Dallas – In the medium-to-long term, the sub-prime crisis will accelerate global sourcing adoption as financial institutions push the envelope on offshoring to cut costs, according to Dallas-based Everest Research Institute. The Institute predicts business process outsourcing (BPO) from the financial services sector will increase 40 to 45 times the current market size over the next five years, with key drivers of growth coming from cost pressures and the timely advent of more vertical-specific offerings by offshore suppliers, according to Everest Research’s study, “Global Sourcing in Banking, Capital Markets and Insurance.”

Within five years, the firm projects spending for global BPO by the financial services sector will reach US$145-$165 billion for India-based services, the hub of global sourcing for financial services. The report also projects offshore BPO adoption in the insurance sector will grow 12 to 15 times during the same time period.

The Indian IT sector is taking a wait-and-see approach. The global financial meltdown following the collapse of U.S. investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term, says Som Mittal, president of IT-BPO industry body Nasscom in an article from Bihar Times.

“It is a cause for concern, not panic,” says Mittal. “The Indian IT sector is resilient to bear the impact of the turmoil. We need to wait and watch to find out how deep is the crisis. There will be some downside in the short and medium terms, which will be two-to-four quarters.”

Everest Research expects the increase to continue, and points to the financial crisis as the reason. Research earlier this year from London-based independent market analyst Datamonitor echoes the increase in outsourcing. Datamonitor’s report, “Trends and Strategies in Policy Administration BPO,” notes that both large and small insurers will adopt BPO. Currently, insurers with fewer than 5,000 employees have the lowest policy administration BPO adoption rate, however, this is likely to change.

The survey also found that large insurers (those with more than 20,000 employees) are increasingly likely to outsource policy administration. Typically, these players engaged in off shoring via captives, or company-owned facilities. The captive route has not been as fruitful as expected, elevating their interest in outsourcing to a third-party.

“The current financial crisis in the U.S. markets is accelerating interest across stakeholders to understand adoption trends and opportunity areas in offshoring, among other cost containment measures,” says Nikhil Rajpal, VP, Global Services of Everest Research Institute. “Banks and other financial services firms are under significant cost-reduction pressure, which is why a large number of firms plan to reduce headcount in Western geographies and move jobs offshore.”

The financial services industry, comprised of banking, capital markets and insurance, is the leading adopter of offshoring services, and accounts for 40% to 45% of worldwide global sourcing.

Highlights of the study’s analysis of vertical-specific BPO functions include:

• The largest untapped opportunities in banking are specialization in transaction processing, account servicing and credit card fraud management
• Well-served functions in the capital markets sector that will continue to drive growth include business acquisitions, account servicing, investment operations, registrar and transfer functions and fund accounting
• The largest untapped opportunities in the insurance sector include policy servicing, customer service, finance and acco ting, new business acquisition and claims processing
• Most financial services companies are now sourcing BPO through captive units in India and the Philippines, however, third-party sourcing also is rising
• Financial services buyers are constantly innovating and restructuring delivery models, the latest being a hybrid model where the back-end processes are migrated to third-party suppliers while complex, judgment-intensive functions are retained within the captive
• To date, UK insurers are largest adopters of offshore BPO, suggesting significant growth opportunities exist for the U.S. insurance market that is three times the size of the UK market. The UK and U.S. insurance buyers currently employ almost the same number of offshore, third-party staff

“The labor-arbitrage-driven offshore model has become a standard expectation for buyers who are now looking to achieve business and strategic impact beyond cost savings,” says Jimit Arora, research director and study co-author. “To achieve this, suppliers will need to continue to innovate and invest in technology, delivery footprint, and domain and process expertise. Additionally, suppliers will need to identify key focus segments to create successful differentiation in the market.”