Investment banks are now exploring nearshoring (or “nearshore outsourcing”) as a necessary option because front office operations are becoming increasingly complex and it’s now more vital than ever before to support and develop applications in real time that are mission critical to business success. Today, investment banks are eyeing nearshoring because they understand the importance of having essential applications — like those that calculate risk, profit and loss, Value at Risk and collateral management — in the same time zone as the businesses that rely on that information to make immediate and informed decisions — and that means nearshoring.
What a different perspective from what’s happened in the last decade when banks moved business processes like information technology, business processes and software development to far away and lower-wage foreign countries, mostly in the Far East, like India, Pakistan and The Philippines.
Nearshoring is gaining traction because it reduces the complexity and risk inherent in traditional offshore outsourcing. It puts everyone in the same time zone, reduces language barriers and cultural issues, promotes closer collaboration between teams, bolsters process and data security and provides intellectual property protection under U.S. trade agreements.
Investment banks are now starting nearshoring operations right here in the U.S. in places like Texas, Florida, North Carolina and the Southwest, keeping jobs in the U.S. Canada is also becoming another nearshore outsourcing location. The key drivers here are access to quality talent through top local universities and lower costs of living, like housing and energy, which can be met by lower salaries. The large salary advantages that offshore outsourcing once offered have largely gone away. Also, many states are now making themselves more attractive to business in order to grow their local labor forces.
However, capital markets firms must understand that they need to establish an “IT portfolio strategy” — the most efficient IT strategy for their front office (order management, analytics, risk), middle office (collateral management, margining, some P/L) and back office operations (confirmations and settlements of trades, reconciliations). The best “IT portfolio strategy” involves leveraging and balancing both nearshore and offshore outsourcing to maximize their individual advantages and create the most effective global strategy for their businesses.
Disclaimer: The views and opinions expressed here are those of David Donovan, a former top trader at Fidelity Investments, and do not necessarily reflect the views and opinions of Sapient Global Markets or any other company.
