Executive Summary
The article examines the growth of the outsourcing phenomenon in the financial services sector and looks at the next wave of “value-added” outsourcing, where banks seek to outsource more highly skilled jobs done by higher-paid employees, thus gaining more from wage arbitrage. The emphasis is on:
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The benefits of taking the long view (strategy) rather than looking for quick piecemeal gains (tactics).
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The value to be gained from outsourcing more highly paid work.
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The erosion of the benefits of “simple” process outsourcing due to rising salaries in major outsource markets like India.
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The impact of consolidation through M&As, when several outsourcing contracts may need to be rationalized.
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The differences between onshore, near-shore, and offshore outsourcing.
Introduction
The major banks in developed markets have been extensive users of outsourcing and have been at the forefront of pushing the boundaries of outsourcing onshore, near-shore, and offshore (near-shore in this context refers to outsourcing to a country location that has a time differential of not more than three hours from the bank’s main business locations). High-profile examples here include Barclays Bank’s outsourcing arrangement with Accenture, and Citibank’s outsourcing operations, which it sold to the Indian outsourcing giant, Tata Consultancy Services (TCS), in October 2008 in a deal worth US$505 million.
In 2004 Barclays signed a £400 million deal with Accenture to outsource applications development for its UK banking systems. A year earlier, in a £230 million deal, it outsourced its desktop management to IT services firm EDS.1 Citibank’s sale of its outsourcing arm was planned prior to the global downturn, since in the spring of 2007, while the world was still in a boom phase, Citigroup said that it wanted to cut US$10.4 billion off its spending over the next three years. This would be achieved by disposing of its own outsourcing operations and instead moving more of its jobs to outsourcing providers offshore. As part of the deal with Tata, it was agreed that TCS would provide offshore services to Citi, using Citi’s former operation, in a contract reportedly worth US$2.5 billion over nine and a half years.2
Today it would be difficult to find a major or even a mid-range bank that does not have fairly extensive outsourcing at least of its IT function, and generally of some business processes as well.
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