The US can outsource the critical task of overhauling its financial IT applications by riding the next wave of Indian IT outsourcing. The Third Wave of Indian outsourcing can re-engineer US financial institutions’ and obsolete information systems that prevented US financial firms from correctly assessing risks that led to the meltdown.
For this re-engineering to take place, American banks and insurance companies will have to outsource modernization of their financial risk management systems. This is where Indian outsourcing specialists can come in and help their several generations of systems that rarely ‘talk’ to each other, by getting them to begin to do so.
Considering its talked-about potential, let’s first explore what the “Third Wave” in Indian outsourcing means, and then discuss how it can come to the rescue of financial institutions in the US.
Over the last 30 years, the Indian IT outsourcing industry has gone through two stages. The first wave was characterized by staff augmentation – also called ‘body shopping’. It established that Indian IT professionals were as good as their Western counterparts.
The second wave saw the establishment of offshore development centers. Started during the 1990s to fix the Y2K bug, these centers evolved to deliver software maintenance and incremental developmental services for a fraction of the cost US companies would pay for similar work at home.
The success of the second wave led to global clients deciding to outsource ERP implementation and maintenance, infrastructure management, and testing services to India.
Over the last few years, we have seen a Third Wave emerge: a growing reliance on IT outsourcing companies for high-end strategic work.
With worldwide clients willing to outsource cost-saving strategic projects, India is presently seen to be at par with companies such as IBM and Accenture.
Indian firms leading the Third Wave have also been partners in major consortiums delivering large, greenfield government programs. For example, both Tata Consultancy Services and Mastek, have been involved in Connecting for Health, a multibillion-dollar health-care IT program for Britain’s National Health Service.
Mastek was considered dependable enough for the British Defense Ministry for it to outsource an air movement logistics application to the company.
So now that Third Wave Indian outsourcing has established its credentials, it’ll make good business sense for the US to outsource projects involving “rejigging” its financial IT backbone. This’ll keep US financial regulators, investors, and clients well informed about financial and business data.
But the most important reason why the US should outsource parts of this complex exercise to Indian outsourcing companies is because of their ability to execute large-scale projects.
Third Wave firms from India are leveraging their investments in software quality initiatives to bring higher levels of success in large program delivery.
Now this is important as indicated by the latest report from the US based Standish Group’s ‘Chaos Report’ on IT performance. The report tracked project failure rates across a broad range of companies and industries, large IT programs across the globe.
More than two-thirds of large programs encounter significant time and cost overruns and almost a third never see the light of day.
The report found that such programs are fraught with risks and have less than a 30 per cent chance of success – a club in which India does not belong.
The IT infrastructure of large US financial institutions is in such thick soup that resorting to outsourcing reverse engineering is not going to solve the problem.
Their core back-office applications and systems are several decades old, and are written in near-extinct languages such as Assembler, PL/1, and Cobol.
Most IT organizations have kept these systems running by patching them together, using the IT equivalent of Band-Aids. They have been minimizing changes to these core systems and developing front-end applications, first during the client-server era and then using different generations of Web technologies.
So one can well imagine what would have happened to mortgage-backed securities, collateralized debt obligations, and credit default swaps against the backdrop of this creaky IT infrastructure.
American financial organizations and companies have been reluctant to address these issues due to risks and costs.
The risks associated with IT legacy modernization, or its possible outsourcing, are twofold: requirements management and large program execution.
Requirement management is a risk because of scant organizational knowledge and documentation about these core legacy systems.
For Indian outsourcing companies this challenge won’t be easy to take up. In fact, US financial companies will outsource work that will be like assembling a 1,000-piece jigsaw puzzle without the picture on the box.
The only viable method to address this ‘requirements challenge’ is to outsource this puzzle, which is a combination of forward engineering, reverse engineering, and pragmatic business support.
This effort must be supported by teams of business analysts and technical analysts who reverse-engineer the software code.
Third Wave Indian firms recognize the need for multiskilled teams. They have strong domain experts and subject matter experts in the countries where they operate, supplementing the technical resources from India.
They also recognize that the second wave approach of working to a customer-given specification will work for application maintenance and minor enhancements. But it’ll fail in large-scale transformation programs.
In the area of large program expertise, Third Wave firms have the track record of much higher rates of successful delivery. Large multinationals outsource key business tasks to them due to their mature software engineering processes.
In summary, it is imperative for large US and European financial institutions to modernize their legacy of obsolete IT infrastructure in order to survive and flourish in the coming years. And Third Wave Indian outsourcing firms offer a more attractive alternative to deliver these programs successfully.