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Alberto Corvo, eClerx
Alberto Corvo, eClerx
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Outsourcing in Financial Services: From an Operational Advantage to a Strategic Enabler

It is important that firms aim to get more than just cost reduction from their outsourcing partnerships.

Alberto Corvo

Financial services businesses are starting to view their operations with fresh perspective. This is driven in part by the need to survive amongst increasingly fierce competition and more recently, due to the crisis faced by the industry and the increasing regulatory pressure. The sharpened focus on operational slack and cost consciousness is driving discipline in measuring the benefits of any initiative. This coupled with a need to find ways to grow top lines is causing a real need to do more with less. Outsourcing and off shoring are effective tools to move towards these goals, however, it is important that firms aim to get more than just cost reduction from such decisions. This introduces new challenges for service providers, which the high-quality outsourcers are geared up to meet.

Focus on What Matters Most ...

The time for inaction is long gone. Financial services organizations were initially more reluctant than other business sectors, but recent years have seen a steady acceleration and expansion of outsourcing as the misplaced trust issues disappear. The unwillingness to relinquish end-to-end ownership was also a factor, however, that too is fast vanishing as people realize that they just need to outsource the work, not the control. Outsourcing represents an opportunity for financial services firms to refocus on their core competences in order to add more value, while getting best-of-breed services for daily operations from a professional specialist.

... Outsource the Rest

It is no longer just the ancillary or supplementary tasks that firms are outsourcing; more real-time activities are now commonly outsourced. An evolutionary scale can be traced from initial movers outsourcing low-end functions over the short-term, to the current drive towards outsourcing more strategically relevant functions for longer-term gains. More sophisticated delivery capabilities and the flexibility to quickly ramp up and ramp down teams are also driving the use of outsourcers for tactical staffing of short-term initiatives and projects within organizations. Increasingly, a pay-as-you-go ethos is evolving with outsourcers where flexibility is being designed into operations without compromising on results and control.

Don't Just Outsource ... Out Think!

The financial services industry is often at the forefront of innovative strategy. There are countless examples of breakthrough practices and technology being pioneered in finance driven by the appetite for bolstering top lines, improving efficiency and cost effectiveness. However, outsourcing seems to have bucked this trend; unlike other industries, financial servicesdoes not yet seem to have accepted outsourcing as common practice.

The main culprit seems to be the misperception that outsourcing processes obliges losing control at the same time. Qualms related to the security of mission critical data is a red flag too. However, as the early movers have long since proved, these concerns are unfounded and easily managed through effective practices and sound disciplines.

No Longer Living on the Edge

The fact remains that for many financial institutions, taking steps towards outsourcing is deemed radical. Meanwhile, outside of the world of finance, organizations have been quick to realize the benefits. Outsourcing in other industries is a cornerstone to maximizing returns for shareholders, while enhancing product developments and improving service effectiveness.

Having said this, financial services firms face two unique but inter-related challenges. Everything they do concerns money, and any way you look at it, managing money is a highly sensitive issue. Secondly, regulators are always watching with a keen eye and tightening the way the industry is policed. So regulatory frameworks need to be well understood and adapted to because non-compliance is not an option any serious player can consider. However, such sensitivity simply demands that the outsourcing model needs to be more sophisticated and collaborative, rather than rejecting the option outright.

Size is Irrelevant

A cursory glance at outsourcing trends in financial services will reveal that unlike other industries adoption has been concentrated amongst the big boys; this holds true on both the buy-side and the sell-side. Scratching the surface will reveal that risk management has been the rationale applied to justify this stance in the smaller houses; however, some in-depth analysis will reveal that using an outsourced service provider actually improves the quality of operations delivery. In part, the marquee announcements of multi-million dollar outsourcing contracts have also fuelled the view that one must be big to outsource; this can't be further from reality. The industry is now waking up to the fact that proficient outsourcers are able to deliver efficiency gains and improved capability irrespective of size of the client, or process. Flexible contracts and sophisticated delivery models with onsite and offshore staffing are long established, and are designed to be flexible, and therefore, agnostic to size.

Have your Cake, and Eat it Too

The worldview that demands end-to-end micro-management throughout the trading cycles is being reevaluated. Financial services firms no longer need to own all elements of their business, front to back. In fact, more than this being a need, there is an increasing realization that no one can be the best at everything. The market has changed. Trying to do everything is now equivalent to doing nothing. In an environment of growing size and complexity, increased competition and the current need to recover balance sheets after the recent crisis, the financial services industry must reevaluate. Many who have moved to an outsourcing model cite it as being central to their improved competitiveness due to enhanced efficiency and effectiveness. They have found that remaining competitive now depends on getting better at doing what directly influences revenue generation, and carving out anything that is residual to be done by external experts.

Firms that have outsourced effectively have found that the key to success is to give up the work but not the control. As a result, almost 90% of those that have outsourced in this way have no intention of retracting. But maintaining control depends upon choosing the right partner and structure.

Why Outsource?

While cost savings may be the initial trigger towards outsourcing, the benefits go much deeper and wider than the bottom-line. The reality is that outsourcing can herald a new era of improved flexibility for an organization, underpinned by enhanced operations. Risk is managed through agreed service levels, costs are fixed at an all-in rate with no hidden elements, and staffing complications are removed. Organizations end up developing a nimbleness that truly allows them to keep up with the fast-paced market - whether that involves molding, downsizing, ramping up, or even shifting strategy altogether.

Agility: Financial market volatility is nothing new, but outsourcing offers the mechanism to respond. Revenue is variable and so costs need to move accordingly in order to meet future trends that are not yet known, and cannot be predicted. Operational Excellence: Outsourcing to a trading services provider brings access to international best practices without the costly overhaul of the in-house environment (process, infrastructure, and people). Partnering with industry specialists means gaining access to specialized expertise and modern working methods that may not be available internally, and would take a disproportional effort to institutionalize.

Risk Mitigation: Moving towards an outsourcing model reduces risk on several fronts, but the primary factor is the ability to truly control end-to-end trading support processes, which are in-turn executed in a more consistent, predictable, and centralized manner.

Costs and Resources: Costs of supporting trading activities are always increasing and maintaining a fully capable in-house team is a huge burden across multiple departments. This includes both the underlying infrastructure as well as the staff to operate it. Furthermore, maintaining a resource pool with the appropriate skills may be impractical, and with change being the only permanent reality, IT budgets are already strained, and the skill-sets needed are increasingly expensive.

Outsourcing Evolution

From modest beginnings throughout the 1990s, the outsourcing of financial services operations is expected to grow 15 to 20 percent in 2011 alone and top $4 billion in annual contract value, according to a recent Everest Group report. As trust grows and expertise is evidenced, an increasing number of financial services organizations are looking to outsource a number of their in-house processes. From documentation and administrative work, financial institutions are continuously looking higher up the food chain and are outsourcing more complex and mission critical operations - this evolution can be tracked across three waves of evolution.


Early adopters of outsourcing only viewed it as a tool for cost reduction, but those that have truly woken up to its potential, are starting to realize its capacity for implementing wider operational strategy. No process is now too small to outsource effectively. This has been a game changer in the financial services industry as smaller firms now have available to them the sort of operational leverage with which they can flex their muscles in their middle and back offices, just as they need to in their front office functions.

About the Author: Alberto Corvo, (Managing Principal, Financial Services) manages the Financial Services division at eClerx Services Limited. He has over 16 years of experience in investment banking and banking technology.

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