Outsourcing has been an attractive way to save money since its inception. As the ongoing recession and regional banking crisis have caused banks to tighten their belts, many financial institutions (FIs) will continue to rely on outsourced IT services. As the financial services industry recovers from recent developments, FIs shouldn’t be lulled into a false sense of security. IT leaders can and should create an IT staffing plan which accounts for future unanticipated events.
My latest report on IT outsourcing, co-authored with Mitch Wein, provides a general overview of outsourcing considerations and a checklist for IT leaders on the decision-making process. In 2023, IT leaders should assess the geographic spread of their outsourced staff, considering both traditional offshoring and up-and-coming nearshoring locations.
Offshoring
IT outsourcing has been important to FIs of all sizes since the 1990s. Over the past few years, outsourcing supply chains have been susceptible to geopolitical developments, such as the COVID-19 pandemic and the ongoing war in Ukraine. The hybridization of the workplace resulting from the pandemic has better equipped many institutions to work with remote teams. In 2023, diverse IT outsourcing options are available to financial institutions.
- India and the Philippines: India has been a favored offshoring location for decades due to its large supply of technical talent and comparatively low labor costs. During the COVID-19 pandemic, disruptions in India affected companies’ operations. Although India has largely recovered from the pandemic and continues to produce new talent, major providers have cut back on hiring.
- Eastern/Central Europe: Countries such as Ukraine, Poland, Romania, and the Czech Republic have numerous skilled software developers at lower prices than North American talent. Companies with Russian, Belarusian, and Ukrainian outsourcing operations faced turmoil after Russia’s invasion of Ukraine in early 2022. While the Ukrainian IT industry has largely recovered, business continuity planning will be key for companies that have resumed outsourcing there.
Nearshoring
Even for hybrid or remote workplaces, offshoring poses challenges, including drastic time zone differences, susceptibility to geopolitical developments, and low transparency into an outsourcing partner’s operations. North American FIs may consider nearshoring to the following areas in order to mitigate the challenges presented by locations further offshore.
- Western Canada: Vancouver has become an IT outsourcing location for U.S. companies due to its geographic proximity and strong talent pool. While labor costs are higher than in regions further away, they are not as high as comparable costs within the U.S.
- Latin America: Software developers are more expensive in Latin America than in Asian countries but are significantly less expensive than North American talent. Latin America is also close geographically to the U.S. Its skilled IT talent pool has undergone rapid growth since the early 2020s.
Over the years, outsourcing has come to comprise a greater proportion of banks’ IT staffing. As Fis increasingly rely on outsourcing, they must also create more complex plans, including continuity and contingency planning. FIs should revisit their IT outsourcing strategy at least annually as part of their strategic planning process. Datos Insights has released a CIO/CTO Checklist outlining the steps FIs can take to insulate their staffing from global developments and fluctuations.
The full report, CIO/CTO Checklist: Offshore, Nearshore, and the Implications of Geopolitical Instability, is available to clients of Datos Insights’ Retail Banking & Payments or Commercial Banking & Payments services. If you aren’t already a client, contact me at [email protected] to discuss how you can get access.
