The Evolution of Outsourcing in Wall Street IT

Outsourcing has changed. Once only thought of negatively as a way to cut head count and reduce short-term costs, outsourcing has become part of the financial services industry's fabric for long-term strategic planning and success.

Although the shift to outsourcing does increase during tough economic cycles, companies now outsource technology and business processes in good times as well, according to Daniel Houlihan, senior VP and head of global fund services for North America at Northern Trust. "Outsourcing is a recession business, and you will always see spikes during downturns," Houlihan says. "But the complexity of the business has firms looking at outsourcing for other reasons than just cost."

Most financial firms are using established offshore software development to supplement onshore development work, which reduces costs and improves time to market, if run properly. Some large firms, such as Citi, run their own offshore development operations, while others work with established outsourcing providers. Some do both.

However, today outsourcing is much more than finding low-cost software development resources. Companies are using it to improve services, enter new business lines, run more efficiently and drastically reduce time to market.

Newer regulations are one reason asset managers are looking for help from service providers. Form PF and new rules around over-the-counter derivatives are just two new regulations that often require potentially costly system changes. "The volume and impact of regulatory changes is one of the key drivers that motivates asset managers to consider outsourcing some of the functions that they may have originally intended to retain in-house," said Christian Bolanos, senior VP and global head of the outsourcing discipline at Brown Brothers Harriman, during a Clear Path Analysis fund outsourcing roundtable debate. Brown Brothers Harriman provides front-, middle- and back-office outsourcing services.

Tech Spending Catch-Up

These demands come at a time, however, when firms have cut back on technology spending. "Prior to the financial crisis, technology upgrades were a consistent part of the budgeting process for firms and, as such, were able to be anticipated year over year," Bolanos said. Since the financial crisis, firms have chosen to delay costly technology upgrades. "Five years later, the postponement of technology spend has caught up."

Newer regulations and a lack of available IT resources are just two reasons firms are accelerating outsourcing. In addition, many middle- and back-office functions are similar across the industry and provide little competitive advantage. Certain newer processes require in-house tech teams to develop completely new systems -- or to drastically modify older systems -- which adds to cost and delays time to market.

Financial services firms are turning to service providers to lower development costs and avoid delays for a variety of processes in the middle and back office. As such, the trend to move more of this functionality will likely speed up, as asset managers face increased business demands, along with smaller IT development budgets.