Online Extra: HSBC's Lessons in Outsourcing

The bank's software-development center in Pune, India, has become one of its most important operations. Here's what HSBC learned in the process

The financial-services industry leads the pack when it comes to outsourcing technology development and business processes. Citigroup (C ) and Bank of America (BAC ) were pioneers, but now banks across the world are outsourcing their tech support and maintenance, administrative back offices, and even customer service.

Among the largest non-U.S. banks to jump on the outsourcing bandwagon is London-based HSBC (HBC ). Starting with one software-development center in Pune, a satellite city of Bombay, the bank moved on to establish development centers in China and Brazil. It also has opened back-office operations in five Indian cities. But Pune's steel-and-glass structure, overlooking the city on one side and the countryside on the other, is HSBC's star center and one of its most important operations.

Like most entrants to this relatively new industry, HSBC went up a learning curve. But it has emerged with a well-greased working model -- a "captive" or house-run outsourcing operation, which has aligned with an outside contractor that came along with a bank acquisition.


  HSBC decided to outsource mainly because the need to constantly improve technology was becoming difficult for the bank, drawing attention away from its core financial-services business. With banking services increasingly dependent on fast, efficient technology, HSBC needed to move to a new technology platform and become more efficient. The decision to outsource wasn't only about cost. The bank also wanted to be able to put more people on a job, if necessary, to get it done faster. "We wanted to be able to turn the [tech talent] tap on and off whenever we wanted," says Rumi Contractor, HSBC's chief information officer for Europe, who helped build the company's outsourcing center.

The bank looked to India, which was developing a reputation for quality software work. Moreover, HSBC had already established a retail and institutional presence in India. So in 2002, HSBC opened its Pune software center, with just 30 people working on software maintenance. Since then, the center's workforce has grown to 2,500, and now it develops software for the company's operations worldwide. Although HSBC's software center is an in-house, captive center, it operates like an independent contractor, getting paid market rates for whatever it does for the bank.

Here are some lessons that HSBC has learned from its outsourcing experience:

1. Start small, then build up.

Starting out with a 30-person center enabled the company to make mistakes and learn from them. It also helped build rapport with the bank's different departments right from the start. HSBC departments looking for tech help would call the Pune center, assign the job to employees there, and then work with them.

The Pune center ran into hiccups at the beginning, CIO Contractor says. Bank departments with tech needs would put out ambitious jobs, and the folks in Pune would accept, biting off more than they could chew. While the center had technical skills, it lacked industry knowledge. For instance, the staff was asked to build an insurance product, but they were unfamiliar with the industry. HSBC solved the problems by requiring experts within the bank to sit alongside the technical experts during projects.

2. Customer involvement is crucial.

Putting down a request on paper isn't enough, says Contractor. It's vital to get the experts involved. The bank learned this lesson while trying to upgrade its 18-year-old international financial-processing system, which was fast becoming obsolete. The job was right for the Pune center, and 80 engineers were put to the task. But HSBC also brought in its experts who had experience operating the processing system. Thanks to their teamwork, the job was completed on schedule, 18 months later, and implemented in the 32 countries where HSBC operates.

3. Use a hybrid offshoring model.

In 2003, HSBC acquired U.S. financier Household Finance. Household had a partnership with an offshore software-services provider called Kanbay, also based in Pune, which developed consumer-lending software for the company. So HSBC found itself with its own "captive" development center, as well as an independent contractor.

"We didn't consider them a competitive threat to our own captive," recalls Contractor. Instead, the bank worked with Kanbay, giving its management a room at HSBC's Pune premises, and including them in management meetings. Kanbay and HSBC devised a plan to partner on projects.

Now the two groups work together on about 35 projects. It's a commercial relationship: If HSBC needs to borrow Kanbay's insurance-software expert, the bank pays for the work. "There is a lot of commitment from both sides to stay on the path and stay honest," says Contractor.

4. Build a sense of community.

At 8%, HSBC's attrition rate is far lower than the industry average of 10% to 15%. It wasn't always that way. The outsourcing industry is filled with young people, and HSBC's unit is no exception -- the average age of its Indian staff is 25. Staffers come to the industry right out of a competitive college environment, says Contractor. "It's a school mentality, with a 12-month time limit for promotions," he explains. "We needed to temper their expectations." The key is building a sense of community within the organization, and instilling the goal of quality work in the staff.

5. Quality is key.

HSBC's Pune center is profitable, according to the bank. But quality, maintains Contractor, is the key factor that will keep a business successful. Customers will be brutal if quality of service suffers. Most important, says Contractor, don't outsource a mess, because problems won't be solved any more easily offshore. And he advises that it's better to avoid short-term outsourcing. "Think hard about the whole strategy. Let your own people do the short-term work, while the outside contractor undertakes the bigger jobs," Contractor says. "It's not the outsider's job to fix your mess."

Kripalani is BusinessWeek's Bombay bureau manager

Edited by Rose Brady

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