Analysis

Why IT outsourcing is increasingly blamed for IT failures at banks

Karl Flinders

When things go wrong in IT, the practice of outsourcing is increasingly being blamed, with recent problems at UK banks no exception. But why is the process of outsourcing IT so problematic?

Banks are notorious for their reliance on legacy systems. They use mainframes that have been running for 40 years, and these have been the traditional place to point the finger of blame when things go wrong. 

But these systems work – it is the lack of understanding of them that is the problem, according to many in the industry. 

Recent cost-cutting pressure and the increased use of outsourced services, including those provided from offshore locations, are now also being blamed.

The combined use of legacy systems and IT outsourcing is blamed for increasing failures as banks hurriedly outsource IT, leading to errors in the transfer of skills, which is essential given the age of systems.

Too reliant on outsourcing

One IT professional in the banking sector said the increase in production problems was being caused by cost-cutting, with the use of offshore IT suppliers a contributing factor. 

“When offshore outsourcing was limited to development and helpdesk services it was not a big issue, but the more recent trend has been to put production support into that model, and that's where I see the problems arising,” he said.

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Offshore can be okay if it stays in-house and outsourcing can be okay if it remains onshore or nearshore, he added, but the far-shore outsource model is where he sees problems. 

"If I was the regulator I would ban far-shore outsourcing of critical production support. The outsourcers don't have enough skin in the game, just a contractual penalty or SLA [service level agreement] hiccup,” he said.

Increasing knowledge gap

The IT professional said it was not the legacy systems which have worked fine for the past 40 years that were the problem. “The problem is these systems are being handed over to people who don't know how to look after them. Who learns PL/1 or Cobol these days? The new generation is into Java and C#. If you grew up with Cobol or PL/1, you're probably 60 and thinking more about retirement.”

There are also risks of offshoring to captive centres not just third parties. In 2011 Swiss bank UBS lost £1.4bn due to a rogue trader. This which could have been avoided had a computer used to detect unauthorised trading been more effective. A source in India told Computer Weekly that the problem occurred in a USB captive in Hyderabad.

He said unlike suppliers, which have processes that must be adhered to, captives are less stringent. He said the rogue trading was missed because data had been deleted as part of a system upgrade. "If there had been a process, like that of any supplier, this would not have happened."

IT problems at RBS

Another IT professional, with good inside knowledge of the Royal Bank of Scotland’s technology, said outsourcing was at the heart of the recent IT problems suffered at the bank.

It is the responsibility of management to keep the right people with the right skills in-house

In summer 2012, the bank's customers were unable to access their accounts for days, as a result of software issues. The glitch in the CA7 batch process scheduler ended with 12 million customer accounts being frozen. Customers were left unable to access funds for a week or more as RBS, NatWest and the Ulster Bank manually updated all the account balances. RBS said the problems cost the bank £175m.

As a result of the software glitch, the Financial Services Authority (FSA) demanded details of how major banks planned to prevent a repeat.

“The CA7 incident happened barely a week after the UK experts had been laid off and was to do with a standard system upgrade,” said the source close to RBS. “In the end it was such a mess that the original experts had to be recalled to sort it out on high pay rates.”

He does not blame the Indian outsourcer's staff, but the fact that there was a tight timescale to hand things over: “It was impossible to devolve 30 years of experience in the few months of hand-over. Cross-training was attempted, but with the throughput of people in India [as fast as they were trained, many went off to get better jobs somewhere else], all the intellectual capital was lost.”

Lack of management

But Neil Kinson, vice-president EMEA at Redwood Software, said IT outsourcing/offshoring in itself is not the problem.

"We hear a great deal about legacy IT systems causing bank glitches, and outsourcing has often taken the blame for its associated problems of slow response times, lack of visibility and human errors, but outsourcing itself is not the problem. The real issue is the siloed and fragmented approach we are seeing from banks towards their core processes,” he added.

“While outsourcing certainly brings problems such as slow response times and lack of visibility, these issues would not exist if businesses had the right processes in place. That is to say, where back office functions take place, whether that be on British or international soil matters much less than how these processes are executed.

While outsourcing itself might not be to blame, the management of the outsourcing transfer must take some blame if a knowledge gap opens up. "It is the responsibility of management to keep the right people with the right skills in-house," said an industry source.