Trends & Highlights

Business Keeps Getting Better for Offshore-Outsourcing Vendors

Despite the rough economic climate, the top three offshore outsourcers - Wipro, Infosys and TCS - grew by 30 percent during 2001 and 2002. And according to a new TowerGroup report by Senior Analyst Dushyant Shahrawat, their future only looks brighter.

"By combining low labor costs, sophisticated processes to manage offshore projects, and CMM Level V certified staff, offshore outsourcers have won the hearts and minds of Wall Street firms," writes Shahrawat. He says that offshore outsourcing is a staple of the future, and even if the economy improves, securities firms will not pull back their offshore initiatives due to massive deals. Most firms, he adds, have already incorporated the offshore option into their long-term strategy.

Shahrawat suggests that, in the next two to three years, there will be a more broad-based movement toward offshore outsourcing, as brokerage firms that have been sitting on the sidelines will no longer be able to ignore the compelling advantages it offers. Investment-management firms and custodian banks will follow suit, but will lag behind brokerage firms.

IT staffing will be impacted. "Staff rolls at Wall Street brokerages will decline from 58,631 in 2002 to 44, 545 by 2005. This will be primarily due to cost pressures, with some of these reductions replaced by offshore staff."

The accompanying chart outlines some of the major areas where outsourcing has taken off.

Description of Some Indian Offshore-Outsourcing Providers

Vendor: I-flex Major Clients: Citigroup, American Stock Exchange Description: Dedicated solely to financial services. Strong reputation based on its highly successful product business but has work to do in growing its services businesses.

Vendor: Infosys Major Clients: Fidelity Investments, ABN AMRO, ING Description: A top-tier player among the offshore providers serving financial services. Has broad service offerings and is aggressively growing its domain expertise in finance.

Vendor: Polaris Major Clients: Citigroup, ABN AMRO, CommerzBank Description: Major focus on financial services with revenue from product sales and service revenue. Citigroup is a major client and a major shareholder.

Vendor: Syntel Major Clients: JPMorgan, American Express, Wells Fargo Description: Smaller player but has clear focus on finance; less focused on broad generic offshore services. Has well-developed services for four major sectors within finance and has dedicated teams for each.

Vendor: TCS Major Clients: Lehman Brothers, Nasdaq, Morgan Stanley Description: Still privately held (expected to go public in the next 12 months). Top player in the finanical-services industry with broadest service offering.

Vendor: Wipro Major Clients: Lehman Brothers, Putnam, Merrill Lynch Description: Top-tier player in finance after Infosys and TCS. Has brilliant IT credentials. Broad product offering. Is aggressively developing securities expertise.

Source: TowerGroup

Major Securities-Industry Activities Taken Offshore To Indian Vendors

Activity: Infrastructure Management Extent of Use: High Analysis: Identified by securities firms as major area to be outsourced; a commodity business usually wrapped into a larger contract.

Activity: Call Centers(inbound/outbound) Extent of Use: High Analysis: Widely used offering that takes advantage of English-speaking, educated Indian workforce. Has room for growth.

Activity: Application & Software Testing Extent of Use: High Analysis: Highest potential to move offshore and leverage CMM certified testing practices, qualified staff, and special test labs.

Activity: Custom Software Development Extent of Use: Medium Analysis: Rapidly growing service offering with tremendous potential for growth but requires vendors to develop domain expertise.

Activity: Industry Solutions Extent of Use: Low Analysis: Securities industry-specific solutions like reference-data management, corporate actions, trade processing.

Activity: Infrastructure Outsourcing Extent of Use: Low Analysis: Capital intensive, high-risk business requiring financial engineering and massive scale. Bastion of firms like IBM/CSC.

Activity: Vertical Package Implementation Extent of Use: Limited Analysis: Slowly growing business with tremendous potential but is stronghold of traditional consulting firms with strong ISV links.

Activity: IT Strategy, Advisory Services Extent of Use: Limited Analysis: Advising institutions on strategic technology issues like architectural strategy, infrastructure management, etc.

Activity: BPO for Securities Functions Extent of Use: Limited Analysis: Institutions are keen to outsource tasks like reconciliation and exception management but held back by low-vendor expertise.

Source: TowerGroup

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Patriot Act Means Major Technology Investment

TowerGroup estimates that the U.S. brokerage industry will spend nearly $700 million through 2005 on technology solutions to comply with the USA Patriot Act. Three quarters of that investment will be directed towards software and integration.

The most challenging tasks, according to a recent TowerGroup report, are identifying, interpreting and integrating data residing in multiple locations. Most of the actual expense will come from gathering data into a centralized location, normalizing it and scrubbing it to ensure consistency.

The brokerage industry is largely starting from scratch as it never before had regulations in this area. There are major downsides associated with noncompliance, including exposing firms to monetary and reputational risk, says the report.

As a result, TowerGroup suggests that firms do not measure these investments with traditional return on investment metrics. However, the investment is expected to pay off by increasing intra-firm communication and serving as a catalyst for individual firms to improve their compliance systems, the report says.

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Corporate-Actions Spending to Reach $830 million

Spending on corporate actions is expected to reach $830 million over the next five years, according to a recent Celent report. The report's author, analyst Pamela Brewster, writes that corporate-actions processing is complicated and the costs and efforts required to implement a solution should not be underestimated.

The report finds that asset managers will spend $225 million - $125 million on third-party solutions and $100 million on in-house development.

Custodians are expected to spend $300 million - $60 million on third-party solutions and $240 million on in-house development.

Lastly, the report shows that broker/ dealers will spend $304 million - $160 million of that on third-party providers and $144 million on in-house development.

Celent recommends that firms take a phased approach by first identifying those parts of the process which not only benefit most from automation, but also lend themselves to easy automation.

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E-Mail Rules

A new book called "E-Mail Rules" provides a business guide to managing policies, security and legal issues for e-mail and digital communications. As its title suggests, the book offers several rules of e-mail - including, Rule #4 "E-mail can come back to haunt you," which is the primary reason that e-mails must be managed.

This book discusses the importance of e-mail management, designing and implementing effective e-mail policies, retaining e-mail business records, the nature of e-mail business records as legal evidence, e-mail security, managing alternative-communications technologies such as instant messaging and, lastly, employee education.

The book is published by the American Management Association and authored by Randolph Kahn and Nancy Flynn.

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Tech Tomorrow

AT Kearney, an EDS company, has published an executive agenda it calls, "Ideas and Insights for Business Leaders." In an excerpt called "Tech Tomorrow," the company provides guidelines for bringing agility to IT.

It defines the term "agile IT" as being made up of a collection of standardized components that can be reused and applied across different applications with minimal energy required to fit them together.

Below are some of AT Kearney's suggestions to achieve agile IT.

- Experiment with Web Services - Understand your business process - Drive your modular IT Vision - Articulate your future business model - Choose the right partners