Outsourcing in the financial services industry has been around for years, but in recent months major players in the financial services arena have made announcements of significant outsourcing agreements. In today’s competitive business environment, financial services organisations have to balance financial performance pressures with increasingly sophisticated consumer demands.
The cost structures of retail banks are vast as a result of the evolution of products and services over time and have been highly resistant to change. At the same time, banks are being forced to rethink their competitive basis. The biggest opportunities will come from being able to deliver products that meet the needs of customers while optimising the functions that account for the majority of the bank’s existing cost base.
As many organisations wonder where the next round of significant cost reductions are going to come from, there is a growing and renewed interest in outsourcing as a strategic tool in creating new business models. This will provide banks with the manoeuvrability needed to gain profitable market share.
A Datamonitor survey in June revealed that banks are increasingly turning to outsourcing as the means to achieve their major business and IT goals. The report goes on to say that by outsourcing some or all of their IT and business operations to third-party providers, retail banking institutions can achieve greater transparency and efficiency of their infrastructure and business processes, thus facilitating the achievement of their strategic operational goals.
Outsourcing options
However, outsourcing is not a one-size-fits-all solution. Outsourcing options can span the entire banking value chain from IT operations, network management, desktop management, application management, software design and implementation, to outsourcing of business processes such as call centres, loan origination, document management, and can even expand into non-strategic services such as human resources, finance and legal.
As organisations become more comfortable with outsourcing models, the trend is growing to migrate “core” back-office activities to outsourcing providers in order to concentrate on customer-facing activities that can drive competitive advantage. Outsourcing has become a critical business decision with long-term implications.
The current wave of financial services outsourcing agreements is becoming increasingly complex as banks identify what is critical to their competitive position and what is not. Many organisations are facing high support and maintenance costs due to the mass of platforms and operating systems being used.
Outsourcing of application management has become much more attractive as application development, testing, integration and day-to-day management all require significant resources that burden an organisation’s budget. The same Datamonitor survey reported that 51.5% of financial services institutions (FSIs) already outsource or are highly likely to consider outsourcing their applications services in the next few years.
Rapid deployment
In many areas of financial services, particularly in mature markets, the choices are either to grow or fold. With new entrants lacking legacy infrastructure coming to market, established players have struggled to keep up. A vital element needed to deliver market share growth is this ability to introduce new products quickly that are exciting to the customer, but are delivered with reduced cost, improved service and improved profit.
One means to rapid deployment of new products is to outsource an autonomous new business operation working alongside the existing infrastructure. The lowered costs of such an operation can provide a bank with the capability to offer creative product packaging with attractive rates and fees without the overhead and inflexibility of legacy systems.
Choosing the right partner
When outsourcing was viewed mainly as a tactical, cost-cutting decision, price was the primary criterion for choosing an outsourcing vendor. Now, process expertise, industry knowledge, vendor flexibility and creativity, reputation and cultural fit are equally important in the selection process. Interestingly, offshore capabilities are often at the bottom of the list and should not be the fundamental issue.
Often, to achieve the desired outsourcing benefits of IT and application agility, the outsourcing team needs to blend onshore, nearshore, as well as offshore resources. More and more outsourcing agreements include provisions for “on demand” resourcing to provide skilled and specialist resources as needed to support project priorities. This allows banks to focus their scarce resources on the organisation’s critical business initiatives rather than on day-to-day IT concerns.
Recent outsourcing deals indicate a trend to outsourcing by best-of-breed providers.
As low-cost service delivery becomes taken for granted, organisations are looking for outsourcing partners that have the creative vision to help them achieve their business strategies. This requires in-depth knowledge and expertise on the part of the outsourcer, but also demands a greater commitment in terms of day-to-day oversight and governance from the organisation.
In the past, financial organisations have failed to understand that outsourcing is a full-time business proposition requiring focused management attention. Unlike other industries, the level of mutual commitment required in financial services outsourcing makes the quality of the relationship more important than the contract.
Many organisations with a history of successful outsourcing agree that performance and satisfaction grow over time. It therefore becomes important that the financial services organisation selects an outsourcer with a good business fit that will support the evolution of the relationship over time.
Management commitment
Like IT and application management, business processing outsourcing has brought both success and failure. But as financial organisations look at improving process efficiency and effectiveness as well as reducing costs, business process outsourcing becomes more complicated than just moving a process to a cheaper location. Banks are beginning to understand that process change linked with improved technology is the real means of achieving sustainable cost savings.
Service providers need to be able to deliver innovative technology in addition to flexible resourcing, often a combination of internal and external resources, in order to have an attractive offering.
Taking advantage of an outsourcer’s proven expertise with other clients and capacity for economies of scale, both in skills and technology, is a significant opportunity for a financial institution to refine their approach.
Credit card processing was one of the first discrete business processes to be outsourced. As this becomes more commoditised, banks are looking for their outsourcer to provide improved process efficiency and effectiveness, in addition to stable or reducing unit costs. As fraud issues continue to make headlines, the ability to leverage the outsourcer’s investment in fraud detection and authorisation technology becomes a cost-saving approach to credit card risk management.
In one key processing area, banks are beginning to rethink the way that they handle payments. While economies of scale are fundamentally important in the payments business, the volume of paper-based payments is decreasing. One strategy that has emerged is outsourcing the collection of cheque payments to take advantage of savings in equipment, staff and infrastructure.
Payment utilities can maintain the volumes necessary to provide attractive pricing for the financial organisation, while the organisation benefits from increased payment turn-around time and the optional advantage of guaranteed payments.
Looking ahead
While no-one can profess to have a crystal ball in the financial services industry, the uptake of outsourcing can only grow over the next few years. The need to reduce operating costs is a given. Competitive pressures will continue to grow with industry consolidation and global entrants into domestic markets.
The need to access new technology as an enabler of business strategy will only increase with the aging of legacy platforms. Outsourcing providers that can offer a range of services, with the proven industry knowledge and resource expertise that is demonstrably better than that of the organisation itself, will be attractive partners for financial services organisations that are looking for a new model to deliver their strategic business objectives.
Mark Davey is group managing director of Fidelity National Information Services’ Europe, Middle East and Africa (EMEA) region.
