DUSHYANT SHAHRAWAT
‘Dramatic’ excitement

The time will eventually come when even a paycheck is processed at an overseas bank facility in China.

According to financial services industry analysts, banks are jumping on the offshore outsourcing bandwagon in an attempt to cut costs.

Dushyant Shahrawat, a senior analyst in Needham-based TowerGroup Securities & Capital Markets, said large banks with international clients have continued to outsource technology and infrastructure maintenance to offshore sites, but are now expanding overseas practices to more operational functions, including human resources and payroll procedures.

“Most banks have outsourced most of their technology, software development and applications management to offshore [sites],” said Shahrawat. “Eventually, the actual application that cuts your payroll check will be done in places like China because it’s just cheaper.”

Shahrawat said maintaining company records for every employee, including hire dates, raises, vacations, bonuses and the setup of 401(k) plans in a company requires a complex infrastructure system that comes with high costs.

“To create administration forms and 401(k) plans when a new employee moves in are an expensive process. Human resources, payroll, administration and office management functions are simple tasks that add up to a whole lot of money for a firm … those [jobs] are now offshore,” said Shahrawat.

Shahrawat said banks’ main data centers generally are still housed in the United States, but many banks now have offshore employees who are able to log in and maintain the infrastructure from overseas locations, including China, the Philippines and India.

Permanent Impact

Raja Gopalakrishnan, the head of banking and insurance at ICICI OneSource, a global business process outsourcing company based in New York that focuses on international business, said banks can contract out to third-party vendors in foreign countries or set up sites themselves.

Ultimately, he said, banks reduce their current information technology and administrative support costs by 30 percent to 40 percent, “and that goes right into [bank] profit.”

“The current trend in retail banking suggests that there is increasing focus on operations efficiency and there has been a focus to increase productivity and decrease cost,” said Gopalakrishnan. “That has led banks to look at outsourcing; however, there are players that are outsource-ready but not offshore-ready. What outsourcing does is offer a little bit of advantage to banks, and offshoring enhances the value of outsourcing because it is cheaper.”

Gopalakrishnan said the main reason banks are outsourcing their jobs overseas is to cut costs.

“We are a global economy and, increasingly, [financial services] are going to be globally served,” said Gopalakrishnan from ICICI’s Chicago office. “The current economic pressure is on the bottom line – companies have to look at ways to cut costs without compromising quality. By offshore outsourcing, there is more of a partnership approach [that offers] much more integrated services to banks.”

According to analysts, India is the prime location for overseas bank sites.

“Most of educated India speaks English, which is pretty uncommon if you look [at countries] outside of the U.S., the U.K. and Canada – most countries don’t have an English-speaking base,” said Gopalakrishnan. “India boasts the second-largest pool of English-speaking people in the world and overall its education system generates a lot of talented people, which drives processing and work into India.”

Shahrawat said global companies including Citibank, HSBC and American Express have been contracting their operations to third-party international vendors for years, and now banks are contracting work to third-party vendors in India.

Shahrawat cited local Massachusetts companies like FleetBank, Putnam Investments and Fidelity Investments as Bay State banks and financial institutions that have engaged in offshore outsourcing through their information technology management systems.

“The focus [for banks] was moving projects offshore to Indian, Filipino and Chinese economies because [banks] began looking for cost reductions for their operations,” said Shahrawat. “Over the last two years, the excitement has been dramatic because of the cost savings involved. In the past year, we’ve seen more banks and financial companies move to offshore centers for outsourcing services … Offshore outsourcing is now looked at more as a strategic issue because the complexity of finance and technology infrastructure takes a heavy toll on most financial services companies.”

But sending a complex system and additional software overseas is not always easy, especially for companies that lack the cultural knowledge of foreign countries.

“Banks who are offshoring are banks global in nature, but there are fundamental differences [between working from home and working overseas] including the culture, the systems and the education,” said Gopalakrishnan. “There are a lot of banks in the U.S. which are just focused on domestic operations, and those banks would have a fundamental challenge to running a business 10,000 to 12,000 miles away. That challenge is either time or perception, but the use of technology can help create a system that makes it seem as if that person is in the next room.”

Gopalakrishnan said the cultural differences between Americans and foreign cultures such as India’s can also be a barrier to offshore outsourcing for banks, but the main issue for many businesses is physically moving part of their operations abroad.

“Within banking, specifically, credit card transactions, customer service, foreign contacts and mortgage collections and loan products are becoming more [popular] to [contract overseas], said Gopalakrishnan. “Other processes are account openings and account maintenance transactions … Many of these transactions do not require face-to-face contact with the client.”

But the increased awareness of offshore outsourcing is what Shahrawat said would attract banks to countries like India and China.

“There is more IT work going on overseas, and that means more competitiveness among the American financial system,” said Shahrawat.

Shahrawat said offshore outsourcing will have a permanent impact on the overall IT functions and decision-making processes of the U.S. brokerage and banking industries and said the benefits to being offshore are “a lower cost, a higher caliber of people and a sophisticated process. This trend is here to stay.”