Riga to Manila to Mumbai

When Jim Hilton, head of business planning and product management at the Prebon Yamane Group, decided to build an order management system for the global institutional broker, he used outsource provider Exigen Group. As part of the project, work was sent offshore to Latvia, a former Soviet republic of 2.5 million people on the Baltic Sea. It was the first time that Hilton had sent work offshore. "We were actually very happy with it," he says.

The No. 1 benefit of offshoring is the lower cost of labor in places including India, China, Eastern Europe and Asian locales such as Malaysia, Singapore and the Philippines. Coupled with growing IT expertise, these locations are attracting more Wall Street firms than ever before. Nearshoring-in Canada and Mexico, in particular-is also on the rise.

In fact, most bulge-bracket Wall Street firms engage in some form of offshoring, notes Dushyant Shahrawat, an analyst at Needham, Mass.-based research firm TowerGroup. Goldman Sachs, Citigroup, Morgan Stanley, JPMorgan Chase and Lehman Brothers all offshore, he says, and some companies are even taking up an equity interest in offshore providers. This summer, Barclay's Bank purchased a 50 percent stake in Mumbai, India-based business-process outsourcing firm HDFC. And, in April, IBM bought Daksh eServices, one of India's largest call-center companies, adding to IBM's more than 9,000 employees in India who do software development and back-office work.

By 2005, Deloitte & Touche expects the top 100 global financial-services firms to offshore more than $200 billion of their operating costs and save more than $700 million. Shahrawat notes that the three largest Indian outsourcers will each surpass $1 billion in sales in 2004.

Jonathan Beyman, CIO at Lehman Brothers, says the lure of outsourcing for him boils down to dollars and cents and the commoditization of IT tasks. He says he can offshore tasks like maintenance for 20 cents on the dollar and still have the same level of service. About 20 percent of the firm's aggregate IT staff comes through Indian vendors, he notes.

That meant some large layoffs initially at Lehman Brothers. But, Beyman stresses, the firm has more employees in IT today than it did before outsourcing to India, because of investments in other businesses. "We now have people doing different things," he says. "We have people doing things that hopefully give us a competitive advantage."

Beyman says Lehman Brothers now is analyzing whether to open up its own site in India. The target, he says, is business process outsourcing (BPO). "It's the same kind of labor-rate arbitrage. We certainly have processes that bear looking at [in terms of] whether or not we can do them offshore."

Prebon's Hilton adds that the first goal of offshoring should be to ensure that you "get something that works when you need it." The second is ensuring that "you can do it cheaply."

So, when it comes to picking a destination to which to outsource, what do the different countries offer?

Nearshore

Investment firms accept a trade-off by sticking closer to home. "In Canada, you don't really get the cost savings you like," says TowerGroup's Shahrawat, noting that the savings amount to 15 percent to 18 percent, compared to 40 percent or more in other destinations.

However, Canada operates in the same time zones, there's almost no language barrier, and the legal and political infrastructures are similar to those in the U.S. According to Jim Alberg, who heads the technology practice at law firm Shaw Pittman and specializes in outsourcing deals, Mexico is getting more work, mostly for processing tasks.

India

The main advantage to outsourcing to India is its established services market. "There are sophisticated processes to manage offshore projects," Shahrawat says. India's large providers offer the full gamut of outsourcing services, from application development to maintenance to BPO. There are about 300 million English-speaking Indians, so language isn't a barrier, and India's labor costs, though rising, remain low.

However, Molly Doland, also a partner in the technology group at Shaw Pittman, warns that the country has "less than ideal laws in place respecting the protection of personal data." Many countries don't protect trademarks and patents to the same extent that they are protected in the U.S. Many also aren't as restrictive in how data acquired by third parties can be used. These issues, she says, must be addressed before entering into an outsourcing agreement.

China

China's not yet a major destination for offshoring from U.S. financial firms, mostly due to weak intellectual property laws and a significant language barrier. But it is a destination for Japanese financial institutions, TowerGroup's Shahrawat says.

Yet John Knapp, a principal at Westport, Conn., consultancy Nathanson and Co., says that Chinese labor can cost 80 percent less than U.S. labor, and China has a highly skilled workforce. The downside, he agrees, is the complexity of doing business in China, though that might ease with its entry into the World Trade Organization.

Western Europe

Ireland and Scotland lead the list of Western European outsourcing destinations. They offer skilled workforces and cultures and languages similar to those in the U.S. Known for application development, North Ireland firms save 40 percent on labor costs compared to a city such as London, contends John Haran of Invest Northern Ireland, a government agency that promotes the country's offshoring firms. Also, property costs and workplace attrition are lower than in places like India, he says.

Nathanson's Knapp says Ireland is strong on the implementation of applications and is getting better at development and ongoing maintenance tasks. The challenge, however, may be to maintain the region's cost advantage.

Shaw Pittman's Doland says that, as the Ireland-based firms approach full employment and compete with low-cost offshore competitors, their margins are shrinking. "While you get quality work, it's not where you'll see the real cost improvement," she says.

Russia

TowerGroup's Shahrawat predicts that India will lose market share to Russia over the next few years. Given the number of engineers and scientists, he says, it's a good place for "hard skills," such as product development and testing. But it is less desirable for customer-facing service work, he notes.

Eastern Europe

Providers in Eastern Europe include firms in countries such as Romania, Poland, Hungary and the Czech Republic. The advantages these countries offer are their proximity to Europe, inclusion in the European Union, low wages and sizable English-speaking populations. "There's a lot of potential," says Shahrawat. The downside is rising wages and a small pool of qualified people.

Southeast Asia

Many Southeast Asian countries - including Malaysia, Singapore, Thailand, Vietnam and the Philippines - have extensive English-speaking workforces. Shahrawat says the Philippines, in particular, is growing in popularity as a BPO destination. The downside to some of these countries is their small labor pools with advanced IT skills.

When picking a place to outsource to, Shahrawat says, the best choice often depends on the size of the project. Small firms may get crowded out of the large offshore markets. In that case, a firm might be better off in a region where the outsourcing market isn't as mature and the service level one can demand may be higher.

That's what Prebon's Hilton did by building a Latvian connection through Exigen. "It seems to be going very well," Hilton says. "It's a model we will continue to pursue."