The true cost of outsourcing in Financial Services

The true cost of outsourcing in Financial Services

CFOs are increasingly viewing IT outsourcing as means to reduce the cycle times of their current transaction processing facilitating a reduction in cost. In theory, corporate governance and compliance can be improved and control over the processes can be increased.

The economic benefits in terms of lower costs are so substantial that firms often cannot afford not to tap into the potential of high quality, lower cost countries like India, China and other developing countries.

However, achieving economies of scale is one of the most commonly over cited reasons for IT outsourcing. Let’s face it, you don’t have to be Alan Greepspan to understand that IT outsourcing brings some clear economic advantages such as reduction in overhead expenses and the elimination of soaring costs associated with hardware and software maintenance.

While cost saving is quoted by a lot of major financial institutions as the most important drive to outsource, contractual flexibility and professional services integration are also becoming more important to the Financial Services (FS) industry.

Over the past few years, many banks are moving to this trend. For example, London-based Barclays Bank, one of the world’s top 25 banks, has expressed a commitment to offshoring over the past years. In 2009, it announced that it would cut almost 2,000 technology jobs, including high-level positions, in the U.K. and move them to Singapore, India and Hungary.

It is my view that many banks, brokerages and insurance companies outsource to enable them to focus on their core business. In such an information intensive industry, IT is treated as a core competitive resource with potential use in the development of new products, markets and organisational capabilities.

Three years on from the biggest financial meltdown in living memory, there is increasing pressure for banks to deliver high quality services that can satisfy customers whenever, wherever and however they need. This requires banks to use a set of complex and diversified technology to run their business. To put it simply, it has become far too difficult for financial institutions to manage the complicated IT skills entirely in-house.

In light of this, companies are looking towards IT outsourcing to provide them with early and cost-effective access to emerging technologies that have the potential to change fundamentally the firm’s IT response to business challenges .

According to recent research, IT is the back-office process most commonly outsourced by financial services organisations, followed by call centres and then HR. Other industry specific processes commonly outsourced include claims, transaction (e.g., credit card, equity trading) and back office processing activities.

Today, more and more standardised open IT environments such as mobility increase the flexibility and require improvement in the  security of technology for financial firms. Take the serge throughout the recession in Merger and Acquisitions (M&As) as a prime case in point.

M&A’s are frequently used in the banking industry as a strategy to develop new business and cut costs. However, IT incompatibility often makes the system integration process difficult and cause delays in operational consolidation. Therefore, inoutsourcing IT work, banks need IT to create a more flexible technology environment, which makes merge more easily and efficiently.

However, it is not just about the M&A process. Being able to react quickly to the regulation requirement and risk management are other crucial reasons for banks consider outsourcing IT, as a means of providing capacity.

Regulators such as the FSA and ICB are continuously increasing and tightening banking regulation, which brings higher demand of detailed and timely financial data. For instance, the Solvency II and Basel II , require banks to set aside a minimum threshold of their capital reserves to cover operational risk such as bad housing debts. This has played a necessary role in banks’ outsourcing decisions.

In addition, operational activities such as customer on-boarding and protection can make up a larger percentage of the banks expense base. Therefore, outsourcing some or all of these processes should ensure that a bank receives higher quality and better on-time delivery at lower price.

For too long now, the financial services industry has been dominated by, what many call, obscene bonuses and overregulation and a dismissive attitude to customers, Meanwhile a quiet outsourcing revolution has been taking place behind the scenes, driven by the need for cost saving and the desire to take advantage of the changing market.

In conclusion, success in the Financial Services (FS) industry lies in the ability to improve business agility and to alter working practices. Even though FS is still facing uncertain times, one thing is very likely, important partnerships with outsourcers will soon become the de facto practice across the industry.

Source: dofonline

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