With a few major corporations leading the way, outsourcing of key business processes is becoming increasingly popular. Creative,client-focused solutions are helping drive the market growth.
Outsourcing in financial services is nothing new. Link, an ATM network owned by two-dozen British banks, is the best part of two decades old, and BACS, the United Kingdom clearing house that processes around 50 million items a day, has been operating since 1968. But the trend for banks to outsource technology functions as well as business processes is accelerating sharply, as banks’ budgets be-come tighter, margins shrink and attractively priced off-shore solutions appear.
A June 2003 report from business information analyst Datamonitor,“Benefiting from Offshore Outsourcing in Financial Services,” suggests that offshore outsourcing by European financial institutions will grow at a com-pound annual rate of 18% between now and 2005. For IT vendors alone, this represents a market opportunity of more than $240 million.“Offshore vendors are gain-ing credibility in areas other than just IT,” says the re-port’s author, Anders Maehre, “and as well as strong growth in infrastructure and application products, we expect the same with BPO [Business Process Out-sourcing].”
Some financial institutions have been reluctant to outsource operations, with various issues causing them to have second thoughts.“When looking at offshore lo-cations, financial companies need to consider risk fac tors such as customer and company data privacy, secu-rity and real time,” says Atul Vashistha, CEO of offshore advisory and management firm neoIT. According to Vashistha, government standards and regulations com-bine to make it harder for financial institutions to out-source, particularly to offshore locations. “Still,” he notes, “with all these obstacles, the financial services sector has led the way.”
As heavyweights such as American Express, Standard Chartered Bank, HSBC, Citibank and AIG have out-sourced IT and business processes, confidence in the industry as a whole has grown. Combined with ad-vances in networks, security and data management technologies, greater maturity of suppliers in address-ing the financial services sector and economic pres-sures,Vashistha is bullish about growth.
Mark Elkins, director of marketing for finance at Damovo, a communication services provider, explains that in some situations risk concerns are ameliorated by a “shared managed services” approach. On this model, “the financial services company retains network and people ‘ownership,’ whilst the managed services com-pany takes care purely of the managed service opera-tions,”he says. Risk is lessened, costs can be cut, and the company can concentrate on its core concerns without losing too much control over the outsourced operation.
Taking the Plunge
Bob Zahler, who heads up the outsourcing practice of law firm Shaw Pittman, argues that those financial in-stitutions that are not outsourcing now “should be seen not as a reluctant majority, but as a portion of the fi-nancial marketplace that has determined for its own good reasons that outsourcing is not appropriate.” As circumstances change for an institution—such as an in-creasing difficulty of maintaining high-level service across a broad range of users—so this decision may change. And while in almost all cases financial institu-tions have already outsourced some portion of their IT operations,“in many cases the reluctance to enter into mega-transactions [such as last March’s $4 billion con-tract between American Express and IBM] is based on a judgment that all the suppliers have had a mixed track-record in delivering a high level of outsourced services across multiple jurisdictions and multiple IT functions,” says Zahler.
Kumar Mahadeva, CEO of Cognizant Technology Solu-tions, an IT services outsourcing firm that offers a mix-ture of on- and offshore solutions, says that there is often reluctance for institutions to be seen to be shifting work from home to abroad.“Our clients are notoriously shy,” he says, but he believes that the recent backlash in the United States to offshore outsourcing, which has led some states to legislate against state-related work out-sourcing, will be short-lived.“I think it will be hard [for the US] to prevent outsourcing directly,” Mahadeva says. Cognizant has worked to develop close ties with a few key clients instead of taking on many disparate projects, a strategy that is vindicated by the company’s continued success.“If you look at our large clients, the proportion of the work they’re outsourcing is actually very small,” Mahadeva says. “There’s substantial growth available from existing clients.” It’s a policy that could reasonably be applied to the industry as a whole.
BPO: A CASE STUDY
When UK insurance company Abbey Life closed to new business in 2000 (its parent company is Lloyds TSB Group, which acquired insurer Scottish Widows as the group’s new insurance brand), the company needed to ensure proper servicing of Abbey Life’s 1.75 million policies. Abbey had five main objectives, according to director of operations Neil Tointon:
• To reduce long-term expenses—for example, by taking advantage of technological developments without investing in them directly• To link ongoing costs to the income of policies, the number of which would naturally decline;
• To manage human resources problems arising from a business unit that would shrink and, as such, offer reduced career opportunities and attraction to staff; • To reduce business risk associated with uncertain workflows or legislative issues;
• To simplify management so as not to detract from the group integration of Scottish Widows.
Abbey Life concluded that the best way to meet these challenges was to outsource the insurance business, and in December 2000 the company signed a deal with Unisys worth more than $300 million over 10 years. “Although we recognized that outsourcing transactions of such size and scope were relatively immature, we felt that it was likely to become an increasingly accepted and pursued model for the future,” says Tointon. The company planned for a six-month transition period, but “within a week UISL [Unisys Insurance Services Ltd.] was delivering an improved service, let alone service at the same level,” he notes.
Tointon says that while the timing of the decision was somewhat “forced” on Abbey Life, “with the ongoing challenges of cost and customer-service expectations that the whole industry faces, we would have continued to review our strategy and operating model just as we did.”
“The growth of specialist third-party providers, in capacity and quality, has made this route more of a possibility—and more likely throughout our industry,” Tointon notes.
A Growing Business
Cantwell says that once outsourcing is validated by one organization, a domino effect tends to lead others to follow.“In the past three to six months the volume of contact we’ve had with people on the subject has gone up by a factor of 10,” he says.“It’s almost impossi-ble to find an organization that is not planning on do-ing this to one degree or another. It’s a remarkable up-tick, and I’d suggest that it is about the economic realities coming home to roost.”
Tw o-thir ds of US banks already outsource one or more functions, and those operations are growing steadily. BNY SmartSource, the Bank of New York’s out-sourcing group, offers Global Investment Man-ager Outsourcing, bring-ing together several buy-side outsourceable functions under one umbrella. “The services we provide for invest-ment management firms and hedge funds are be-coming more and more complex,” says Stella Vanguestaine, BNY SmartSource’s managing director. “What we’re seeing now is that it’s increasingly an impera-tive for such companies to outsource in order for them to address what their real added value is,” she notes.
The Bank of New York bought Pershing, a part-offshore firm with oper-ations in India, from Credit Suisse First Boston earlier this summer. Pershing deals with broker dealer out-sourcing. Joseph Velli, senior executive vice president and head of securities at Bank of New York, says that an increase in the use of such services is inevitable: “Companies don’t want to re-invest in technology, and it’s clear that with 1,100 clients from Pershing and the matching economies of scale, we can only see an acceleration.”