June 15, 2001

A growing number of U.S. financial services firms are looking offshore for help in developing and maintaining IT systems, according to industry executives gathered at a New York conference sponsored by eRunway, Inc., a Westborough, Mass. software services firm, and the Wall Street Technology Association (WSTA).

While none of the companies represented intend to move all of their development work overseas, the practice is becoming increasingly common against the backdrop of shareholder scrutiny, a domestic scarcity of talent and the availability of viable overseas alternatives.

Bob Rosetta, vice president and head of the investment bank's application development vendor services team for J.P. Morgan Chase, estimates that his firm spends $5 billion per year on technology. Hiring to meet that level of demand isn't easy. "Once you leave the trading centers - New York, London - it's hard to find people to do the work," said Rosetta.

Rosetta has been working with offshore development partners since 1990. One reason is that overseas partners are likely to reach higher levels of sophistication in their software development practices as measured by the Capability Maturity Model (CMM) for Software, a framework established by Carnegie Mellon University's Software Engineering Institute (SEI). Overseas development centers often reach CMM Level 5, the highest level, whereas most internal IT departments are lucky if they reach level 2.

John Wen, Technology Director for Offshore Development at Merrill Lynch, also discerns a difference between his internal IT staff and those found at offshore development centers. As business requirements call for more structured programming approaches, internal staff might find a better home in other parts of the organization.

"A lot of programmers thrive on heroics," said Wen. "You have to gauge whether they will be able to be retrained, or you put them somewhere else, where heroics are valued - like on the trading floor."

Merrill Lynch turned to overseas development 18 months ago as part of a TCO (Total Cost of Ownership) initiative, launching numerous engagements from the front office to the back office. Selecting the capital market applications to move offshore posed a challenge, said Wen, who found that front office applications were often more portable than batch or mainframe processes, despite initial expectations to the contrary.

Fannie Mae, the mortgage industry powerhouse, also took a hard look at which systems to send overseas. "It used to be the company was very much a mortgage services company surrounded by analysts and financial gurus," said LeRoy Pingho, vice president for enterprise services for Fannie Mae. "We've now become a company that's fully half IT, and the rest are out servicing customers."

As a result, Fannie Mae can't afford to fail in its IT initiatives. "We don't have the luxury of building things and allowing them to mature," said Pingho. "Even with all of the dot-com failures over the last 18 months, it's not like IT resources are becoming an easy commodity to find."

But at the same time, shipping critical jobs overseas isn't a palatable option for the government-sponsored entity. "We are a U.S. firm, we're chartered by the U.S. government, and we don't want to ship a majority of jobs outside of the U.S.," said Pingho. "But we're constantly being asked to do more for the same money."

Pingho describes three levels of IT: core business systems, transactional systems and utility systems. While utility systems and transactional systems to some extent are fair game for outsourcing, he draws the line at core business systems. Part of the reason is that core business systems draw closely upon the business expertise developed within Fannie Mae. "We don't expect development centers to have domain knowledge of our business," said Pingho. "It's our core competency."

But Chuck Gallant, chief information officer of PFPC, Inc., won't stop at core systems. "Your goal should be to get to core systems development and maintenance," he said. "If you can't get to maintenance and enhancement, you haven't solved your cost savings dilemma."

PFPC, a subsidiary of PNC Financial Services, provides back office and call center services for mutual funds and investment companies.

While offshore development may cut labor costs in half, Gallant says, outsourcing IT development requires an additional 20% to 25% expenditure for incremental management costs. "Overall savings are 20% to30% over local development," said Gallant.

Just because developers are located overseas doesn't mean they're invisible. "They're 'offshore,' but you're going to see a lot of these people," said Gallant. "We know our 50-75 programmers as well as we know our own, and treat them similar to full-time employees."

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