FRAMINGHAM (10/17/2003) - Some of the largest financial services firms in the country are banding together to develop a set of best practices for moving their real-time IT processes offshore.
These companies, in a sector that's collectively an aggressive user of low-cost offshore IT services, aim to reduce the risk of shifting live operations, including production application support, to India and other countries.
Offshore development has traditionally focused on application development and maintenance -- coding work that doesn't involve access to live production systems or data. But IT shops will take more of their core operations offshore if management of security, privacy and other risks can be adequately addressed.
Once companies start managing their production applications offshore, foreign-based providers will theoretically have access to live data, said Jim Salters, director of technology initiatives and project development at the New York-based Financial Services Technology Consortium, or FSTC, which is developing the best practices. There is "an increasing scale of risk and reward in the kinds of functions you take offshore," Salters said.
The reward is potentially lower costs. U.S. companies have been racing to use offshore services, and market research firms such as Gartner Inc. are predicting an acceleration of the rush. By the end of next year, Gartner expects that one out of every 20 IT jobs at user companies will have moved offshore.
"The floodgates have just opened," said Kumar Mahadeva, CEO of Cognizant Technology Solutions US Corp., a Teaneck, N.J.-based offshore services provider. "At this point, we got into a situation where the industry as a whole is almost constrained by how fast it can grow," he added.
Offshore outsourcing of production support and other IT infrastructure operations is a niche activity today. But analysts at Meta Group Inc. predict that in the next several years, as much as 40 percent of production support may be managed offshore.
Two months ago, the members of the FSTC -- a who's who of financial services companies, including J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. -- met to discuss how they could reduce offshore risks.
Work is under way to examine offshore security, privacy, business continuity and contract-cancellation issues associated with offshore management of onshore applications. The goal is to complete a best-practices report by the end of the year.
The FSTC will also work with vendors and financial services groups such as the financial industry consortium BITS in Washington. The group recently updated two outsourcing guideline documents to include overseas production support.
The BITS reports offer guidelines for complying with regulations. The second of the two documents, available for public comment through Oct. 28, suggests guidelines for security audits, vendor management and cross-border relationships.
"What we were looking to do for our members is develop risk mitigation tools that the industry can use to identify and understand the controls service providers are using . . . around things like access (and) communications," said Faith Boettger, the senior consultant in charge of the BITS initiative.
The FSTC seems to be taking a more tactical approach. For instance, it will look at data-masking technologies and offer guidelines on technology features. IT vendors are looking for technology guidance from the group, said Salters.
By participating in this effort, companies may be sharing competitive information. But Salters said that if any firm makes a mistake in managing offshore operations, there could be ramifications from lawmakers and regulators for everyone in the industry. "It's really not considered a proprietary issue at this point," he said.
Stressing Home Field Advantage
U.S. IT vendors are attempting to compete with offshore service providers by developing more cost-effective business models and telling customers that price isn't everything.
One such company is Ariesnet Inc., a Web developer that uses independent contractors to deliver projects in a system it calls "virtual teaming." The system allows Ariesnet to deploy its workers as needed and get more done at lower cost, said Cruce Saunders, president of the Dallas-based company.
By treating employees well and building a project delivery structure that allows flexibility in their schedules, "your whole organization will benefit from adding talent without adding cost," said Saunders.
Chip Express Corp., a custom chip manufacturer in Santa Clara, Calif., hired Ariesnet to redesign its Web site.
"Developers in India are very capable of coding and providing what you ask for," said Heather Savage, the marketing communications manager at Chip Express who managed the project. "But that's not all I need," she added. Savage said that although she considered offshore developers, she ultimately valued the easy access she had to Ariesnet's Web developers and felt she was working in partnership with the company.
Another outfit taking on offshore developers is Real-Time Technology Solutions Inc. in New York. Earlier this month, the company announced a service called Onshore Automated Testing, which has enabled it to reduce prices by offering remote testing services instead of having its employees go on-site.
Some service providers, such as Deloitte Consulting in New York, say they're competing by operating offshore development centers that combine the best of both worlds: low cost, plus value-added integration and business-consulting expertise.
Some users of offshore services, meanwhile, recommend against trying to compete directly with providers in India and elsewhere.
"I think U.S. companies can compete, but it won't be as the low-cost provider," said Ron Glickman, CIO at DFS Group Ltd., a San Francisco-based company that operates duty-free shops primarily at airports worldwide.
Instead, Glickman said, U.S. firms need to focus on strategies that provide expertise beyond what's available from offshore development. "I think getting complementary with offshore is a more important strategy than getting competitive with offshore," he said.
One thing that's made offshore providers attractive is the quality of their work, said Paul Fielding, who is in charge of offshore initiatives in application development at a financial services firm that he asked not be named.
Fielding, who was at offshore provider Cognizant Technology Solutions' user conference in Key Biscayne, Fla., last week, said that although costs are prompting U.S. firms to look offshore, it's the quality of the work that keeps them there.
Fielding said India's developers are more disciplined about coding than U.S. developers are. The U.S. software industry was spawned by brilliant and creative people who focused on innovation, not quality, he said. "That culture persists even today," Fielding said, "but now people depend on this technology as though it were a manufactured product."