Building an Asset in IT - The Offshore Solution for Middle East Banks

Current IT solutions are more often than not a hindrance to the Middle East’s banks; Booz & Company explores the possibilities for banks to successfully utilize offshore IT development services.

Banks in the Middle East are being both energized and challenged by the innovative potential of technology in creating new products and services, which typically require new functionalities across a growing portfolio of platforms and channels. Although the continued push to deliver such products and services is helping banks to build new business, it is also significantly taxing their already-stretched IT resources, according to a recent study by Booz & Company. 

In many cases, bank Chief Information Officers (CIOs) are discovering 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 Growing IT Burden

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 CIOs are discovering that their IT functions are simply overburdened by the increasing demands placed on them, thus hindering banks’ ability to go to market with new products and services.

“This challenge has been further compounded regionally by shortages in some local labor markets, such as shortages of technically trained graduates and difficulties in hiring foreign labor due to protracted visa application processes,” said Ramez Shehadi, a partner with Booz & Company. “Regional CIOs are finding that different IT resourcing models are necessary for banks to bring to market new products and services in a competitive timeframe and at the high level of quality that customers now expect.”

Scoring IT Resourcing Models

There are a number of resourcing models for banks to consider to effectively manage their growing IT development demands. Each has its own merits and limitations, but given the needs of regional banks and the limitations of the labor market, the most effective option is likely to be Offshore Development Center.

  1. In-house Staff: Banks can increase their IT function by hiring additional staff, which allows them to maintain control of the IT operation and keep proprietary knowledge in the bank. In addition, this model is simple to implement as it only requires recruiting new staff and integrating them into existing processes. However, this model is restricted by the available local talent.
  2. Contracting: Banks can assimilate contractors into in-house teams with the help of third-party vendors. Contracting presents a simplified hiring and termination process, and the bank keeps control of the IT function as it remains on-site, but third-party vendors are also affected by the availability of talent. The model is more costly than hiring an in-house team directly, because vendors add a premium for their service.
  3. Outsourcing: Banks can elect to remotely source people and processes from external vendors, particularly with technology that is neither proprietary nor strategic for the company. Outsourcing provides access to new labor and talent pools, and may generate labor cost savings if the vendor has established economies of scale. Drawbacks include reduced control over people and processes, potential loss of intellectual capital, possible cultural differences and high turnover rates typically seen among IT vendors.
  4. Cloud Computing: In addition to sourcing people and processes, banks can source the underlying technology in a cloud computing service model. This is slowly becoming a more popular option as vendors’ experience and success in this arena continues to grow, however 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.
  5. Offshore Development Center (ODC): With the ODC option, a bank develops its own dedicated talent pool where talent is more readily available, either nearby (near-shoring) or distant (offshoring). There are three forms of ODCS;
    - Build-operate-transfer (BOT): The center is started and operated by a partner for a fee until it is transferred fully back to the bank
    - Captive: The center is entirely set up and operated by the bank
    - Joint ventures (JVs): Ownership is shared with a partner

ODCs are the most compelling model for Middle East banks 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 percent between 2004 and 2009.

The 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 labor pool and established IT service providers are close at hand.

Offshoring: The Devil Is in the Details

Of course, a successful transition to an ODC model requires highly effective execution. 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 customized or standard in the marketplace, and are controlled by regulations governing issues such as cross-border transmission of data.

Finally, 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.

Laying the Groundwork

“Issues that may arise during or after the implementation of an ODC can generally be avoided if the bank works to ensure, from the beginning, that key readiness requirements are met,” said Zakhour. “These typically center on effective demand- and vendor-management capabilities. Failed ODC projects have shown that a bank cannot expect an ODC to remedy current weaknesses in these areas; rather, the CIO should make a concerted effort to understand and solve these inadequacies before offshoring.”

  1. Demand Management: Weak communication and misalignment between IT and business divisions can lead to lost revenues and market opportunities if not addressed. When relations between these divisions are strained and dysfunctional, an ODC model can do little good. Mature IT demand-management governance and processes are required to ensure that they are interacting efficiently and effectively.

    Collaborative efforts begin with IT and the ODC co-operating to identify the right IT solutions for various business requirements, and then prioritizing and synthesizing them across the bank’s business units. As part of this process, the IT function should strive to consolidate overlapping IT requirements shared by the business units. It should also include quality assurance checkpoints across all steps of the IT development life cycle, as well as hands-on involvement of the business user in the testing phase to ultimately ensure that the solution meets the needs of the business.

  2. Vendor Management: Inevitably, banks that increase the amount of IT work completed externally will come to increasingly rely on a network of distinct vendors. As such, they will need to strengthen their capability to effectively manage such relationships. Typically banks focus these efforts on the procurement management phase with well-defined tendering processes. But as vendor relationships become more complex and meaningful to the business, the IT function will need to develop additional capabilities, such as strategic sourcing, contract management, operations management, and performance management.

    Banks that opt to offload some of their IT tasks to an offshore development center must have processes in place to closely monitor their vendors’ day-to-day operations, so that they can identify and promptly resolve issues before those issues graduate to major problems. Similarly, a fully defined vendor performance management framework, one that includes key performance indicators and targets, is critical to ensuring that project tasks meet the desired requirements and SLA terms, and that the objectives of IT and the overall business are aligned. Such a framework should continually evolve over time to improve efficiency levels and ensure that the latest technologies and capabilities are at the bank’s disposal.

Shehadi concludes that as banks in the Middle East continue to offer more sophisticated products and services in lockstep with market demand, IT resourcing models will become even more integral to their day-to-day operations. “They hold a key advantage over their Western counterparts in this respect, as they do not have to look far for help. Workers with the requisite IT skills both inside the region and nearby have created opportunities for Middle East banks to offshore some of their less strategic, but still time-consuming, IT tasks.”

Nonetheless, banks must take care when turning to others to manage their growing IT burden. IT offshoring can introduce significant risks to the business, risks that can quickly turn an ODC ‘solution’ into a money-losing venture. It is therefore critical for banks to plan for and mitigate these risks by ensuring their IT capabilities and processes are up to the task of effectively managing their IT demands and their vendor relationships. Banks that put in the necessary work up front, and as the ODC gets up and running, will be best positioned to create a dynamic portfolio of products and services and ultimately earn the right to win.

Click here to download the pdf report by Booz & Company.