Fewer than 30 percent of financial services companies will outsource strategic projects by the end of next year, although companies seem more willing to outsource IT maintenance or call center type work, according to a study released this week by Gartner Inc. IT managers on hand for the Gartner Financial Services Technology Summit in New York this week agreed with the study"s findings and said they are creating their own outsourcing centers in India -- where workers are cheaper, yet motivated and skilled.

"We went the captive route because of the span of control we get," said Sean Motely, vice president of IT for New York-based Lehman Brothers Inc."s investment management division.

In February, Motely"s company launched a "massive" recruiting effort in Mumbai, India, to staff a 1,000-person IT and business process outsourcing (BPO) center. About 10 business divisions were told to come up with a plan for outsourcing IT development to the center, where Motely said his division will send Java and .Net applications development. Each division at Lehman Brothers is responsible for the success of its own effort.

"From a technology perspective, those [Indian] workers are sharp, and they have a good work ethic," he said.

Lehman Brothers left its more mundane outsourcing contracts for Cobol and DB2 maintenance and development to outsourcers such as Tata Group in Mumbai, India.

Rick DeMaria, technology platform director at mortgage-backed securities dealer GMAC-RFC Ltd. in Bracknell, U.K., said the industry generally views the skills of outsourcing vendors as limited. "The general perception is that the typical experience with outsourcing is great until you try it," said DeMaria. "We"ve limited our outsourcing to infrastructure support."

Gartner"s numbers reflect those kinds of decisions. Less than 20 percent of financial services providers will use business process outsourcing to support competitive differentiation through 2007, reported the Stamford, Conn.-based company.

"The issues generally are that they"re not happy with the outsourcing providers," said Gartner analyst Kimberly Harris-Ferrante. "Business process outsourcing will continue to remain slow over the next three years."

Ferrante said the problems don"t always stem from the outsourcer but often involve a bank or insurance company"s lack of experience with large outsourcing deals. "What we find is most companies don"t have an overarching strategy that says at the end of the day, "Here are 10 different processes that we have to grow so we can compete with our peers." It"s more knee-jerk reaction to outsourcing," she said.

Gartner estimates that U.S. financial services firms spent on average US$53 million on IT outsourcing services in 2002, compared with an expected $65.6 million this year. Spending will continue to increase, reaching $83.8 million by 2009, it said.

"So it"s growing," Harris-Ferrante said. "But to support competitive differentiation assumes an underlying strategy, and only 20 percent of BPO projects out there will be strategic in nature. The rest will be traditional tactical-type projects where the company is saying, "We need someone to do it cheaper and faster.""

Harris-Ferrante recommends keeping core competencies such as business knowledge, data management, and vendor and project management internal to a company. But she said outsourcing can help financial services firms respond to pressures such as staff shortages, a lack of internal skills to support specific processes or tasks -- and high labor rates.

On the other hand, outsourcing can raise internal fears about business control, job security and data privacy.

Even so, companies should consider outsourcing more strategic projects to help with mission-critical activities, Harris-Ferrante said. Those activities include customer facing functions like loan servicing and policy or account servicing, as well as back-office projects such as systems consolidation, disaster recovery and systems integration, she said. One way to ensure greater success is to make those projects enterprisewide in order to standardize management processes.

Harris-Ferrante also pointed to a lack of metrics needed to measure the value and business impact of outsourcing projects, which prohibited many of the organizations surveyed from accurately assessing the outcome of projects. Projects fail, or provide less-than-expected results, for many reasons, Gartner said, including a lack of investment in project management to monitor outsourcing relationships.

"A lot of companies are coming back and reporting they"re not getting what they wanted because there"s no bidirectional communications," she said.