The continued push to deliver new products and services is helping banks to build new business, but it is taxing their already- stretched IT resources, according to a recent study by Booz & Company.
Throughout the evolution of the financial-services industry, banks have harnessed new technologies to offer current and prospective customers increasingly sophisticated products and services.
In the Middle East, banks attempt to meet evolving consumer needs while encouraging the use of low-cost electronic channels. However, as the pace of this technological evolution intensifies, bank Chief Information Officers (CIOs) are finding that their IT functions are overburdened by demands from business and the challenge of maintaining an ever- growing portfolio of technology solutions. As a result, they are significantly hindering the bank's ability to go to market quickly with new products and services, the study warned. "This challenge has been further compounded regionally by shortages in some local labour markets, such as shortages of technically-trained graduates and difficulties in hiring foreign labour due to protracted visa application processes," said Ramez Shehadi, a partner with Booz & Company.
There are a number of resourcing models for banks to consider to manage effectively their growing IT development demands, the study said. Each comes with its own set of merits - and limitation.
Pros: Allows banks to maintain control of the IT operation and keep proprietary knowledge in the bank.Cons: This model is restricted by the available local talent.
Pros: A simplified hiring and termination process, and the bank keeps control of the IT function as it remains on-site. Cons: More costly than hiring an in-house team directly, because vendors add a premium for their service.
Pros: Access to new labour and talent pools and may generate labour cost savings if the vendor has established economies of scale. Cons: Reduced control over people and processes, potential loss of intellectual capital, possible cultural differences and high turnover rates typically seen among IT vendors.
Pros: This is slowly becoming a more popular option as vendors' experience and success in this arena continues to grow. Cons: Becoming fully dependent on a vendor can be a disadvantage due to the loss of technology ownership, which makes it difficult to undo such a partnership. There is also the potential for integration issues, as well as regulations that may prevent the exportation of customer data outside of the bank's home country.
Are ODCS the answer?
The study said the Offshore Development Centre (ODC) option is the most effective model for the Middle East for a number of reasons. They grant access to new labour markets and remotely established IT service providers while enabling the company to maintain partial ownership (in the case of a JV) or full ownership (in a BOT or captive model).
This makes an ODC less risky than other sourcing options, while the added control of an ODC facilitates its potential repatriation once the required IT skill set is available locally. This option is increasingly critical to governments (particularly in the GCC) as they seek to develop the capabilities of their nationals. Due to these advantages, ODCs have emerged worldwide as an increasingly attractive option; in fact, global spending on offshore IT services grew at a compounded annual growth rate of 24 per cent between 2004 and 2009.
The study pointed out that banks of the Middle East have one advantage over their Western counterparts, in that they have a relatively low- wage professional talent pool within easy reach. Egypt, Jordan and the UAE boast healthy numbers of IT graduates, and India's tech-savvy labour pool and established IT service providers are close at hand.
Devil in the detail
A successful transition to an ODC model requires highly effective execution, the study said. Setting up an ODC takes a large up-front investment, which can quickly turn into a loss if governance and integration issues are not thoroughly planned out. "Beyond deciding which ODC model is the best fit for its business, a bank must develop a clear picture of what it requires from its IT function.
In particular, it should decide which resources will go to the ODC and which should stay in-house," commented Lutfi Zakhour, a Principal with Booz & Company.
"CIOs should evaluate the roles of IT function plays within the company; those that have a direct impact on the bank's ability to go to market and maintain its current IT capability should be retained in-house. Operational activities such as development and testing are stronger candidates for offshoring."
The CIO should then endeavour to understand the linkages between individual IT functions and the various technology solutions, taking into consideration the degree to which the technologies are strategic, are customised or standard in the marketplace, and are controlled by regulations governing issues such as cross-border transmission of data.
CIOs who turn to an ODC as an offshoring solution should know going in that they require sufficient setup time and additional manpower to initiate and manage the relationship. That means there will likely be pockets of downtime, either during the launch process or later during handover periods, when the bank has more IT employees than the current workflow demands. These temporary inefficiencies are more than offset by the IT function's heightened abilities to support new products and respond to the day-to- day needs of the business over the longer term. nBME
Offshore development Centre explained...
There are three forms of ODCs:
1) Build-operate-transfer (BOT): The centre is started and operated by a partner for a fee until it is transferred fully back to the bank2) Captive: The centre is entirely set up and operated by the bank 3) Joint ventures (JVs): Ownership is shared with a partner