Monday, May 10, 2004

The banking industry is ripe for business process outsourcing

BPO entails outsourcing an entire business function—not just certain aspects of the function, such as IT systems. Good BPO candidates are key back-office processes, such as items processing, call centers, and even entire HR departments.

The impetus behind this more extensive kind of outsourcing is certainly cost savings. In addition, the flexibility with which banks must respond to industry challenges presented by straight-through processing (STP), electronic bill presentment and payment (EBPP), and truncation is increasingly important.

Outsourcing bank back-office processes also helps mitigate risk. And many banks choose BPO to gain access to intellectual capital and skill sets.

Issues to consider before making the move to BPO
Banking is ripe for BPO. For example, of the top 20 banks in North America, more than half have outsourced their items processing, are actively searching for providers, or are reviewing the business case for such a move. So, what should banks consider before making the BPO decision?

Pricing needs to be at the top of the list. However, it's also one of the hardest things to get right. BPO is immature, and drawing up the right cost structures and identifying good deals is often something of a guessing game. So the financial side of any contract, let alone any other clauses, requires appropriate expertise to judge correctly.

Two additional factors compound the problem. First, BPO typically incorporates a desire to improve best practices or deliver operational transformation. It can be difficult to discern where the danger points lie in the relationships governing these crucial but intangible qualities.

Second, the very nature of BPO requires companies to negotiate functions that they have little knowledge about, which is one of the reasons they want to outsource in the first place. But this can pose a serious risk. Unscrupulous outsourcing partners may use this lack of expertise to pull the wool over a company’s eyes. Therefore, banks should begin by outsourcing what they thoroughly understand before moving to more innovative projects.

How soon will BPO benefits be quantifiable?
How soon a bank will realize the benefits of BPO depends on the situation, according to "BPO in Banking: Outsourcing the Back Office," a Giga Information Group report by analyst Julie Giera. If the scale of outsourcing is one small area of back-office operations, then banks will potentially realize benefits sooner because conversion to the outsourcer’s area of responsibility will occur sooner.

However, if a multibillion-dollar bank decides to outsource its entire items processing facility and consolidates, say, 15 different capture facilities into five, while converting to image and truncation at the same time, it could be at least a year before the bank will realize any substantial benefits.

In addition, banks are often ill-equipped to assess the benefits that BPO can bring, let alone when it might bring them. The focus of most traditional outsourcing relationships is solely on reducing the cost of current services, which has resulted in an important missed opportunity for increasing the business impact of outsourced IT as well as BPO.

Successful outsourcing contracts involve relationships between parties, not transactions. As such, the value an outsourcing partner can and should deliver goes well beyond cost savings. But most CIOs and IT managers have little experience in measuring that type of value, and they're often unprepared to apply such concepts to BPO.

BPO should be an offer that many banks simply cannot refuse. Whether it's an offer they can understand is another question entirely.

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