Outsourcing

Q: What benefits can banks expect from outsourcing? What functions/services offer the greatest potential opportunities?

Lori Blackman, DNL Global: Companies certainly aren't getting the economic savings that they perceive going into these deals. The answer to trying to close the gap between expectations and reality often is to address vendor management. The most effective way to close the gap is to address the talent.

Ashik Ardeshna, Mercer Oliver Wyman: Classic economies of lower-wage, reengineered processes and economies of scale still hold. These economies are about cost and productivity. Business cases suggest average net savings of 20 percent. Final benefits can be lower due to contract mismanagement and increased organizational complexity for managing outsourcers. New economies are about innovation. This involves using a third party's staff or technology to develop competitively differentiating capabilities (e.g., decision support analytics, application appliances) for better business decisions and faster time to market.

Atul Vashistha, neoIT: The principal drivers for outsourcing by banks are cost control, process improvement, service quality, management of customer expectations, regulatory/reporting pressures and the need to focus on core business competencies. Labor cost arbitrage does offer banks a window of opportunity, but this window may be short-lived. Real, long-term economies will be achieved through recruiting and developing talent on a worldwide basis. IT outsourcing is the most common current source of savings and economies.

The greatest savings and economies in the area of business process outsourcing (BPO) currently are found in the many day-to-day tasks banks must undertake, which include data entry, verification, mailing of checkbooks, document storage and management, payroll management and other housekeeping activities. The specific tasks or services that are most commonly outsourced today include check conversion, ACH processing, returned-check re-presentment, nonsufficient funds check recovery, direct debit/automatic payments, payroll deposits, electronic lockbox services, check image storage and retrieval, telephone check processing and ATM management.

Suresh Gupta, Capco: Most outsourcing vendors expect to provide 20 percent to 30 percent savings; typically, these savings are derived from greater economies of scale and/or superior technology platforms employed by vendors. However, offshore vendors, particularly in low-cost locations, such as India, have delivered savings in excess of 40 percent to 50 percent. Banks exceedingly have begun to capture even greater savings by establishing captive centers in these locations, thus bypassing traditional outsourcing models. When offshoring, banks should budget 5 percent to 10 percent extra cost in their savings estimates. These hidden costs, due to such things as incremental program management and travel, commonly are overlooked by newcomers to offshoring.

Q: What are some of the risks of outsourcing, and how can banks mitigate these risks?

Vashistha, neoIT: Network security, personnel security, physical security, customer privacy and information protection are critical risk factors while outsourcing work to another country. Banks must conform to local laws in these areas, and consequently, they expect their offshore vendors to have a complete understanding of these laws in order to ensure compliance. The legal systems in many supplier nations do not have specific data security or privacy laws, and this is a concern for most banks. For this and other reasons, banks tend to be cautious when outsourcing functions that involve handling cash, sensitive customer information or financial authority.

Many banks consider security certification an important criterion while selecting vendors for outsourcing. In order to address their concerns around security in offshore locations, banks take a number of initiatives, such as hiring specialized security consultants and executing specific service-level agreements with security clauses with suppliers.

Ardeshna, Mercer Oliver Wyman: In terms of severity and likelihood, the data security risks of outsourcing don't appear to be significantly greater than internal ones. Well-managed outsourcing relationships can provide better controls, due to the commercial relationship that forces stronger data procedures. Offshore relationships are susceptible to local legal environment and data protection disciplines. This requires both knowledge of local legal practices and an understanding of the cultural attitudes employees have about data.

Gupta, Capco: Most banks manage outsourcing risks adequately. The risks around data security, intellectual property, legal challenges, etc., become more important when offshoring. Typically, these can be characterized as country-specific risks. Laws regarding intellectual property rights, the maturity of the legal system, the regulatory framework, business practices, the politics -- they come into play when considering a potential location. Therefore, it is important for banks to pay special attention to these issues when negotiating outsourcing contracts. In some cases, it might pay to outsource only those processes for which the risks of data leakage are minimal and establish captive offshore centers for more-sensitive processes.

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio

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