Banks Take Control of Outsourcing Relationships

Banks are outsourcing more than ever, but they expect more than just low-cost labor. They're demanding -- and getting -- more value out of their outsourcing relationships by rethinking what's possible, restructuring deals and enforcing tighter controls.

Outsourcing, never a popular subject, has become nearly taboo as U.S. unemployment stalls near 10 percent. "No one is eager to demonstrate in this market that they're taking jobs out of America and putting them somewhere else," Peter Bendor-Samuel, founder and CEO of Everest Group, a Dallas-based outsourcing consulting firm, drily observes.

In fact, Arizona and the federal government have taken desperate (and controversial) measures to shift jobs from immigrants to U.S. citizens, including forcing companies to lay off all illegal immigrants. The topic has become so mainstream that NBC plans a fall sitcom called "Outsourced" about a call center manager who gets relocated from Kansas City, Mo., to Bangalore when his company's call center staff are all fired and replaced with lower-paid workers in India.

Data show that U.S. banks' outsourcing activities are growing -- both offshoring to lower-wage regions (such as India and the Philippines) via the multinational outsourcing firms (including Tata, Wipro, Infosys, HCL, IBM and Accenture) and through captive arrangements, as well as onshore engagements with U.S.-based service bureaus and outsourcing providers. In the first quarter of this year, financial services companies reported 40 outsourcing deals, versus 26 in the previous quarter. Notable deals in early 2010 include Deutsche Bank's $114 million contract with GFT Technologies in which GFT will take responsibility for applications that handle payment transactions, online banking, credit card management and securities transactions; and the multiyear contract that U.S. Bank signed with TSYS for card processing services.

"In the banking industry, people are still looking to improve their efficiencies, reduce costs, and free up cost and capital," comments John Buscher, partner and managing director for outsourcing advisory firm TPI. "For political reasons, some offshore work is being kept quiet, but outsourcing is alive and well in the financial services industry."

But these aren't yesterday's outsourcing deals. For one thing, banks now expect more than just low-cost labor. And the size of deals, who's making them, the scope of the work and even the structure of the contracts themselves all are evolving to meet today's new business demands.

The New Outsourcing Deals

The typical bank could trim expenses by as much as 20 percent through outsourcing, estimates Terry Moore, Accenture's North American banking lead. But it's not as simple as finding a single partner. The age of the outsourcing megadeal is fading.

While American Express's $4 billion, seven-year technology services deal with IBM was not unusual in 2002, "You will never find such a contract today," reports Prasanna Satpathy, SVP and head for financial services in the Americas at HCL Technology. "Contracts are for five or three years, and they're broken out -- one provider will provide desktop services, another brokerage software, a third a business process."

TPI, which tracks outsourcing deals that are valued at more than $25 million, says there were 109 such contracts across all industries in the first quarter of 2010, a 21 percent decline from last year. And restructuring accounted for 42 percent of the market, the highest ratio ever, the firm notes, proving that companies have the leverage to make more demands from providers and are consequently rewriting their outsourcing contracts.

The large money center banks, which have been outsourcing for more than 10 years, often through captives, are restructuring and fine-tuning their sourcing relationships. And while a few have sold their captives to Indian multinationals, most -- including Bank of America, Credit Suisse, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley, Standard Chartered, Wells Fargo and UBS -- still have offshore captives.

Meanwhile, community banks, which have long been comfortable with the outsourcing/service bureau model, seem to be doing a bit more of it as the economic climate continues to challenge them (see related sidebar).

Regional banks have traditionally been the outsourcing holdouts, reluctant to gut IT and operations and give those jobs to an outside provider, especially in another country, according to Jame Cofran, SVP, global banking and financial markets, at CGI, an IT and business process outsourcing firm. "It's a much bigger deal to them because they're closely associated with their geography," he notes. "Some regionals have said, 'No way, no how are we going outside the boundaries of the U.S. It's not worth it, given the image we have here.' "

But many are weakening their resolve under economic pressure. "The money center banks have validated that you can and should do this," Everest Group's Bendor-Samuel says. "It does reduce costs, and you can get performance gains out of it."

The regional banks have to offshore to compete with their larger brethren, HCL's Satpathy argues. "J.P. Morgan has more than 10,000 [full-time equivalents] outsourced in low-cost geographies," he points out. A regional bank can't hope to compete when its IT costs are millions of dollars higher, he adds.

Reprocessing What's Possible

While the shape of outsourcing deals in financial services is changing, so is the scope of the work. Large banks still send application development and maintenance work offshore, and community banks continue to rely on local service bureaus for core processing. The newer trend is business process outsourcing, particularly mortgage and student loan processing, with paperwork performed offshore and the actual decision made stateside. "There's a movement in banks toward a sourced or managed cost per loan," explains Everest Group's Bendor-Samuel.