Banks forced down outsourcing and offshoring route

Outsourcing and offshoring are set to increase in the banking industry despite rising profits in the sector, because of the pressures of market consolidation, fierce competition and the need to cut costs, according to a new IDC report.

The profitability of the 50 major European banks improved in the first half of 2004 to 1.48 per cent compared to 1.33 per cent at the end of 2003 but this is also tied in with the ongoing trend for cost-cutting.

IDC's Financial Insights tracking report predicts that the twin pressures of increased profits and more efficiency savings are having a significant impact on IT buying decisions as the banks switch from a fixed to variable cost model.

Daniele Bonfanti, programme manager for the European IT Opportunity Financial Services programme at IDC, said this means more dynamic flexible sourcing strategies that combine outsourcing, offshoring, shared service centres, consortia, and joint ventures between financial institutions.

"The importance of technology in the financial services sector is growing since banks understand the added value that IT can provide to their business and now have resources to invest, even while keeping a strict control on costs," he said in the report.

The view ties in with Deutsche Bank's announcement today that it will slash 6,400 jobs, consolidate its IT platforms and outsource and offshore more non-core functions.

The Financial Insights report predicts IT spending for the banking sector in Western Europe will have a compound annual growth rate of 5.6 per cent between now and 2008, with online banking and payment processing tipped to be the hottest areas.