Offshore outsourcing by financial services firms will double over the next four years as these companies turn over larger and more strategic parts of their operations to offshore providers, reported market research firm Datamonitor PLC.
Anders Maehre, managing analyst at the London-based company, said financial services firms in the U.S. spent about US$590 million on offshore services from third-party outsourcers last year, while their European counterparts spent about $480 million overseas.
But by 2008, Datamonitor expects offshore spending by financial services firms in Europe and the U.S. to nearly double to more than $2 billion, said Maehre. Among the services financial companies will increasingly send offshore are business process functions such as mortgage processing, insurance underwriting and claims processing.
Financial services firms are asking their offshore providers to play an ever larger role in core operations, said Maehre. Providers that were initially tasked to perform specific application and support work, for instance, are now being asked to take over the development area, he said.
In some cases, the rationale behind these expanded outsourcing deals isn"t just cost reduction, said Maehre. The move is also seen as an opportunity to improve business processes that companies may be a struggling to fix internally because of political resistance.
Offshore providers are also reacting to customer demand for more extensive services by buying up consulting capability. Last month, two large offshore firms, Satyam Computer Services Ltd. and Cognizant Technology Solutions Corp., each bought consulting companies to better enable them to help companies with strategic IT development.
"We have seen the market evolve, and the expectation of our customers (has) changed dramatically over the last few years," said B. Ramalinga Raju, founder and chairman of Hyderabad, India-based Satyam. "Customers are no longer content with getting the low-end technology services from offshore."
Satyam last month acquired Citisoft PLC, an investment management consultancy, for $23 million, with an additional performance-based payment of up to $15.5 million over a three-year period.
Teaneck, N.J.-based Cognizant acquired Fathom Solutions LLC for $19 million in cash and stock, and a "contingent consideration" of $16 million payable in two years. That firm was founded by former Accenture executives in 1999, and has expertise in financial services and telecommunications.
"We"re continuing to move up the value chain in the services that we offer," said Francisco D"Souza, chief operating officer at Cognizant. He said the purchase will better enable his company to give customers "the best of both worlds" -- strong offshore capabilities coupled with consulting services.
The India-based firms are also competing against U.S.-based providers such as IBM and Electronic Data Systems Corp., which have been building up their own offshore centers to add to their existing consulting capabilities, said Maehre.