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Perspectives: Outsourcing

Outsourcing Having accepted outsourcing and offshoring as more than cost-cutting strategies, banks are reevaluating which parts of their businesses to outsource. As a result, they're not only gaining efficiencies and access to better technology, but also improving their operating models.

Q: How has outsourcing evolved as a strategy? What are the major drivers of outsourcing for banks?

Philip Simons, ABN AMRO: The key trend is the growing pace of outsourcing. Initially, banks were performing strategic analysis as to whether they should or shouldn't outsource. The situation now is that banks have accepted targeted outsourcing as a part of their strategy -- the question now is what parts of the business to outsource. The major motivation is cost reduction and access to new/better technology, which often is the catalyst as banks that perhaps have not made the necessary investments in technology over the past few years now are faced with the need to upgrade their systems. Outsourcing is a possible effective strategy for investment avoidance.

Another significant driver is the ability to offer a broader range of products to clients at a cost-effective price in light of increasing competition from global institutions in a bank's domestic market. Outsourcing enables local banks to achieve the economies of scale and quality of service of a Tier 1 institution and enables the local bank to focus on its core activity of client service.

Bill Martorelli, Forrester Research: There had been a spate of outsourcing relationships with banks two to three years ago, but we haven't seen as much outsourcing in the banking sector lately. But we're seeing banks going after offshoring opportunities aggressively, and they're broadening the footprint -- it's not just for application development and maintenance now, but for things like BPO [business process outsourcing] and IT infrastructure management.

Anders Maehre, Datamonitor: Skepticism toward outsourcing continues to wane as banks see sourcing services as more than a cost play. While cost continues to be a major consideration, banks increasingly are looking to outsourcing to provide more, such as transformation of infrastructure and processes, systems investments, access to a global sourcing infrastructure, and gain sharing. In terms of business volumes generated, infrastructure outsourcing continues to represent the bulk of outsourcing revenues, but both BPO services and application services are growing significantly. The application side, especially, is undergoing significant change as Tier 1 banks increasingly opt for strategic application outsourcing -- that is, outsourcing the entire application maintenance and development function.

Q: What are the data security risks of outsourcing/offshoring? How can banks mitigate these risks?

Peter Ryan, Datamonitor: The concern over data protection of customer details is valid. Any BPO provider that does not adhere to the strictest security and compliance policies leaves itself vulnerable to corruption. Therefore, it is crucial that any outsourcer entering into a relationship with a client devise a mutually agreed upon security policy that will be adhered to for the life of the contract. In addition, outsourcers should proactively seek out global standards for best practices in this domain to further ensure data security.

Martorelli, Forrester Research: There are legitimate security considerations for outsourcing and offshoring that companies need to be aware of. A recent Forrester survey suggests that, as a result of these issues, some people are going to slow down their outsourcing activities. Still, the offshore BPO market does not seem to be slowing to any appreciable degree.

Jonathan Corr, Ellie Mae: Before venturing into any outsourcing agreements, banks need to ensure that their partners have high levels of security in place. At many overseas facilities, employees are not allowed to have camera phones, for instance, and those that deal exclusively with electronic documents are not allowed to have paper or writing tools at their desks. Visitors can't come in unescorted, and bags are checked upon entry and departure of these facilities. While security overseas can be much tighter than domestic security, it is important for banks to make sure that offshoring partners maintain these high levels of security -- banks need to do sporadic site inspections and audits to ensure that these levels are consistently upheld.

Q: There has been increasing specialization in outsourcing services. How can banks benefit from this componentization?

Simons, ABN AMRO: The key is to find the right solution for the client. This requires using a flexible consultative approach in understanding the key drivers and creating an appropriate solution for each business area. This often results in having to provide a combination of the traditional outsourcing solutions -- for example, pure business processing outsourcing for areas that are labor-intensive but where the clients' systems are an integral part of their infrastructure that cannot easily be replaced, plus full systems through appropriate interfaces. There are very few constraints as to what functions should be considered for outsourcing. Traditionally, people have talked about outsourcing noncore functions. However, some things that are considered core services for customers may not be core activities that an institution needs to perform itself.

Martorelli, Forrester Research: Outsourcing presents a huge opportunity, not only in the sense that we'll replace expensive jobs with less expensive jobs, but also maybe reconfigure the business mix and try to do something we couldn't do before -- make something economically viable that wasn't economically viable using a more conventional model. When evaluating what to outsource, you must have the full picture: You have to get the technology picture, the operational picture, the audit picture and the compliance picture.

Corr, Ellie Mae: The componentization outsourcing trend has a lot of merit to it. In essence, individuals are assigned very specific tasks that they perform over and over again, helping to ensure that the task is completed correctly every time. For instance, instead of allocating a multistep task to a single person, outsourcing firms have effectively broken down multistep tasks so that each task is efficiently handled by a separate person. For training and quality purposes, this method is highly efficient. From a business perspective, this enables banks to keep relationship management on their side, and outsource in order to achieve efficiencies without losing the transaction.

Q: What are the emerging markets for offshoring? How do nearshoring regions such as Canada and Mexico fit into the outsourcing picture?

Corr, Ellie Mae: The new and emerging market for offshoring is probably the Philippines, which is coming in second to India. The cost of labor in the Philippines is a bit lower than in India, but there aren't a lot of centralized knowledge or industry-specific business process outsourcing organizations. In terms of nearshoring, I don't believe Canada or Mexico will play a big role. The cost of labor in Canada is still high and not attractive enough for the kind of efficiencies being sought through outsourcing.

Martorelli, Forrester Research: Opportunities are emerging all over the world, including contact center opportunities in places like Panama. Romania and other locations in Eastern and Central Europe offer multiple language support, primarily to European customers. You can look at nearshoring regions as a complement to Indo-centric outsourcing strategies. Perhaps there are things that you don't want to do in India because you prefer to remain in NAFTA countries, in similar time zones and relatively nearby. But there are some limitations to nearsourcing regions. Canada may have limitations in terms of the potential for cost savings. Mexico is emerging, but there may be some other limitations -- for example, the English language support there isn't as great as you might find in India.

Ryan, Datamonitor: Banks certainly should be aware of the emerging locations for contact center nearshoring. Canada poses an excellent option for U.S. banks due to the common nature of financial services between the two countries, while Mexico is an excellent option for lower-cost customer service for the burgeoning Latino community in America. **--Peggy Bresnick Kendler

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio

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