How do medium-sized banks survive in today's brave new world? The challenges seem Herculean. The big banks are getting bigger, smaller banks are becoming acquisition candidates, and the Internet is changing how consumers interact with their financial institutions.
Outsourcing is one way for banks to cut costs and become more competitive, says Alfred Ricci, of Union Bank of California's sourcing management office. Union Bank is the fourth largest commercial bank in California.
One of the bank's important reasons for outsourcing was "to cut costs," says Ricci. However he says the bank learned "competitiveness will come from getting value from outsourcing." He says outsourcing ensures the bank receives higher quality, better on-time delivery, access to world class skills, fast project start-up, banking industry best practices, and even benchmarking information about similar financial institutions, while allowing it to focus resources on its core business. "All this translates into lower costs and higher quality, which will make the bank more competitive," he notes.
Offshoring became an obvious choice. "Why hire a tier one player that charges $200 an hour to build a system when you can go offshore and staff a highly-skilled team within days at an average of $40 an hour?" Ricci asks rhetorically. "It's just not necessary to pay a high cost for consultants any more," he says. "Offshoring is a wiser way to use investment dollars," adds Ashish Sinha, Executive Vice President of Polaris Software Lab, one of the bank's three suppliers.
The bank felt comfortable taking this strategic approach to offshoring because the industry's early adapters - Citibank and J.P. Morgan Chase - "have proven that outsourcing can cut costs and have numerous other positive results at banks," adds Ricci.
Ricci says the bank wants to do well by its stockholders and customers. A strategic reason for banks to outsource is to achieve a higher stock price by lowering cost structure. "Generally speaking, stock market analysts view outsourcing as positive because cost savings go directly to the bottom line as profits. If market analysts predict higher estimated profits, this would in effect raise the stock price," Ricci explains.
Customers benefit because the bank's cost of funding is lower with a higher stock price. "The bank gets more money for the same amount of stock, which allows us to offer more competitive rates to our customers," the executive adds.
Outsourcing to Get More Than Cost Savings
Competitiveness from outsourcing comes from more than just cutting costs. Ricci says the bank, which has 284 branches along the West Coast and 21 international offices mainly along the Pacific Rim, also needed access to technical skills it didn't have. A crucial factor in the bank's success is the reliability of its 300 plus IT systems. Now that the bank has outsourced, it calls its three service providers, (Cognizant and Tata Consultancy Services are the others), who can hastily convene a highly skilled task force in days to diagnose and resolve a problem. "Help is just a phone call away," he says.
Ricci says he solicits the opinions of his suppliers when studying architecture projects for the bank, which has $42.5 billion in assets. "We can get an educated opinion at a very reasonable cost," he reports. "We have internal IT specialists, but our core business is banking. Our suppliers compliment us because their core business is technology. With our partners, we can gain their technical expertise, while allowing us to focus our resources on our core banking business," he reports.
Outsourcing also allows Union Bank to share the risks of implementing a new IT system. When the bank developed systems itself, it was 100 percent responsible for its success. Now, the bank shares the risks inherent in applications development and maintenance (ADM) with its three suppliers.
The bank also gains access to ADM best practices. "We can piggy-back on their CMM (Capability Maturity Model for Software, an industry-wide process designed to improve the development of software) and their quality assurance standards," the bank executive reports.
Outsourcing increases the risk in one area: data security. Banks and other financial services firms' internal security departments need to work diligently to keep their companies up to speed with federal oversight (e.g. Office of the Comptroller of the Currency) and federal regulations (e.g.Gramm-Leach-Bliley Act).
Selecting a Supplier with Domain Expertise
Ricci says the bank chose its three mid-tier suppliers (Cognizant and Polaris) because "We wanted a strong relationship with our suppliers," says the bank executive. (Sinha says Polaris is India's sixth largest outsourcer.) Ricci felt his bank didn't have enough volume to work with only tier-one Indian providers like Tata..
He's happy with his supplier selection. He says Polaris "has been very appreciative of our business." He says the supplier devoted a large number of senior people to his projects. "We like the hands-on attention," he says.
In addition, Polaris has domain expertise in the financial services space. Like most industries, banking requires specialized knowledge. One of the reasons the bank chose Polaris is its 18-year relationship with Citibank in India; Sinha was a former chief information officer (CIO) for a division of Citibank India. In addition, the bank liked the fact that the supplier has 250 bankers on its payroll. It helps when everyone speaks the same jargon.
Sidebar: Offshore ADM Pilot Projects - Advantage or Risk?
The bank's initial outsourcing trial period ended at the close of 2003. Now the bank is in the thick of its IT outsourcing. After the bank handles the challenges of creating the Sourcing Management Office to handle ADM, it plans to look at the possibility of handling more complicated outsourcing relationships. "Once our outsourcing management and processes are mature, we'll be ready to consider the possibility of managing more strategic issues like BPO, where we can achieve even more savings and value," Ricci says.