The long-term future for outsourcing is positive

[dhilipkumar]

The long-term future for outsourcing is positive

MUMBAI: Indian IT firms, which were banking on big integration projects from the mergers and acquisitions of banks in the US, may be disappointed. The acquiring banks are opting not to integrate these systems and instead simply, scale up their own systems and scrap the systems of the target banks, said Gartner's VP-research, Peter Redshaw, who's focused exclusively on financial services outsourcing. "These are typically migration projects and much smaller," he said in an interview with ET.

In the past, banks have opted to pick up the best systems from both the acquiring bank and the target bank and integrate the two or go with the system used by the acquirer. In the current slowdown, most of the banks are opting to go with the latter because it's simpler, cheaper and faster. "In the first case, where you work out what you take from system of Bank A and what you take from system of Bank B, is where IT companies get a lot of business. In the second case, there's a bit of scaling up of systems, transferring the data and re-formatting it. But it is more of a migration than an integration job," said Mr Redshaw.

Companies like TCS and Infosys Technologies that service many top US banks were anticipating significant volume of business from integration. For instance, both Merrill Lynch and Bank of America are clients of TCS. This would have meant that TCS was a strong contender for any integration project by virtue of knowing the IT systems of both these banks.

IT spending by financial services firms is also not likely to rebound in 2010, even if the economy picks up, he said. This is because there is always a lag between recovery and IT budgets returning to pre-slowdown levels. Mr Redshaw estimated that overall, IT budgets of banks have shrunk by 15%. A majority of this - about 70% - is still internal IT spending, and this likely to return to 2007-levels only by 2018. External IT spending, from which IT services vendors benefit, is, however, likely to rebound much faster. This is because banks are increasingly moving more work outside.

If the economy recovers in 2010, Mr Redshaw expects external IT spends to get back on track by 2011-12. "The long-term future for outsourcing is positive and healthy. Where banks will make those big cuts and where the cuts will be permanent in their internal spending," he added.

Customers have become more risk-averse in the current environment after the Satyam scam. And, vendors are evaluated on a number of counts including where they are headquartered, under which country's jurisdiction they operate, if they have a US listing and what disclosure norms they follow and where their board is domiciled.