Outsourcing on the rise in financial sector

Cost pressures and the need for flexibility drive rapid increase in IT and business process outsourcing

IT outsourcing and business process outsourcing (BPO) are the fastest-growing service lines in the financial services sector, according to research firm Gartner. In fact, at least seven outsourcing 'megadeals', worth an estimated aggregate of more than US$20 billion, were signed in the banking and credit industry in 2002.

"An important element in many of the megadeals is a focus on IT infrastructure and operations. Many of the mega-outsourcing contracts involve substantial consolidation and centralization of IT assets on a global basis," says Susan Cournoyer, principal analyst for Gartner's IT Services group. "Yet the outsourcing megadeals also represent a look ahead. Outsourcing providers promise to meet IT and business needs through new technology and new business models, particularly the on-demand model that appears to promise relief from fixed costs."

One recent example of IT outsourcing among Asian financial institutions illustrates some of the business drivers that generally influence an organisation's decision to outsource.

In May, IBM announced that Thailand's National Finance Public Company (NFS) had outsourced its computer centres, network system and IT operations to IBM in a five-year deal. NFS is a long-established finance and securities organization with subsidiaries in credit, finance, asset management, warehousing, property development and management, as well as securities. In 2002 the organisation secured a banking license from Bank of Thailand.

The move into retail banking was one of the main drivers for finding an outsourcing partner, as the company wanted to enable its various subsidiaries to expand their respective branch operations throughout Thailand and offer new and better financial services to customers.

"The partnership will enable us to reduce IT infrastructure expenses and investment risk, and allow us the flexibility and capability to grow our business," says Mr. Suphadej, president and CEO of National Finance.

Besides straightforward IT operations outsourcing, BPO has emerged as one of the fastest growing service opportunities in the financial services market.

According to Gartner, worldwide financial services business process outsourcing (BPO) revenue totalled $41.3 billion in 2002, a 9.3 percent increase from 2001 revenue of $37.8 billion.

BPO is not a new service area for financial services -- check-processing services have been around for decades, and payment processing showed steady robust growth through the 1990s. Gartner analysts say that the situation is different now because BPO is rapidly expanding into areas that were off limits to outsourcing just a few years ago. Increasing acceptance is also driving expansion in the number and scope of deals, which, in turn, increases the market size.

The outsourcing of transaction processing is rising particularly in the areas of securities and foreign exchange. SunGard eProcess Intelligence conducted research in April among the top 500 banks and found that 46 per cent of transactions processed are already outsourced. Over the next two years, the research indicates that growth in outsourcing will remain strong, rising to almost 68 per cent of transactions processed by early 2005

Specialist firms such as ADP and ADP Wilco and large banks such as State Street and Bank of New York have benefited from this rise in business process outsourcing and have carved niches in particular areas. These companies manage certain business processes for a large number of small and medium-sized financial institutions.

When it comes to choosing a service provider to outsource a certain process to, for financial institutions and other industries demonstrating strong technical skills and application expertise are the top priorities. However, financial services providers differ from other industry IT buyers when it comes to considering cost and industry expertise.

"Reflecting the industry's price sensitivity, cost ranks higher in the IT buyer's decision making in financial services than in other industries," says Cournoyer. "Industry knowledge is also more important to financial services IT buyers, which likely accounts for the trend toward more in-depth verticalization among top-ranked providers."

Rebecca Scholl, senior analyst for Gartner's IT Services program adds that keeping the discussion about costs on the table when negotiating a BPO deal benefits both buyers and sellers. "BPO providers are right to justify their costs by citing investments in business process improvements. Nevertheless, over time, buyers should expect innovation to keep costs in line," she says.

Scholl recommends that organisations looking to outsource first systematically analyse their internal business processes, and associated external service provider offerings, to best determine possible improvements to the bottom line. "As this understanding is gained, enterprises can determine what processes can likely be outsourced, and can then investigate what is and is not readily available from external services providers," she adds.

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