Sourcing Strategies

Banks face myriad sourcing options, from build versus buy to in-sourcing and outsourcing. To select the right strategy, banks must determine which processes or services offer the most opportunity for competitive advantage or cost savings.

-Michael Blum, Lead Banking Partner, Business Performance Services, IBM (Armonk, N.Y.)

-Mark Nelson, EVP, IndyMac Global Resources (Pasadena, Calif.)

-Bill Bradway, Group VP, Banking, Financial Insights (Framingham, Mass.)

-P. Chintamaneni, Dir., Business Development, Capital Markets Manager, Cognizant (Teaneck, N.J.)

Q. How should banks choose sourcing options, and what are the biggest challenges to executing those sourcing strategies?

Mark Nelson, IndyMac Global Resources: Whether you build, buy or outsource, the key is optimizing the return and making sure the quality doesn't get compromised by utilizing an external party to do the work. The sourcing strategies are options to pursue on the way to optimizing ROI and performance, and on the way to developing your best cost-benefit approach. Those are the end goals. The quality piece is key; you can't go backwards in quality or customer service levels.

Bill Bradway, Financial Insights: It helps to think about the bank size or scale and product mix. For instance, in a traditional commercial banking model with both consumer and commercial business service delivery, smaller banks tend to think of their primary supplier as their core banking vendor. The services the supplier provides can be as comprehensive as the bank wants. The other sourcing option tends to be thought of as in-house. Banks tend to stay with one or the other and will switch only when there's been a management change or if the organization grows significantly. On the other hand, the largest banks might decide to hire a specialist to come in on a temporary basis for a specific project after doing an analysis of their strategic capabilities in IT.

Michael Blum, IBM: The biggest challenge bankers still face is deciding on and defining what processes or services they should source in-house versus outside. The other challenge is uncoupling. So many older systems are so highly integrated that it is difficult to uncouple them. There is very little business-value-type analysis being done around build versus buy. The only real build cost is becoming the cost of building interfaces. If a solution provides a client with the functionality it needs, then there is no need to build. But the solution would need to be interfaced with existing systems. So it is important to apply other analyses such as the flexibility, scalability and resilience level of the solution. Right now, bankers are doing basically cost-benefit analysis. They need to use different metrics, such as return on investment.

Prasad Chintamaneni, Cognizant: Cost management, client retention and ROI are major challenges for banks. The most competitive financial institutions have developed diversified business models while changing their sourcing strategies. Most banks are focused on business performance, not build or buy exclusively, but on the optimum solution that enhances customer retention and growth initiatives. The challenge for banks is to ensure that they have close relationships with a tightly integrated group of service providers that have the right expertise to deliver business value.

Q. When should banks outsource?

Nelson, IndyMac Global Resources: For us, the inside piece - what we tend to retain internally - includes the overall strategic leadership, architecture and design, and developing the components that are going to be key to our competitive advantage or have high intellectual property content. We started our outsourcing efforts by utilizing offshore resources to supplement our development and testing teams, some on a staff-augmentation basis and really just an extension of our organization. As we gained more comfort with our vendor and began to see the quality of resources it has, we've begun to expand into complex roles such as project management, business analysis and even in some architecture and design areas. For us, speed to market is one of the things that really is a driver in escalating our IT offshoring effort. Having the ability to access talented folks on a relatively fast basis has enabled us to push programs forward more quickly than if we were to do it all internally.

Bradway, Financial Insights: Speed to market is key, and regulatory and compliance concerns are very much ongoing. The decision to outsource tends to be a blend of two primary drivers. One is what I'll call the "penalty-box avoidance syndrome" - the C-level executives don't want to be in the headlines as being deficient. The other, more long-term-oriented driver is, "Maybe I should be reexamining my business processes and taking steps to make sure that they have the right level of fiduciary responsibility." So the question to be addressed is, how do I take care of, on a preventive basis, improving my business processes?

Blum, IBM: To make the correct business decision about when to outsource, you need to go through a componentization exercise to break your business down into functional components. By creating a new model based on functional components, bankers can put the components in a portfolio setting and value them relative to the strategy of the bank. The result of the portfolio-type analysis will determine which way a bank needs to go. For example, if you see a component that can create market advantage (account opening, perhaps) but does not do so today, it more than likely will need to be replaced with packaged solutions. If, on the other hand, you have components that will not gain you any market advantage but will continue to sustain operations in a cost-effective manner, then you may want to consider improving on those by making a minimum investment in custom development. If you see components that take away from your market advantage (high cost, not core to the business) then you should be thinking of business process transformation services.

Chintamaneni, Cognizant: Outsourcing is the right decision when you are able to derive at least similar or better-quality product in the same or shorter time frame but at a much lower cost. The decision to build internally is most often driven by proprietary concerns where competitive advantage to the firm is paramount. However, a co-sourced model is often the best approach, when a services provider - especially a hybrid on-site/offshore firm - can demonstrate significant domain expertise, process maturity and architecture skills that complement the bank's own resources and, more importantly, accelerate time to market.

Q. How has the request-for-proposal (RFP) process changed? How should banks handle due diligence when evaluating vendor solutions?

Blum, IBM: Unfortunately for bankers, the RFP process has become a pure commodity horse race. Rather than really seeing the true business value that a top-tier service provider can bring to their business, most banks bring in an intermediary whose only role is to reduce price.

Bradway, Financial Insights: The RFP process is starting to create more component-based or template-oriented structures, or a la carte if you want to order off a menu. So the bank begins to think more clearly about the range of requirements it has, and then it will incorporate proposal components to address its requirements, and that allows a more interactive dialog with the responding suppliers.

Q. What are the pros and cons of "one-stop shopping" - that is, buying a comprehensive solutions suite from a single supplier?

Chintamaneni, Cognizant: The primary advantage of one-stop shopping is that the financial institution has fewer touch points and lower overhead issues. However, most banks have co-sourcing relationships with four or five "best-of-breed" solutions providers. This sourcing strategy enables banks to ensure that they are receiving the most value from each deal, the right skill set and resource-planning flexibility.

Nelson, IndyMac Global Resources: The advantage to using one shop is that you have lower overhead; there are some efficiencies from an execution standpoint to going with a single vendor. You get faster speed of execution in that you're not trying to decide to which vendor to give the project. On the other hand, multiple vendors allow you to spread relationship risk; if something happens to one or the other vendor, you're not losing the whole thing.

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