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Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value

As a buyer of outsourced services, it is important to engage with these companies differently than in the past.

Jim Reesing, President, U.S. Business Development, Xchanging
Jim Reesing, President, U.S. Business Development, Xchanging
In an August 2013 Wall Street & Technology article, “Hedge Funds Increasingly Look to Outsource,” senior editor, Rebecca Lipman, reported that 25-30 percent of hedge funds are in the process of outsourcing back and middle office work. Further evidence of outsourcing growth in the financial services sector is illustrated in a January 2014 study by NelsonHall, an outsourcing research firm, which examined 2013’s BPO contract activity in the commercial sector. The report noted that BPO contract value was up 40 percent globally in 2013 relative to 2012 and that, within the commercial sector, banking was one of the two most strongly performing industries.

While the growth and performance hasn’t always been of this scale, as the industry exploded in the U.S. over the last 15 years, financial services companies were early adopters of outsourcing, driven by the large and complex nature of the organizations, which led to duplication of functions and lack of efficiency.

Additionally, many of these companies were, and still are, located in New York or other high-cost cities. Steep labor costs and talent shortages made it difficult to recruit and retain a competitive workforce. The outsourcing industry offered a way for leading edge institutions to gain a real competitive advantage. Companies could access high volumes of expertise and labor, allowing them to accelerate results, to consolidate functions, and to increase efficiency. Further, since much of the work was being done by outsourcers in lower-cost (or offshore) locations, financial services companies could also take advantage of tremendous labor arbitrage. The combination of these factors led to an explosion of outsourcing in the industry. Companies quickly began to outsource simpler, non-core tasks such as software maintenance, software testing, and call center BPO.

In more recent years, financial services companies have continued to embrace outsourcing, but some of the initial benefits (namely labor arbitrage and filling large skills gaps) have now been realized. The simpler, non-core tasks are already outsourced, and thus, as the needs of the industry have evolved, so too have outsourcers. Rather than relying on a small number of providers with huge breadth and depth, the industry is now seeing a greater number of providers that are more specialized.

As a buyer of these services, it is important to engage with these companies differently than in the past. Here are some things to consider:

1. Select a provider that specializes in your industry and domain. As the industry matures, companies are now looking for solutions that will allow them to outsource more complex tasks, and to deliver deeper domain expertise. Whereas ten years ago, it was very important to have tremendous breadth of resources and the ability to scale (resulting in the significant growth of the likes of TCS and Infosys), it is now more important to be able to deliver a niche solution and to bring domain expertise to the table in order to maximize results. If, for example, an institution wishes to outsource securities processing or other complex functions that are closer to the business, an outsourcer that specializes in these services is absolutely essential.

2. Select a partner that can give you the right kind of attention and support. Size of the provider is not as important of an issue as it was previously, for example when trying to fill 1,000 IT jobs. This means that you may now have more relationships with more providers. It will also mean that you will be able to align the right provider with the right function.

Many of the providers have now grown so large and unwieldy that they have lost their flexibility and agility. If you are going to be outsourcing a function that is closer to your core business, it will take a lot of interaction and partnership. It truly requires a working, communicative relationship. There will be issues and challenges, and you want to work with people that you trust and that will work closely with you to find solutions. If you end up in an adversarial relationship, both parties will suffer. Choose a partner where you know you will have access to senior management when necessary. You no longer need to sacrifice the relationship because you need to find a vendor that has scale.

3. Establish the rules of engagement and metrics up-front. Setting objective, as well as subjective (i.e. “how do you feel we are doing?”) metrics, is critical from the start. More importantly, those metrics need to be tracked and used constructively. There are a number of factors in an outsourcing relationship that can cause either party to believe something is wrong or that the other party is to blame. You will find people within your organization who do not embrace outsourcing, who don’t know how to work with an outsourcer, or who just take an “us versus them” approach to the engagement. Establishing criteria to level the playing field for both parties will ensure that, as a team, you and your partner can find the source of problems, find bottlenecks and biases, and drive productivity forward.

Additionally, all of the metrics and dashboards might be ‘green’, but a client could still be unhappy and it can be very difficult to surface that dissatisfaction and to quantify it. A monthly metrics dashboard should be reviewed in-person by both parties, extending all the way up to the executive level. It is important to also share a subjective rating; this can be achieved by a simple 1-10 rating on a handful of questions such as: How satisfied are you; How would you rate our quality; How is our overall performance”.

Discussing the ratings in a face-to-face meeting will allow you to maintain alignment, track trends and make sure both parties are working together to resolve issues, as well as encouraging discussion. This process will bring issues to light that the metrics will not and will increase communication and client satisfaction.

4. Create a top-down outsourcing relationship to ensure success. The executive sponsors should explain the rationale for outsourcing and set their expectations for how the parties will work together. It is important to educate the people who will end up working closely with the outsourcer, and help them to understand your goals and what you need from them. There is often a disconnect between the executive level and the people who end up delivering. This misalignment can be the difference between success and failure of an outsourcing engagement. As the relationship matures, both parties should be as aligned as possible on goals. In many successful partnerships, incentive compensation for employees of the client and the outsourcers will be based on the same KPIs. Both parties are truly tied to each other’s success.

In summary, real value in the form of flexibility and efficiency can be achieved when financial service firms unburden themselves of back office functions. The right outsourcer will take on those non-core functions so the institution can focus on its value-driving operations. Simple steps can be taken to ensure this hand-off of tasks is smooth and sustainable in its ability to drive value. Some of those are outlined above and are proven based on my own experience. Are there any others you might add?

Jim Reesing is president of U.S. Business Development at Xchanging, a $1B business process, procurement and technology services provider. To learn more, please visit www.xchanging.com.

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jreesing
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jreesing,
User Rank: Apprentice
2/12/2014 | 6:46:07 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
It all comes down to people. Some of the best client relationships I have had came out of adversity. People on both sides came together, trusted each other, and helped each other to succeed. When you and your vendor have people that can build that kind of relationship, it makes a huge difference in your level of success. In my mind, that is why cultural fit and willingness to partner are key criteria in choosing a partner. And after the deal is done, finding the right people on the client side to champion the relationship is equally critical.
IvySchmerken
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IvySchmerken,
User Rank: Author
2/12/2014 | 5:38:09 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
This probably should be someone who is familiar with the contract and service level agreements and who is flexible in working out any differences, but still preserve the relationship.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
2/12/2014 | 3:20:36 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
Very true. there is no outsourcing contract that can foresee all of the challenges and problems in advance. Someone who has the knowledge of the business, can be flexible, and also has the authority to negotiate, is important to any outsourcing deal.
jreesing
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jreesing,
User Rank: Apprentice
2/11/2014 | 10:56:33 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
I agree with you. Contracts are necessary for governance, but needs change for both the business and often the project. When the requirements change, or there are problems that arise, both parties need to be able to work together as partners to solve problems and to keep the project on the critical path.
IvySchmerken
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IvySchmerken,
User Rank: Author
2/8/2014 | 4:35:58 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
Outsourcing has changed a lot from 15 years ago when the main motivation was cheap labor. Today, as you point out, outsourcing providers are more sophisticated and have specialists in domain areas including risk analysis and reference data. Even so, it sounds like picking the right person on the financial service company's side to manage the relationship day-to-day with the outsourcing provider is key to making this work.
lward222
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lward222,
User Rank: Apprentice
2/8/2014 | 2:45:34 PM
re: Growth of Financial Services Outsourcing: How to Drive Maximum and Sustainable Value
I was in the outsourcing business for many years (I was on the side awarding and administering the contracts) in the IT field. One critical area of success is "Who" you pick to the be main person running the contract, both on the vendor's side as well as on the company doing the outsourcing. In too many instances, companies selected the most highly qualified "technical" person to do the job. These folks usually suffered in their role because they saw the contract as being a matter of "black and white" (let's face it, a lot of tech folks see the world that way) and they had no sense of what "give and take" actually means. An organization needs to select someone with good business acumen, terrific interpersonal skills, and a perspective on the job that leaves them open to negotiation even in the face of the "black letter of the law" of the contract.
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