Scotiabank Starts With the Basics

Though outsourcing overseas raises data security concerns, banks that outsource onshore face many of the the same issues. Scotiabank Group (Toronto, $281.5 billion CAD in assets) outsources a number of its vital functions, including core computing and check processing, and researches potential service providers thoroughly before contracting any services, according to Linda Tuck Chapman, vice president, strategic sourcing, Scotiabank Group. Tuck Chapman spoke with BS&T's Cynthia Ramsaran about how the bank approaches outsourcing.

Q: What companies does Scotiabank outsource to and what types of solutions are outsourced?

Tuck Chapman: There are a lot of misconceptions about what is and is not outsourcing. Outsourcing, I believe, is where there is a third party performing a function or an activity, that can, with reason, be performed by the bank, and it is really integral to our operations. So this would include things like processing and running our systems, but it would not include things such as strategic suppliers, such as your printers, ad agencies, etc. And there are quite a lot of different terms being used around outsourcing. But what I am talking about are things that are very integral to the operation. It should look like an extension of yourself and, in fact, should not be visible to your employees or to your customers that it's not you performing the service.

Like any other company, we look at the issue that we are trying to resolve and what is the right way. Sometimes outsourcing is the answer and sometimes it is not. It really touches a broad range of things. We have quite a large outsourcing initiative to run our mainframe operations, with Symcor [Mississauga, Ontario]. We also have them processing our checks. Those are the ones that are visible because those are large arrangements, but we have a lot of smaller arrangements that are very important to us, as well. And there is a better opportunity for us to work with a third party who can perform the service for us for a variety of reasons. For example, we are in the process of outsourcing our pension administration. That would be a good example of where we found that, because of the number of regulatory changes that we are facing, even though we have a large pension plan, we don't have a great depth of expertise around the actual system side of it. It's been difficult for us to stay on top of the technology changes - the changes that come in quite naturally as a result of regulatory changes.

We have quite a lot of human resources benefits from outsourcing, too. Generally speaking, it is a lot better for Scotiabank to outsource within Canada because it gives us closer access to the outsource service providers and because we are working with them day to day. They are running part of our operations. Very often we like to visit their sites and get involved with the planning, development and changes. It is a pretty broad range of companies that we are dealing with.

Q: Do you have any long-standing outsourcing relationships? How have the relationships evolved?

Tuck Chapman: If you think about cash servicing for our branches, I can't begin to tell you how long those arrangements have been in place. They are long term. Outsourcers deliver to our branches. They pick up and service our automated bank machines. They deliver cash and pick up our deposits. At times we work with third parties on registering loan documentation. We have a long-standing relationship with a company that does records storage and retention. We are very much a sales and service organization, and instead of spending a lot of time trying to maintain them - because it is important to have easy access to our customers who would like to know something about a transaction - we outsourced that years ago and we consolidated that with a large provider. And you can imagine the amount of records a bank produces. That is quite integral to our operation. It's not a jazzy outsourcing arrangement, but it is quite important to us.

Q: What are some of the key issues involved in maintaining a good relationship?

Tuck Chapman: I think it starts with due diligence on both sides so that any outsourcing service provider understands enough about your operation that they can determine whether or not they can perform all the activities that you would like them to, in a way that you expect. It starts with a lot of due diligence and a fair amount of effort in defining requirements. Basically, you negotiate, and no one is perfect, so there may be some things that the outsourcing provider cannot do at the moment and you need to recognize what service you are buying. A lot of due diligence is in what is important and needs to be done well today, and also where you might want to develop and grow together. So the relationship is based on due diligence, a good contract and good measures. The things that make these arrangements work really well over time are maintaining that focus and the structure around the relationship and also the trust that goes into this relationship.

Q: What is Scotiabank's strategy behind outsourcing?

Tuck Chapman: I would say, number one, is that we are very much a customer-service-focused organization, and a people organization, as well. When we start to look at any possibility in terms of outsourcing, we really look to see what the best thing is to do for our customers and our employees. I mean that quite sincerely. It is a serious topic internally - not just what it will do for us. We might want to access a new technology, or some new processes or ideas for innovation or cost savings - whatever it is, we always start with the basics. How will this affect our customers? How will this affect our employees? Moving forward from there, the overall strategy is really to outsource the things where it makes the most business sense.

Q: What are some specific risks involved in outsourcing?

Tuck Chapman: There are all types of risks. There are risks in the process - that you are not going to do a proper job and take the time to thoroughly do all your homework. You have to do your homework internally. In what kind of condition is the business activity that you are outsourcing? Do you need to do any repairs, or document, or redesign internally? When you look at the supplier, there is a long list -What is its financial stability? Their commitment to you? Their commitment to the business? Do they perform this for other companies? What is their track record? Are they in this for the long haul? The list is very long. Then you find a partner and you believe that you are going into this with both sides being satisfied with the arrangement, and then you go through transition risk, which is a very risky period because you are continuing to operate during a state of high change. Somebody else on the other side is taking on a part of your business that is obviously important to you. There are different types of risks before and after.

Q: What are some things being done to address these risks?

Tuck Chapman: It all starts with good processes. I always say, "It's pay me now or pay me later." If you don't put the effort in putting a good arrangement in place and really doing your homework on it, then you will have to deal with those things later. People - not in Scotia Bank, but elsewhere - think it is OK to go into an outsourcing arrangement and they think it is okay to go in with just a handshake. That is kind of an admirable goal, but it is not a realistic goal. You need to spend a lot of time to go through all the details.

Q: With outsourcing arrangements in different markets, how does Scotiabank balance the regulatory requirements for each market?

Tuck Chapman: That's complicated, but it is not that difficult. We have the Offices of Superintendent for Financial Institutions (OSFI) overseeing all of the bank's operations because we are headquartered in Canada. There are regulatory requirements in each of these jurisdictions. We work very closely with our legal department or legal representatives in those jurisdictions to make sure we understand the regulatory requirements, including privacy laws and other types of laws. We just don't sit here in Canada and think Toronto is the center of the universe. We understand the Canadian laws in great detail, locally.