Citigroup Inc., which has agreed to sell two operations and technology units this quarter, says it will continue to scrutinize its tech operations as it seeks to streamline and return to profitability.
"We're conducting a very deliberate and well-informed review of our global O&T capabilities," said Marty Lippert, Citi's chief operations and technology officer. "I have no predispositions with these reviews that either outsourcing or running a function internally is better. We'll make decisions that will benefit our customers and improve overall efficiency."
Citi announced a deal last week to sell its Indian infrastructure management unit, Citi Technology Services Ltd., to the Bangalore outsourcer Wipro Ltd. for $127 million in cash. As part of the deal, which is expected to close by March, Citi agreed to hire Wipro to continue performing the unit's infrastructure management and application development duties for the New York company for six years. Wipro said it anticipates revenue of at least $500 million from Citi over the course of the contract.
In October the Mumbai outsourcer Tata Consultancy Services Ltd. agreed to pay about $505 million for another Indian unit, Citigroup Global Services Ltd., and Citi signed a $2.5 billion contract for Tata to provide business process outsourcing services for the next nine and a half years.
Mr. Lippert said that these deals do not mean Citi is going to turn increasingly to outsourcing, and that it may work with fewer outsourcers or bring some work in-house if the review determines that its relationships leave room for improvement.
In the case of Citi Technology Services, which was founded in 2005, the company decided it would be more efficient to outsource the work rather than to own the unit, he said.
"That particular unit provided infrastructure service support to Citi, and I think we did a very good job of providing the service," Mr. Lippert said. "But as we conducted our global strategic review, it quickly became apparent that even with Citi's size, we only had a certain ability to scale this function, and we had already reached that upper end of our scale."
Rodney Nelsestuen, a research director at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said more financial institutions with captive technology units — and more outsourcers seeking to take over captive units — will make deals like this one in the year ahead.
The trend toward creating captive units like Citi Technology Services stemmed from a desire by financial institutions to "maintain cost savings while still maintaining control," he said. In recent years "the outsourcing industry has really leveraged its scale, so the captives, while they can sure save money, are not as attractive as they used to be."
Infrastructure management is a specialized skill, but outsourcers like Wipro desire it because it is "highly transferable," Mr. Nelsestuen said. "Infrastructure is a very specialized, highly technical area, but it's also pretty standardized."
Mr. Lippert joined Citi in July from Royal Bank of Canada, where he was a vice chairman and the group head of global technology and operations.
Vikram Pandit, who became Citi's chief executive last year, said in May that it planned to shed $500 billion of noncore assets. Since then it has struck agreements to sell its German retail banking business and its interest in the CitiStreet benefits servicing business. Last month Citi announced plans to cut 53,000 jobs, or 20% of its work force.
Mr. Lippert said his job largely involves reviewing Citi's operations across operational silos and determining the most cost-effective approach for each task.
"I wouldn't be here if we weren't taking a more centralized and integrated approach" to operations and technology, he said.
In the case of Citi Technology Services, the review determined that selling the unit "will allow us to take better advantage of the underlying economies of scale and bring this business to a different level than what we would be able to do on our own," he said.
Citi chose to work with Wipro because the review determined that it was the outsourcer "who had the best servicing capability in this space," Mr. Lippert said. "We're very comfortable with the partnership and relationship that we have with Wipro, and it's one that we'll look to develop even further."
Soumitro Ghosh, Wipro's senior vice president of financial solutions, said most of the employees at Citi Technology Services are assigned to infrastructure management, with the rest working on application development.
Citi has promised Wipro $500 million of business in the next six years, and "our intent is to grow this business much beyond that," Mr. Ghosh said. "Just from Citi alone, it can be far bigger than the half-billion-dollar commitment," and Wipro is ambitious about adding clients to bring in even more revenue.
For Wipro, "this will actually open up a new market" of infrastructure management in the financial services sector, he said.
Wipro would also be a preferred provider to Citi for application development once the transaction closes, Mr. Ghosh said. "In today's context, most of the financial services customers obviously have a huge, huge pressure to take cost out. Through this acquisition, we are going to really help our customers reduce their spend on the infrastructure side."
For Citi, the deal is critical to its cost-cutting strategy, he said. "The captive unit is really not so core a function and is also a fixed cost for them."
Mr. Nelsestuen of TowerGroup agreed that Citi could pay Wipro more than $500 million over the contract's term.
"When you get into application development and maintenance, you're starting to get into the core of the ongoing business in such a way" that Citi's spending "could certainly go much higher than that number," he said.
Citi's review stems from a strategy that is "not really about outsourcing or insourcing," Mr. Nelsestuen said. "It's really about 'Where is this best executed, and why?' "