Tower Group, a research and consulting firm, expects big push to outsourcing by global financial institutions in countries like India and China.

Outsourcing in financial industry is undoubtedly on the rise...top 15 global financial institutions will increase information technology spending on vendor-direct offshore outsourcing by 34 per cent annually representing an increase from $1.6 billion in 2004 to $3.89 billion in 2008, Tower Group said in its latest report.

If outsourcing is executed properly, resources no longer bogged down by maintenance and IT work will be able to address the backlog of IT projects intended for competitive differentiation, said Virginia Garcia, senior analyst in the Financial Services Strategy & IT Investments practice at Tower Group and the author of the research.

Maintenance costs will go down and more money will be available to innovate. Firms that do not view offshore outsourcing as an opportunity less are missing the boat, it said.

Most of the top 15 global financial institutions are already outsourcing some parts of IT to offshore destinations, many through specialised offshore vendors, it said.

Additionally, many leading firms now own and operate their own captive sites in countries like India or China, which allows for better risk management and IT governance and thus a more confident transfer of riskier IT and business processes to low-cost destinations.

New research from Tower Group reveals that instead of bringing just IT budget or job cuts, offshore outsourcing will actually serve as a strategic enabler for the redeployment and retraining of key resources to meet more critical business objectives.

Tower Group offers three recommendations for financial institutions looking to navigate outsourcing's choppy waters.

Recent political debates on outsourcing have tended to focus on customer-facing business processes like call centres.

Call centre outsourcing leaves no room for error, given the high potential for consumer backlash and ensuing reputational risk.

It advises financial institutions that are offshoring novices to look first at outsourcing back-office functions, rather than starting with more public front-office services.

Security and operational resilience must both be a top priority, including making accommodations to protect critical data from fraud and ensuring adequate infrastructural redundancies should any regional system stress or crisis occur.