Banks in advanced markets (North America, Europe and Japan) or in emerging markets (such as India, Malaysia, South America) face essentially the same business dilemma today - increased competition. The nature of the competition differs, but the fundamental issue is the same. So is the way the banks are reacting to this pressure - by investing in technology enablers as well as undertaking cost-reduction initiatives. In opposite directions on the spending spectrum, these measures obviously present a dilemma that's a tough nut to crack...without outsourcing.
The focus on reducing operating costs is embedded in another trend seen in outsourcing within the financial institutions industry worldwide during 2002. As Christine Carr, account executive at Getronics, notes, banks are being more selective in their choice of outsourcing providers. "Because of an increased focus on risk analysis," she explains, "they want to choose providers that obviously have some financial stability, have done this for a long time and are going to be around in the industry for a long time.
It's resulting in a trend of buyers choosing larger providers that "can give them rock-bottom prices and yet stay in business," adds Graham Stuart, Getronics' vice president of banking services.
In large part, this focus on costs is driven by a weak economy in the U.S. and in other nations; but Carr says buyers also have become increasingly concerned with shareholder value - and that, after all, means increasing revenues or decreasing costs. Banks are decreasing costs by increasing outsourcing in areas that are more utility-based (maintenance, help desk, etc.). But a change in 2002 has been to outsource these functions on a piecemeal basis, rather than as part of a "total IT" deal. High-level, "keys to the kingdom" things are being outsourced too, comments Stuart, "but the pressure on costs is so great at the moment that the gloves are coming off."
The competition for market share of consumer spend manifests itself among the global Goliaths' cost-cutting measures in two primary trends:
- Outsourcing the maintenance and support of mature automated systems that can no longer be supported cost-effectively in house; and
- Moving banking back-office business processes offshore, where labor is less costly. R. Ravisankar, CEO, International Operations and Technology for i-flex solutions limited, notes this has been a motivating factor for a significant increase in business in India during the past six months.
Goliaths and Davids Vying for the Same Customers
The field of rivals in the financial institution arena now includes a number of emerging players as competition for established institutions and traditional business models. "In the U.S. and other mature markets, you have new players, like LendingTree.com, encroaching into traditional space with somewhat untraditional models and changing the dynamics of competition and pricing in those markets," explains Ravisankar.
Similarly, in Japan, Shinsei Bank, as well as a handful of Internet banks, are leveraging new technology to present a more compelling value proposition than their gigantic competitors can effectively muster. Even in India and other nations that "still tend to be technologically backward for the most part," Ravisankar says "private-sector banks are starting from scratch with dramatic technology. They are coming up with a very credible challenge to some of the larger, established, banks with vast infrastructure (and, therefore, higher operating costs and greater inefficiencies)."
Because the emerging "little guys" are outsourcing their technology needs and many business processes to experts that have enormous resources to leverage, they stand shoulder-to-shoulder, or even taller, than some established gigantic banks - and have lower operating costs. They also have a built-in group of customers among Generation X consumers more accepting of online services and emerging technology.
Understanding the Customer
Business intelligence and analytical applications now are hot areas for increased investment in technology among banks, and outsourcing providers are positioning themselves with specific offerings in this area. Banks are using technology to better understand their customers' needs and consumer behavior so they can offer personalized services and products to each customer.
They're also outsourcing both technology and business processes to ensure the customer experience and level of service is consistent across all channels of interaction (PDA, telephone, Internet, branch bank, ATM, etc.). Historically, consumers have faced inconsistent information from channel to channel; and some services were accessible only from certain channels.
"Obviously, banks and financial institutions want to provide all of those channels to their customers," says Carr, "but there is less focus on pushing self-service and Internet-based types of banking as the primary channel. Their main drive now is making sure they retain customers; so the banks need to be all things to all people. That raises their operating costs."
She says this motivation is also at the base of a trend toward "outsourcing providers joining forces to provide services, leading to different ways to provide what would be thought of a traditional service." The industry has seen a huge movement in 2002 of providers doing deals together for a particular client's needs. In many cases, the result is ultimately lower cost and increased efficiency.
Also driving this trend, Carr believes, is an increase in specialization among providers. "As customers demand more and more, you have to pull in all the different specialists to be able to provide that one service today that, years ago, one company provided," says Carr.
Referring to projections of growth in outsourcing in this arena, Stuart says the center of world banking is still the U.S. "Things tend to have a ripple effect though, and the rest of the global banking scene is about six to eight months behind and very much in tune with what's going on in the U.S." He believes international bankers look to the U.S. as a proving ground, especially since so many large American banks have foreign operations. "The first people ahead of the rest of the pack would be the British Banks," he adds.
Ravisankar's bird's eye view of the future of outsourcing in the global banking arena finds most of Europe still in the pioneering stage of outsourcing and Japan in the exploratory stages. Ravisankar says, "Clearly, we are now seeing what I believe is the second wave of outsourcing - where all the followers are getting into the game." He notes a number of significant outsourcing arrangements for banking software development and IT maintenance outsourcing contracts turning to India during the last few months and expects this trend to accelerate over the next two years.
With the exception of the mature Australia-New Zealand market, John Bligh, general manager for Financial Services Sector, IBM Global Services Asia Pacific, describes the markets in this region as being entirely different from each other.
The next area for explosion in outsourcing, he says, is the ASEAN group of nations (India, Singapore, Thailand, Philippines, Malaysia, Indonesia). Deregulation, according to Bligh, is a driving force in ASEAN, but the primary motivator for outsourcing is the need to change legacy applications to new-generation applications.
Outsourcing is attractive in the region because "capital is a huge issue in ASEAN," says Bligh. "By outsourcing, they can move away from that capital-intensive requirement into a more predictable cost environment." He predicts that, not just ITO, but "BPO will really be taking off in some of these countries."
The November 2002 signing of a landmark outsourcing arrangement between Thai Farmers Bank (TFB) and IBM (10 billion Baht, US$230 million) demonstrates significant movement in this arena. TFB is Thailand's third-largest commercial bank in terms of assets, loans and deposits and has branches in major Asian, U.S. and European cities.
IBM also was awarded IT services at DBS Bank (the largest bank in Singapore and fourth largest in Hong Kong) in November. It's estimated that this agreement (S$1.2 billion, US$679 million) will result in a cost savings of about 20 percent for the bank over 10 years.
A number of banks in Korea (which is plagued with issues revolving around trade unions) also are now advancing outsourcing discussions with IBM.
The market in China (which includes Hong Kong, Taiwan and the People's Republic of China) is still in its "very, very early days," Bligh believes. "They are not quite ready for outsourcing yet, but they are certainly ready for new applications that speak to markets; and that is most likely going to create the outsourcing opportunity," he says. "This market will predominantly be driven by speed. With the entry of China to the World Trade Organization, outsourcing can help them quickly get their banks where they need to be. Also, to this day, there is no transparency in their banking system; and that will drive massive change."
New security and privacy regulations in the U.S, risk management standards required in the upcoming Basel II accord in Europe, and new accounting regulations in Japan are opening up new markets for outsourcing. But, while changes in regulatory requirements bring major challenges to existing IT infrastructure, they are not the real business drivers for the increase in outsourcing, says Getronics' VP, Stuart. "Those still tend to be the motherhood and apple pie things - more traditional, such as the need to drive costs out of the business, reduce the number of suppliers and make processes more efficient."
Financial Institutions Outsourcing Trends for 2003
- With an increased focus on risk analysis, banks are being more selective in their choice of outsourcing providers. They seek providers that have financial stability, have done this for a long time and are going to be around in the industry for a long time. Driven by a focus on cost reduction, buyers are choosing larger providers that can give them rock-bottom prices and yet stay in business.
- Business intelligence and analytical applications now are hot areas for increased investment in technology among banks, and outsourcing providers are positioning themselves with specific offerings in this area.
- With the dual trends of providers becoming more specialized and buyers demanding more and more value in outsourcing arrangements, many providers are joining forces to create specialized offerings and delivery of services that meet a particular client's needs.