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Financial services adopting sourcing lessons from manufacturing according to research from London Business School and Capco

Financial services companies, like manufacturing firms before them, are outsourcing and offshoring, going beyond geographical and organizational boundaries in search of efficient operations

(London/New York, 22 May 2006) – The financial services industry is going down the same offshoring and outsourcing route pioneered by the manufacturing industry according to new research released today.

Financial services is one of the most important industries in both the UK and the US and is one of the biggest employers, but it has historically lagged behind manufacturing industries in exploring the opportunities of outsourcing and offshoring – key components of what are known as ”global sourcing models”.

This new and in-depth research, published in a joint study conducted by a team drawn from London Business School and the Capco Institute, explores the experiences and sourcing strategies revealed by sixty two executive respondents from the world’s top financial services organizations. The findings dispel many of the myths surrounding both outsourcing and offshoring in the financial services industry today.

Some of the key findings of the research are as follows:

The Global Sourcing Model is well established amongst the world’s leading financial services organizations even for “vertical business processes” often assumed to be too difficult to outsource or even offshore. Indeed, 58% of survey respondents who outsource business processes already use alternative sourcing strategies for these vertical processes.

These companies no longer think about “whether to outsource” or “whether to offshore” in terms of single functions and a single vendor; instead they are beginning to manage sophisticated sourcing frameworks that integrate multiple-vendors, multiple-geographies and vertical, business specific processes. Nearly 25% of the respondents reported that they already use a combination of resources onshore and offshore, in-house and outsourced.

While cost savings continue to be the dominant motivation for the transition to global sourcing models, other factors are emerging as important drivers; over 40% of respondents cited quality improvements as a key objective while 25% cited increased flexibility as a priority, especially in outsourcing.

Experience confers sophistication; the more experienced among the survey respondents outsource/offshore more challenging processes, report experiencing fewer hidden costs, claim to manage multiple sourcing models with fewer difficulties, and report more effective collaboration with their suppliers.

Respondents are not overly deterred by the specter of ‘negative press’ when offshoring – among the top ten potential obstacles to offshoring, this factor appeared as only the 9th in the list; only 8% of the respondents cited negative press as a “very significant factor” in making offshoring decisions.

The most significant management challenges in global services sourcing are often at the operational level. Good project management capabilities were cited as the single most important ingredient to a successful global sourcing capability. In ongoing research at London Business School Dr. Puranam is studying project management capabilities in offshoring services.

Dr. Phanish Puranam, Assistant Professor at London Business School and co-author of the survey, commented on the findings: “The survey highlights that financial services companies are finally adopting what can truly be described as a Global Services Sourcing Model. They are doing what the manufacturing sector did years ago, breaking up the supply chain and breaking free of geographical and organizational boundaries.”

Dr. Suresh Gupta, Head of Sourcing at Capco, added: “Despite the myths and media headlines surrounding offshoring, the leading financial services organizations are already far along the path of implementing sophisticated Global Sourcing Models. It is no longer a question of whether to outsource or offshore a generic process like IT maintenance; instead they are already moving complex, business-specific processes offshore.”