UK banks on lifeline may cut down tech spending

Struggling British banks accepting a government bailout package will cut IT spending by up to a fifth and face pressure to move their offs
hore call centres in India and other countries back home, a UK-based research firm said.

British banks such as Barclays, Lloyds TSB and Royal Bank of Scotland (RBS), which have accepted government cash to recapitalise, will halt spending on technology until the second quarter of 2009 and even cancel their offshore outsourcing programmes in pursuit of low-risk models, TowerGroup said. Such developments will be extremely bad news for India’s software vendors, for whom the UK is a key market.

According to industry estimates, India exported around $6 billion (Rs 29,000 crore) worth of software and BPO services to the UK during year-ended March 2008, accounting for some 15% of the country’s total software exports.

Lloyds has outsourcing deals with top Indian software vendors Wipro and Satyam Computer Services, while RBS counts among Infosys Technologies’ clients. Furthermore, both Barclays and RBS have captive offshore centres in India.

“National interest may result in the UK banks bringing their call centres back to Britain,” TowerGroup European research director Bob McDowall told ET.

“Banks which have substantial government shareholding will have to consider carefully not only the financial impact, but shareholder reaction if outsourcing and offshoring result in job losses in the UK,” he added. Out of a $792 billion bailout plan for the financial services sector, the British government is setting aside $79 billion to buy stakes in stricken banks.

The partial nationalisation is seen putting pressure on the banks to cut IT spending and reevaluate their offshore outsourcing plans. “One could see a reduction in overall IT spend in the financial services sector of 15-20% in 2009 compared with 2008,” Mr McDowall said. The financial crisis and the worsening economic situation are also triggering rate cuts for all new IT contracts being signed in the UK.

Many UK banks have asked their IT suppliers to take a rate cut of almost 12%. According to the Association of Technology Staffing Companies, hourly rates for IT projects in the UK have fallen to around $69, from $79 in the last quarter of 2007.

“The 12% slump is primarily due to new contracts being signed at lower rates rather than renegotiated deals,” a statement by the association said.

A situation akin to that in the UK might also develop in the US, spelling further trouble for Indian IT companies. The world’s largest economy is implementing a $700 billion financial bailout package of its own and accounts for nearly 60% of software exports from India. “There is already a noticeable freezing of spending on IT development, including suspension of non-critical projects (in the US),” Mr McDowall said.

Source: EconomicTimes