In the past month a number of financial services institutions have announced plans to offshore further IT jobs to India.

Lloyds TSB expects to make savings through an outsourcing deal with IT service provider Xansa and UK IT positions at ABN Amro will be lost as the Dutch bank aims to save $70m (£37.5m) by moving IT applications development abroad.

Research by consultancy Deloitte shows that 62 of the world’s leading banks and insurance firms could collectively reduce annual overheads by as much as $16bn (£8.6bn) by offshoring IT development, servicing and call centres.

Chris Gentle, director of research at Deloitte, says that with the financial services industry reaching maturity in the West, margins are being squeezed and banks need to find cost savings.

‘It is important to dispel the myth that this is all about call centres moving to India. Only 10 to 20 per cent of all spending offshore relates to this,’ said Gentle.

The majority of offshoring involves IT application development, technology support and back office functions such as payment processing, he says.

Cost is a big factor in offshoring. Most financial services firms are finding that a project can be carried out in India for 40 to 60 per cent of the cost of one in the UK, says Deloitte.

But Martin Hart, chairman of the National Outsourcing Association, says large numbers of highly skilled software developers in India and China are also proving appealing to banks that need to develop new online financial services products fast.

‘IT is a fundamental part of the financial services industry these days. They rely on everything from web sites to CRM systems,’ said Hart.

Being able to develop new financial services applications 24 hours a day, by shifting the project to different service centres around the world, also means new money-generating products can be launched faster.

‘If you have your own IT department, often their skills aren’t the ones you need. It raises the dilemma: do you retrain staff or outsource?,’ said Hart.

But offshoring is not without its drawbacks, he says. Last year former employees at Indian outsourcing firm Mphasis were arrested for allegedly stealing more than $300,000 (£160,000) from Citibank’s customers.

‘There’s no reason to believe that fraud is any worse than in the UK, but the problem comes with business processes in place,’ said Hart.

‘If you have a high-worth individual’s data all on one screen, being viewed by a lowly-paid call centre operator then there will be temptation.

‘Systems need to be better designed to encrypt data and only make certain bits of information available to staff.’

Greater management controls also need to be put in place with offshoring contracts, he says.

‘You need to know your own business processes. Because of cultural differences, they won’t necessarily interpret it in the same way as someone in the UK,’ said Hart.

Offshoring…in 30 seconds

*With ever-shrinking profit margins, financial services firms are relocating IT functions to cheaper labour markets, such as India, China and Eastern Europe.

*Financial services firms are expected to relocate as much as 20 per cent of their total cost base offshore to cheap labour locations in the next four years, according to Deloitte. Some 10 to 20 per cent of financial services employment is also expected to be offshored by 2010.

*Offshoring in the financial services sector is set to double by 2008, says consultancy PricewaterhouseCoopers (PwC).

*PwC’s survey of 156 financial service firms also found that more than 50 per cent offshore IT functions or plan to in the next three years. Some 12 per cent of organisations do not offshore any activities.

*Turnover of staff in India’s main IT centres can be between 40 and 60 per cent, raising security and handover issues.

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