Thursday, November 22, 2007

The Advantage of Offshore Financial Outsourcing

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The trend for outsourcing lower level IT functions, requiring generic and easily acquired (and replaced) skills, has been sustained and popular with financial companies. Offshore destinations such as India offer scalability because their working population is significantly larger than the domestic market. They also provide a pool of skilled graduates, as well as impressive language capabilities, and a compatible culture.

Initially big business took the plunge and directed IT functions offshore, but today even smaller companies with a turnover of less than £5 million and/or less than 100 employees are happy to outsource. This reflects the growing trend for a wide range of companies to outsource all manner of business to offshore destinations. Even the smallest start-up will look east if they have a suitable project in hand and an eye turned to the best deal.

India is the most mature offshore destination, closely followed by Sri Lanka. The Far East and South East Asia are alternative destinations, although not as popular. Another emerging trend is for IT functions to be outsourced to nearshore destinations like Russia, the Czech Republic and Poland, where security might be tighter and management-time can be more effectively utilised.

However, the market trend for finance companies to outsource relatively simple IT functions to Sub Continental Asia is being superseded by a growing desire for suppliers to build systems and applications that supersede anything that they could build in-house. From wanting 'yes men' companies are now keen to engage with suppliers who will bring their own skills sets and help improve the quality of the project.

According to a 2006 National Outsourcing Association research report, 73.3% of respondents outsourced application development. The second most popular function was application re-engineering and migration at 36.7% . The study attracted seventy-six responses from outsourcing decision makers within financial organisations throughout the UK.

This trend for outsourcing increasingly complex projects perhaps isn't so surprising. Most finance companies that outsource IT functions prioritise fluid communication, domain and technology expertise and security, with cost perhaps fourth on the list – important, but of no real use without the other three. Without expertise or good communication skills, a supplier could take up valuable management time. At worst, miscommunication can be disastrous.

Businesses should carefully consider the full advantages (as well as potential disadvantages) of offshore financial outsourcing, before committing to a supplier. India has experienced wage inflation because of competition in the market – the ITO skills pool is finite. So if labour costs rise, it makes sense to outsource higher end projects, if that is both possible and desirable.

Whether a project can be outsourced still depends on its complexity and size, as well on management time, security and adherence to regulation, but there seems to be an increased belief that offshore suppliers can enhance the value of a project, rather than simply completing a given project in an unimaginative fashion.