BENGALURU: Here’s the big reason why most of the big IT services companies are still struggling to accelerate: Many large banks have got into a do-it-yourself mode for their IT. Where once they outsourced work, they are now choosing to do more of it in-house, mostly in their own global inhouse centres (GICs) in countries like India.
The financial vertical has long been the bread & butter of the IT services business, but the sector’s contribution to overall revenue has fallen for most of the big vendors over the past few years.
For TCS, financial services was 33.4% of overall revenue in 2016-17 — it was down to 31.1% in the last quarter. For Cognizant, it’s down 3 percentage points in the past two years, and for Infosys it’s down 1.4 percentage points.
There are also no signs of a reversal in this trend. In the last quarter, TCS’ financial services vertical grew at 4% year-on-year, when its overall revenue grew 10%. The corresponding figures for Cognizant were 4.5% and 9.2%, and for Infosys 2% and 6.8%. Compared to the preceding quarter too, growth was anaemic, far lower than the overall quarter-on-quarter growth, suggesting that the sector continues to weigh on the IT industry.
At the last quarter earnings announcement, Infosys COO U B Pravin Rao admitted as much when he said the company had a negative impact in the quarter from two of its clients due to insourcing. The company’s revenue from financial services declined by 1.5% compared to the preceding quarter. HCL Technologies’ revenue from the financial vertical shrunk by 1.4% in the June quarter and the company said it was due to some of its clients insourcing work Neither Rao nor HCL named the clients that are insourcing, but it is possible to make some guesses based on who outsources to whom.
‘Bank IT staff more efficient than outsourced employees’
Deutsche Bank, Bank of America, Citibank and UBS have been some of the biggest outsourcers of IT, according to IT advisory firms TOI spoke to. Deutsche Bank has an annual outsourcing spend of $6 billion and counts DXC, IBM, Atos, Wipro and Infosys as IT partners. Bank of America outsources $5 billion of IT annually and has contracts with IBM, Accenture, Infosys and TCS, among others. Citibank is estimated to outsource between $1.1 billion and $1.5 billion, to vendors including TCS, Wipro, HCL and NTT Data. UBS outsources about $1 billion and its vendors include Capgemini, Epam, Luxoft, HCL and Genpact.
All of these financial institutions are now insourcing, as also those like RBS, Credit Suisse, ANZ. “Citi had sold their captive business to TCS and Wipro (in 2008) and now they again have a captive business with 4,500 people in Pune alone, and plan to be 8,000-strong there,” said an industry executive who did not want to be named. Citi has centres in Pune, Mumbai and Chennai, employing about 16,000 people, and is growing everywhere. Citi declined to provide a comment for the story.
A UBS spokesperson disputed the outsourcing figure provided by third parties to TOI, but acknowledged that the bank had insourced around 2,000 jobs in the last six months, with the primary objective of improving effectiveness and efficiency. The spokesperson said, “UBS’ business solution centres abroad and in have grown in recent years. We now have a global and consistent network that includes India, the US, Poland, and China, as well as the nearshore centres in Switzerland (Schaffhausen, Biel and Ticino). This has created the conditions for insourcing where it makes sense.”
The bank told TOI that one of the main reasons for insourcing is that it wants to retain and strengthen strategic and market-differentiating expertise within the bank — activities that differentiate the bank as a financial services provider from its competitors. “In the technology area, there are topics such as blockchain, digitisation or . Or operational activities that generate added value for our clients. Or also positions in research, analytics, finance and risk management,” the spokesperson said, with reference to strategic and market differentiating areas.
Deutsche Bank declined to provide a comment for this story. But former Deutsche Bank COO Kim Hammonds told TOI last year that when she came to the bank in 2013, about 80% of the tech was outsourced, and she had since brought it down to 50%. The bank had during that period hired some 4,500 engineers, many of them in its India technology centre. Hammonds, who left the bank in May, had told TOI that she intended to insource some more.
Deval Shah, MD of Danske Bank’s IT and support services centre in India, said a lot of the banks have started realising that their productivity is much higher when they insource. “In this day of digitisation, the time to market is very important. So now when we are working in a very agile environment, with the business, with IT, the ability of your own IT staff to comprehend the business is 10 times more than the ability of a contractor to understand the business. I don’t see vendors building that kind of expertise to help any bank reduce their time to market,” he said.
As for the traditional areas of IT, where vendors have expertise, much of it is getting automated. And even that work some banks are choosing to do in-house. “Service providers that do billing on FTE (hours worked by one employee on a full-time basis) have no motivation to do automation. We (Danske India) are not a revenue centre, but a value centre. From our perspective, we are always focused on automation,” said Shah. The Danish bank had in 2006 outsourced much of its IT to L&T Infotech, but took back the entire operation in 2014, and has since been building up its own centre in India.
Phil Fersht, CEO of IT research firm HFS Research, said a study they had done with KPMG on the state of outsourcing found only 30% are seeking to renew similar contracts with their current providers, while a similar percentage will only stay with their current provider if they can shift to more outcome-based pricing and have more automation to reduce cost and headcount. Another 44% will either pull work back in-house or change provider.
Peter Bendor-Samuel, CEO of IT research & consulting firm Everest Group, said the Indian players have been living in denial. “They have all been forecasting good years in banking and we have been telling them that for many reasons this was unlikely to happen. The banks’ GICs have matured and they are clearly growing them at the expense of third parties. For some functions, they are also bringing work back on-shore and this work they are keeping in-house. They have largely decided that they like the big Indian firms as their legacy (partners to maintain their traditional IT),” he said.
Bendor-Samuel said that even when companies are seeing some growth in the financial services vertical, it’s coming from areas other than banking — for instance, TCS’ deals in insurance, including the $2-billion Transamerica deal.
However, K Krithivasan, president of the banking and financial services business unit of TCS, said that things are changing even in banking, with players moving from a compliance mindset to a growth mindset. Banks, especially those in Europe, have been bogged down in dealing with compliance issues, including the General Data Protection Regulation (GDPR), forcing them to take their eye away from IT investments. “Banks that are focusing on leveraging technology for growth and transformation are engaging with us very strongly because of our investment in cloud, AI, automation and location-independent agile,” Krithivasan said.
But as the European banks return to IT investments, the big question is, will they prefer to do more of it in-house? The message from Deutsche, Danske and UBS — as indeed the American banks — isn’t good for Indian IT.
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