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I am former editor of The Banker, a Financial Times publication. I joined the publication in August 2015 as transaction banking and technology editor, was promoted to deputy editor in September 2016 and then to managing editor in April 2019. The crowning glory was my appointment as editor in March 2021, the first female editor in the publication's history. Previously I was features editor at Profit&Loss, editorial director of Treasury Today and editor of gtnews.com. I also worked on Banking Technology, Computer Weekly and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Friday 24 July 2009

Source of comfort

Features

IT outsourcing is entering a new phase in which non-central services like HR and legal departments are outsourced.Where are the boundaries of what can and can’t be outsourced,and will the compliance issues raised by this development make managers lose sleep?

Starting last summer, the Dutch financial services group ING made a series of announcements about streamlining its banking operations through outsourcing different aspects of its IT and processing. In its initial statement, the bank said: “Based on the outcome, ING will determine whether other companies can perform certain activities at the same standard of quality, with more flexibility and at lower costs than ING itself.”

In March ING entered into a seven-year agreement with financial services consulting, processing and technology firm Capco under which Capco Reference Data Services acquired ING’s Security Master File platform and now provides ING with managed reference data services. ING signed with LogicaCMG in April for the outsourcing of applications development, IT maintenance and testing of IT systems, and the next month it signed a deal with Astron for the processing of banking and insurance documents in the Netherlands and Belgium.

This outsourcing epidemic culminated with ING signing a memorandum of understanding worth €800 million over five years with a group of IT outsourcers in July. In a series of deals, expected to be signed by the end of the year, the suppliers — Accenture, Atos Origin, Getronics and KPN — will take over workplace services, such as installation, maintenance and support of desktops, laptops, printers and telephones, at ING’s banking and insurance operations in The Netherlands and Belgium. Through this process, the bank hopes to save close to €460 million per year.

As seen from ING’s determination to streamline its business and focus on what it does as a bank, outsourcing is back on the agenda for financial institutions. David Parker, senior executive, Financial Services, Accenture, argues that the banks need to focus on customer facing activities and outsource almost everything else. “The shift of focus on growth opportunities, coupled with the inherent complexity that exists in a lot of retail banks that have really grown up over the last 30 years with new products, sections, channels just added as bolt-ons, means that banks are pressed for profit margins.”

Banks are looking to drive through value by outsourcing as much as possible. Cost cutting is no longer the only driver. In its annual outsourcing survey, the Outsourcing Institute found that improving bank’s business topped the list of priorities, with cost cutting, freeing up resources for other projects and gaining access to world class capabilities close behind.

The battle with legacy systems also gave the banks more reason to outsource because they just couldn’t respond fast enough to market changes with the complex clunky old systems. Outsourcing can accelerate re-engineering and reduce time to market for new products.

Not surprisingly, the first wave of outsourcing has concentrated on IT as banks wake up to the view of technology as an enabler, not the reason that the bank exists. “IT is a very mature area for all banks to outsource, such as their data centres, desktop support, infrastructure maintenance, telecommunications networks,” says Andrew Nye, associate partner, head of retail banking, Financial Services, Atos Origin. “It is probably the first sector that banks outsourced and they have been building relations with outsourcers in this space for many years.”

IBM has been on the receiving end of some of this flurry of activity and racked up a number of outsourcing deals in the past year. Recovering from a couple of rippedup contracts with high-profile financial groups like HBOS in 2002 and, more recently, JPMorgan Chase in 2004, IBM reported a number of IT outsourcing wins with ABN Amro, Laurentian Bank in Canada, Banco Sabadell in Spain, and Portugal’s Banco Santander Totta and Banco Espírito Santo. Portugal’s largest financial group, Banco Comercial Portugês Group, extended its initial service contract so that IBM now also manages the IT infrastructure of Bank Millennium, BCP’s Polish subsidiary.

More sophistication

The IT outsourcing model has become more sophisticated over the years. Three Chilean banks have taken a novel approach to replacing their core banking systems. Banco del Desarrollo, Banco Security and Banco Internacional have employed Entel, a Chilean telecom provider, to build and manage the entire turnkey project for the outsourcing of operations and technology, including the core banking system replacement with Flexcube from Indian technology company i-flex.

The second outsourcing wave sees banks focusing on the generic services around human resources, finances and legal. Sue Roberts, executive consultant, banking sector at Xansa, a UK outsourcing technology firm, says that there has been a big drive to recognise that financial institutions are both a business and a bank. “They weren’t aware of how much of the value chain they were hanging onto. They were printing their own chequebooks and sorting their own mail. It never occurred to them to outsource their payroll or any of the other business management-type things,” she says.

“What tended to happen was that the bank went through a journey whereby they accepted that they couldn’t own the entire value chain. They had everybody doing a repeat of the process in every little branch or head office, so they began asking if there were some things they could centralise. There was a big push — like the branch redesign programme at NatWest and a lot of the work Midland went through to create a centralised processing — to move the work away from its original little operational teams into something, still bank-owned, but centralised.” Roberts sees this as a first step towards outsourcing because it is buying a managed service to deliver parts of the value chain.

Xansa is providing Lloyds TSB with accounts payable, employee expenses and fixed asset accounting in a five-year deal, and will move Lloyds’ HR operations to offshore centres in India in a separate five-year agreement. Barclays has also extended its technology outsourcing agreement with Xansa, which includes supplying applications management and major change programme to Barclaycard.

The third wave has begun and is targeting performance development and key back office operations, such as processing of cheques, mortgages and credit cards, as well as statement printing, even identifying marketing lists and running marketing campaigns. Roberts says: “It has been in the last three years that the cultural mindset has changed. Bank executives have realised that it is no longer an emotional choice — ‘I am not letting someone take my empire away from me’ — but an analytical choice.”

At a vanilla level, all players are looking at these types of areas. Almost all banks outsource their credit card processing. Alex Jablonowski, co-author of The Art of Retail Banking, says that banks have to outsource bog standard transactions to get economies of scale. “Payments systems are inefficient unless you are a big bank and become a processing factory. What banks can’t outsource is their brand, product mix, or customer-facing activities. Outsourcing the back office is no problem - you don’t choose a bank on the basis of their back office processing.”

Although that is true, some of these activities are getting maybe a bit too close to customers for comfort for some institutions. Nye exposes the difference in comfort zones. “There are some players that are pretty open-minded and looking to outsource what they can and focus their investment on the customer side. Lloyds TSB and Barclays are in that camp. But then there are other players — I am not saying that they don’t outsource anything, but they like to retain control very much. RBS and HBOS fall more into that camp. For example, HBOS actually took the decision to insource their IT having decided to outsource it previously a couple of years back.

“For me, the rule is how much it impacts the customer experience. If it has a risk of impacting, then the banks will think twice about moving the boundary and they prefer to keep it in-house. There are some organisations that culturally see that boundary a lot further out. So for RBS, everything that touches the customer and supports it one or two levels below, they will want to control. They would only choose to outsource things that they are absolutely confident would not have a customer impact,” he explains.

Lloyds TSB is pushing the boundaries of comfort. EDS is being used to provide a full end-to-end call centre and back office operation where EDS is selling loans to Lloyds TSB customers. “We handle all the direct phone calls, and we do the selling, cross selling, and consumer protection insurance. We process all the applications for personal loans and see the product right through its lifecycle on behalf of Lloyds TSB. It is a full lifecycle outsourcing operation and we have had that for a number of years,” says Jonathan Charley, vice president of EDS Retail Banking division. EDS also provides mortgage servicing and customer interaction for Santander.

The debate rages over what constitutes core competencies and the decision comes from the top as to how significant banks see their own staff being part of the differentiated services they are offering to their customers — and how they differentiate those services. There are definitely areas of comfort and discomfort, but fundamentally the only thing that can’t be outsourced is the risk and responsibility — the regulatory authorities, such as the UK’s Financial Services Authority, make this pretty clear. The buck stops with the bank.

Managing SLAs

“A service level agreement seems pretty much the baseline,” says Kevin Ludwick, global head of regulatory services, Qumas, a compliance software firm. “But what is important is the arrangements the firm has in place to manage that SLA. The important thing is the principle of delegation. The FSA’s mission is to lay responsibility onto senior management to identify and manage the risks in their business. So in terms of suppliers, you have to understand the risks associated with this outsourcing. You have to make sure that you have the right people with adequate arrangements in place to control that. This places an even greater burden on compliance infrastructure and technology than in-house arrangements.”

Yet in a recent survey by PA Consulting group, only 43% of financial institutions were found to have undertaken any form of due diligence before outsourcing IT operations. Almost half recognised IT outsourcing as a way to achieve business transformation, but banks are failing to perform adequate due diligence. Almost three quarters of clients wished they had increased focus on ability to deliver on promises at the outset.

The FSA is finding out first hand the amount of work it takes to outsource. It signed a four-year agreement with Xansa to transform applications development and also awarded Capgemini UK a four-year framework contract for the development of new and enhanced IT systems. The FSA wants to improve its business capability and effectiveness, plus be able to handle the growing responsibilities in an evolving financial services and legislative landscape.

The bottom line is the same for everyone — core competency focus. “[Banks] must increasingly wake up and realise that there are some serious threats to their market position — they will start to fall by the wayside unless they do something creative and innovative,” says Elton Birden, vice president of UK financial services, Unisys. “The ones that are successful and go forward with the right flexible model and an open strategy towards sourcing generally, they will be the ones that survive in the new world. And that is not just about cost cutting — it’s about all the other factors around like control, applying resources, etc. I think we will see a boom in this market over the next couple of years.”

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