, or time-zone barriers, while costs can be 50 percent lower than in the United States), are those which the firm does not see as a real differentiator between itself and its competitors.

As far as what to outsource is concerned, Pett says that Fidelity will send off both application development and maintenance work. "Right now we're in the learning process at Fidelity," says Pett. "We're starting by outsourcing technology projects that are clean cut and then we will move to more stand-alone apps and then to more tightly integrated apps."

Sending application-development work overseas may, someday soon, no longer be a choice but a necessity. It all depends on the amount of technical expertise in the United States and how much it costs to tap it. During the boom days of the late 1990s prognosticators were saying that the well of IT professionals in America was about to dry up - and to a large extent, it did. Techies found themselves in a position to name their price and firms awash with IPO money were more than happy to oblige.

Given the massive number of layoffs in financial services over the past two years (many of them in technology) the IT well is once again on the rise. That, however, may not be the case for long.

In general, Pett says that he is a big fan of outsourcing offshore. "I think there is mythical loss of control that occurs when doing this type of outsourcing. I've had few projects go as smoothly as the ones I've had (offshore-outsourcing firms) do for me."

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