This month, The Banker learned that Barclays Bank is negotiating to outsource its payments processing for corporate customers to Deutsche Bank. This follows last year’s announcement that Deutsche Bank and Dresdner Bank payments for retail customers will be processed by Postbank. Last month, Barclays was involved in two more outsourcing deals: one handing its trade services processing to ABN Amro, the other giving a mandate to Mellon European Fund Services to provide dealing services.
Unthinkable thought
In banking today the unthinkable is not only being thought of but acted upon. The extent to which European and US banks are outsourcing among themselves to gain efficiencies of scale and competitive advantage should – in a rational world – give perspective to the political fuss over outsourcing to India (see page 122). With a US presidential election looming, however, more grand speeches and scapegoating can be expected in the short term. Longer term, it is highly unlikely that any legislation will be passed that does lasting damage to the business.
As Mellon Financial Corporation's chairman and CEO Martin McGuinn said in an interview with The Banker (see page 48): “Politically, I have argued to legislators that they cannot realistically tell us where we can and cannot do business. Do they mean us not to do business in London or just not in India, and if not in India where else?”
The Mellon experience shows how outsourcing is a two-way street for many companies. The bank is an insourcer of work in its core asset management and security services businesses and an outsourcer to the Philippines and India of operations such as call centres and software development.
A recent KPMG report suggests that the outsourcing trend is moving down the corporate ladder, with UK middle market firms (turnovers of less than Ł500m) getting in on the act. Stopping outsourcing would be economic suicide and would lose more jobs than it saved as companies became less competitive and their growth plans came to a halt.
Do due diligence
While the politicians rant and rave to little effect, banks that are considering outsourcing should study other serious issues.
One is the nature of outsourcing contracts that often stretch for seven to 10 years and, even if they don’t, can be hard to break because of the disruption that this causes. What this means is that banks are trading flexibility for efficiency. Lengthy due diligence is essential in making sure both the partner and the deal are right.
