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Citigroup Cost Cutting Puts A Bull's-Eye On IT

It'll bear much of the cost-cutting brunt. But it'll also be part of creating platforms for greater efficiency

Talk about life on the edge. As part of Citigroup's campaign to cut $10.4 billion in spending over the next three years, the banking giant's tech operations have been slapped with a bull's-eye, the target of big consolidation and offshoring projects in the coming months.

Citigroup plans to close half of its 42 data centers, move thousands of jobs to lower-cost locations in the United States and abroad, and possibly replace some big-ticket data storage systems with commodity gear, according to regulatory filings and executives who spoke on a conference call last week.

Prince: Be nimble--a much lower cost

Prince: Be nimble--at a much lower cost

Photo by Yuriko Nakao/Reuters
If the plan works, Citigroup will become "more nimble," chairman and CEO Chuck Prince said. Prince and other executives didn't offer many IT details, but they made clear Citigroup's tech operations will play a central role in the restructuring--both as part of the cost cutting and as a platform Citigroup can use to roll out new offerings more quickly and cost effectively. "The simple fact is, we have to make our middle and back office help us serve our clients better, help us generate revenue better and faster," Prince said. He's under heavy pressure to improve results, after revenue rose just 7% last year to $89.6 billion while operating costs rose 15%.

Citigroup plans to cut 17,000 jobs--roughly 5% of its total workforce--and move 9,500 more positions to "lower cost" locations. More than half the cost cuts are expected to come out of tech and back-office operations. This undertaking rolls in a previously announced IT streamlining that had already begun. "We are now looking at this as one project, as would be expected," chief operating officer Bob Druskin said. "You could not do a structural expense review without technology."

The company didn't specify jobs to be cut, but it's likely many will be in IT given Citigroup's desire for a leaner tech operation. Citigroup already has 19,000 employees in India taking customer service calls, crunching numbers to support investment research, and performing other back-office tasks, mostly from Citigroup Global Services operations in Mumbai and Chennai.

How much work is too much for banks to push offshore? Deloitte--itself a provider of offshore services--says banks have barely begun, predicting that 30% of the industry's IT spending will move to low-cost locales in three years. Today, it's 6%. In addition to its own operations in India, Citigroup has outsourced tech functions to Infosys, Satyam Computer Services, and Tata Consultancy Services. TCS Americas president Surya Kant says banks in general are more aggressively outsourcing routine tech and office work. "Banks have been spending more on running the business than changing the business," he says. "They want to reverse that."

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Outsourcers downplay the risks--cost overruns, lower quality and productivity, management problems, lost industry knowledge--that offshoring can bring. But Citi, which recently spun off its India-based banking software company iFlex, knows what it's getting into. "They're probably further along than most banks on this," says Bart Narter of banking consulting firm Celent. "They're as good as anyone at offshoring."

Despite the multibillion-dollar stakes, outsourcing strategies aren't set in stone. Former Bank One CIO Austin Adams terminated a $5 billion outsourcing deal between JPMorgan Chase and IBM after Bank One and JPMorgan Chase merged in 2004 and Adams became CIO of the combined companies. The rationale: Tech was one of the company's competitive advantages. The problem with this sort of about-face is companies end up trying to rehire tech talent they previously laid off or off-loaded.

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