Expect a phrenetic Q1'09 for outsourcing activity in the banking sector

More on the recent survey we ran (to which many of you contributed) on the immediate outsourcing intentions from the beleaguered financial sector.

     The financial services sector has held back from many outsourcing opportunities in recent years through a stubborn resistance to change and a fear of losing control over non-core business processes.  However, with this current tough financial climate, executives have little choice but to embrace global opportunities that afford both short and long-term cost-savings, access to process acumen and new technologies. When we delve deeper into the new survey data,

the major banks are clearly the most aggressive with ramping-up their plans to pursue outsourcing strategies:

Figure 1: Over the last month, has your firm been looking to increase / decrease your expenditure on outsourcing services (IT and BPO)?

n= 44 Major US Financial Institutions

     It is those outsourcing services where initial investment outlays can be offset by a heavy labor arbitrage component that are now top of the agenda for the beleaguered banking sector. 

     To this end, the main service-lines where banks are focusing are banking-specific BPO services, application outsourcing, and Finance and accounting BPO (see Figure 2).  Insurance companies also stated a strong focus on adopting insurance-specific BPO services in a 6-12 month period.  Service lines not being so aggressively pursued are primarily HR outsourcing and IT staff augmentation projects:

Figure 2: How do you foresee your demand changing for the following outsourcing services over the next 6 months?

n= 29 Major US Banks

"Tough times call for tough measures, and outsourcing fits the bill for some financial organizations"    

    This data supports the position that banks are now seriously evaluating the lower-hanging fruit right now - they are looking to find solutions that can support their changing business models, and the more they can be supported by cost arbitrage, the more likely they are to move into an outsourcing transaction.

    While current leadership discussions in this sector have clearly been dominated by mere survival strategies, the sourcing strategy talk will follow soon afterwards, whether they are going into an M&A situation, or simply looking to strip out cost. I predict a very bury Q1 2009 in this sector.  What do you think and what are you seeing?

 

Comments

[Michael Schneck]

Phil,

Thanks for your insights. I agree with Peter and hopeful on better terms. :)

IMO, banks are more likely to start with infrastructure (in some cases long overdue) and move to transactional/shared services projects. Branch automation is also hot. Not sure about the KPO w/respect to the privacy issues.

[Rick McGlone]

Hi Phil

I find you comments on the BPO space informative. The new or next step advantage for most of these industries is KPO. Knowledge Process Outsourcing. What are your views here and your thoughts on how the space is being embraced.

Cheers

Rick

[Phil Fersht]

Peter,

I agree - planing and evaluation will be rife in Q1 and we'll see a lot of contract activity from Q2 onwards next year. I do think many of the banks will see out the year to find stability in this market, before making serious sourcing plans after the New Year, hence my Q1 prediction for the sparking of new activity,

PF.

[Peter Allen]

Phil;

Great observations, as usual.

I agree that Q1 will be busy, but the contract awards aren't likely to materialize until Q2/3. That is, unless the desperate take to perpetuating rate card agreements and call that 'outsourcing'.

I am sincerely hopeful that rationale minds will use this window of opportunity to fundamentally restructure their business operations using third-party expertise, and not simply trim the edges with more staff augmentation sourcing.

To the Service Providers of the world: THIS is your chance to re-set the game through terms that are in the best interests of Clients and Providers, alike.

Peter

[Phil Fersht]

Mike,

Most of the leading insurance providers in my experience already use outsourced IT services with heavy offshore elements. However, the Insurance sector is one of the slower-moving sectors to move into broad business process outsourcing for initiatives such as offshore claims processing and F&A BPO.

One of the barriers to offshore-outsourcing insurance services relates to the lack of domain expertise among vendors. In recent years, there have been several changes in the regulatory framework and statutory requirements in the sector, which may be varied from state to state. As a consequence to their relative offshoring immaturity, insurance companies have tended to report lower savings from their outsourcing efforts, when compared to their banking or securities counterparts. I expect this to pick up later next year as the banking sector moves more heaviliy into outourced models and we have a "trickle effect" into the insurance sector - especially with the tightning markets and maturing vendor delivery models in this sector,

Regards,

Phil

[Mike Gantt]

Hi Phil,

Wonder what your thoughts are about insurance.

Thanks,
Mike

[Alan]

Phil,

Will be interesting to see if Obama, if he gest in, pushes back on a lot of the offshore outsourcing the banking sector is considering,

Alan

[Sunil]

I am concerned that banks will be so flush with handouts from the government's bailout fund, they will have little incentive to look for operational cost savings.

[Erik Snijder]

Hi Phil,

Interesting article. I agree - and have already been having some conversations with a couple of major European banks regarding an accelerated outsourcing strategy. IT apps and F&A are among the areas I see being considered - also other areas like payroll and payments,

Erik Snijder