Saturday, June 30, 2007

Financial Services Outsourcing: Not If, But When

Source: Banktechnews.com

Doing more with less is the mantra for all financial services executives today. Continually improving operational excellence may seem like an impossible goal in a world where the volume of transactions increases exponentially, customer expectations rise daily, regulatory requirements abound, and the margin for error is zero.

Outsourcing has increasingly become a mandatory and highly successful strategy within market-leading banks around the globe. A recent survey of industry executives conducted by Deloitte Research revealed that the majority believe more than 20 percent of the industry's global cost base will have shifted offshore by 2010. The Outsourcing Journal predicts that between 20 to 30 percent of a bank's staff will either be an offshore captive or employed by a third party outsourcer.

Banks have already realized substantial savings from offshoring, from $8 to 12 billion in the last four years, up to 37 percent savings per process outsourced. The ability to reduce costs, increase market agility and improve business focus, response time and speed time to market will be significantly impaired by keeping functions in-house that can be efficiently provided by a third party.

BPO companies now offer a way to bridge the gap between the reality of today and the vision of tomorrow for financial services: a way to achieve the cost and quality advantages of strategic global outsourcing without the risks of losing control of the operation and without the investment costs of setting up their own offshore centers.

Achieving cost savings from wage differentials and tax incentives of 45-55 percent is just the beginning of a successful outsourcing relationship. Productivity and consolidation gains from a less expensive but very skilled workforce increase the value derived from the outsourced services. Finally, re-engineering processes can further increase the savings to a total of 60-70 percent less than the initial costs.

Perhaps the most significant benefit from global outsourcing is an intangible: once the headaches of routine, high volume transactions are moved out of the bank's offices, management and staff can devote their energies and resources to the tasks of realizing business goals and building competitive advantage.

However, outsourcing and offshoring can be a daunting prospect to many managers, especially those in mid-size banks which lack the resources to follow in the larger banks' footsteps and set up their own captive operations offshore. Potential drawbacks include increased concerns of risk around security and privacy; losing control over their businesses during the outsourcing process given that this could have a serious impact on their reputation and competitive position; and accountability for that outsourced function, even if a contractor fails to comply.

Banks should create an enterprise strategy for outsourcing rather than the more traditional functional approach run by functional or business unit leads. The resulting master plan will help the bank evaluate which processes could be outsourced and which ones could or should go offshore in logical groups sequenced to maximize value as well as prepare for the challenges of managing a bank in 2010 and beyond.

Processes that are easiest to outsource are those that are labor intensive, well defined, have few possible outcomes, are standardized with clear rules, and stand alone with minimal linkages to other processes. The mapping process is an integral part of successful outsourcing. Analyzing each step of the process and determining the most efficient way to execute it on the front end will ensure that the outsource map will be most effective. The BPO partner should clearly define the steps, which involves identifying the selected services migration phases and ranking them in order.

To ensure that outsourcing remains a source of competitive advantage, not a risk to business, banks must be proactive in creating a risk-aware culture and implementing a risk-management architecture that integrates risks of all types across the enterprise. A successful risk management program must have a long-term planning horizon, yet be structured carefully to yield concrete value in the near term.