BOSTON -- Outsourcing has been on the minds of chief investment officers as current market and regulatory challenges have pushed the practice to the forefront of the business world's focus, according to participants in a CIO roundtable discussion here at the National Investment Company Service Association's Technology Forum 2004.

Outsourcing jobs has been the subject of much controversy in the mainstream press, as opponents of the practice say sending jobs overseas and hiring low-wage earners in developing countries at the expense of the American worker only helps big business and leaves U.S. citizens out in the cold. While outsourcing doesn't have to occur outside of the country, it often does because in a number of overseas outsourcing locations, labor costs are often a mere fraction of what they are here. An increasing number of firms view American workers as expensive.

But, potential regulation of the practice, as well as market developments, have forced CIOs to reexamine the way they do business and determine how, and at what level, outsourcing of jobs to places like the Philippines, India and Southeast Asia, fits into their plans.

With an ever-increasing globalized economy, outsourcing has become a vital part of many organizations and has even become more mainstream recently. When asked what functions his firm outsources, Joe Connors, senior vice president of technology and operations at GE Asset Management, said jokingly, "A better question is, what are we not outsourcing?" Among other things, his firm is currently outsourcing some institutional portfolio analytics, he said.

One of the main reasons outsourcing has gained steam, especially since the start of the bear market, is due to financial service firms' desire to control costs, or, more precisely, headcount. It is a natural reaction to the high-flying days of the corporate excesses of the late 90s.

However, not everyone is in favor of outsourcing, especially those most directly affected by it. Catherine Brauer, chief investment officer of Prudential Investments, said there was an initial backlash at her firm against management's decision to outsource some of Prudential's infrastructure offshore two years ago.

"We moved some consultants offshore," she said, adding that several of the firm's permanent staff, especially workers who had direct interaction with those being cut loose, were displeased with the change. However, Brauer said the workers' views came more in line with the company's decision once it was explained to the staff that either the outside consultants had to be let go or Prudential would have to start making layoffs. "We saw a tremendous savings, but it took some time to get used to," she said. "We were able to get work done we would never have been able to due to cost constraints," Brauer said.

Outsourcing can be a way to avoid the constant rebalancing of staff levels, complete with buyout packages and payment of unemployment benefits, not to mention the negative publicity and the human element associated with a large-scale layoff.

"We are continuing to spread people very, very thin," said Peter Noll, CIO of MFS Investment Management. "The company had its first layoffs a few years ago, and we don't ever want to be in that position again." In 2002, the firm cut 110 employees, or more than 4% of its staff, mostly among administrative and behind-the-scenes personnel.

"There's a very stiff headcount constraint at GE," Connors said. "Our rule of thumb is we understand the process here and outsource IT when it becomes repetitive and redundant."

Risky Outsourcing

"If a vendor has a solution we are interested in, we will go offshore to get that," said William Aimetti, CIO of the Depository Trust & Clearing Corp. "We do what's right for the right situation. When it makes sense, we would entertain the idea of outsourcing. However, I would not consider outsourcing our infrastructure," he said. "It's too risky. We're not just driven by dollars and the bottom line."

However, as the practice has become a more accepted and a regular part of business in the 21st century, it has also gained the attention of regulators. Increased regulation of the practice could bring this panacea for many firms back down to earth, and lessen the advantages firms find in outsourcing jobs offshore, or make the process more difficult.

Either way, most of the CIOs speaking at the conference session didn't even break a sweat about the prospect of potential regulation. "I don't worry about it. I don't think it will happen," Aimetti said. "In terms of what we do, it's not really an issue."

When asked about how potential outsourcing regulation may affect his firm, Connors replied that GE Asset Management would "legally comply with the law. We're a global firm, and we have businesses around the world," he said.

"I don't think [increased regulation] is going to happen for macroeconomic reasons," said MFS' Noll, adding that it would be "somewhat foolhardy" to limit the field of "knowledge workers" to those just based here in the United States. And while Noll said MFS has not found application development outsourcing to be as valuable as some other firms have, there are many other educated, trained workers in other parts of the world willing to work for less.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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