Pressure to cut IT costs and improve efficiency will result in yet another push towards outsourcing and offshoring. Michelle Price speaks with Daniel Marovitz, head of product management and chief operating officer, technology and MIS, global corporate finance, Deutsche Bank, about the bank’s outsourcing strategy.

 Times of budgetary stress and cost-containment, coupled with dramatic infrastructural disruption, have historically prompted many financial service providers to undertake large-scale business process and IT outsourcing arrangements. According to a recent survey of financial services companies conducted by AMR Research, the global financial crisis will be no different. For although the benefits of the global outsourcing boom now stretch well beyond labour-cost arbitrage models, outsourcing is still widely regarded as a principal means by which to cut costs and gain economies of scale, and fast.

Like many of its top-tier peers, Deutsche Bank is an enthusiastic user of outsourced services, with a large proportion of its technology staff operating from a number of global offshore locations, particularly India and ­Russia. As head of product management and chief operating officer, technology and MIS, global corporate finance, Deutsche Bank, Daniel Marovitz is tasked with the considerable job of overseeing multiple outsourcing agreements, all of which have to be carefully managed and strategically deployed, he says.

“The conclusion that the bank came to several years ago is that a lot of the heavy lifting around technology is not core to what we do: technology is core to what we do, but the production or construction of all parts of technology is not core.”

Captive operations

For reasons relating to “control, comfort and regulation”, he continues, the bank has typically outsourced and offshored IT functions, but has kept ‘captive’, that is kept offshore but in house, operations. Access to systems that commit the firm’s capital, for example, is only possible as a bank employee, even if that employee is based in Warsaw.

Technology functions, for example software development, are in most cases operated by third-party IT service providers, of whom the bank has a wide array, says Mr Marovitz. “We used to work with a wide array five years ago. But like most banks we ended up with a pretty messy situation, so over the past few years we have tried to consolidate that spend, and ensure we are important to the outsource provider and that they are important to us.”

In this previous environment, he adds, the bank was not truly able to benefit from both its scope and scale, where the use of outsourced services was concerned. “But now we do,” he adds. The ultimate nirvana for organisations such as Deutsche Bank, is to eliminate duplicate and costly vertical silos and instead operate one IT function, used horizontally across the bank, serviced by a single, central offshore hub: this is the global shared services model, to which many organisations aspire but few have yet achieved.

“Every bank is a bit near it, but people have misjudged how strong those silos are,” says Mr Marovitz. Although many banks do not yet have the risk appetite to realise this model, the ever-narrowing cost-saving gap between onshore and offshore locations will inevitably improve its financial attractiveness.

In the meantime, some providers and clients are attempting to build out more sophisticated risk-sharing and gain-sharing agreements with their providers. Deutsche Bank, for example, has entered into a gain-sharing agreement with its Russian IT service provider Luxoft, focused on a piece of web-based customer relationship management software the Russian company developed for the bank. Under the arrangement, both parties will sell the software to other institutions, with Deutsche Bank receiving 90% of the software licence fee and 10% of any custom-development fees.

Mr Marovitz and Luxoft’s CEO Dmitry Loschinin designed the simple arrangement in very little time, but it remains unclear how successful it will be given Deutsche Bank does not operate a dedicated sales force. Nonetheless, the bank is pioneering some small innovations through its service provider relationship.

The right balance

Fear of losing control and of taking on too great a shared risk, however, remains a major source of anxiety for many banking chief ­technology officers, who are still trying to understand where and how outsourcing arrangements are best applied. “Banks are always struggling to figure out what they are. What is a bank, and what do they do for a living? That’s not a trivial question and the answer to that question changes every few months,” says Mr Marovitz. Because technology has become so inextricably linked to what banks do across every single product area, he continues, the degree to which banks should onshore, offshore, outsource and insource remains a subject of continuous debate.

“Some people feel they’ve gone too far, and some people feel they haven’t gone far enough. This is a constant process,” he says, adding: “We’re still in such early days.”

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