At last, I get the chance to present the Ernst & Young (Switzerland) study “Banking - The future of sourcing” published last year. This review was triggered by a presentation of the study in my course at HEC Lausanne on May 28, 2010, by Yan Borboën, Senior Manager.
MAIN FINDINGS
(for indications about the population surveyed and data collection approach, see the end of this post)
Goals of outsourcing
To no surprise, the study identifies “cost reduction as the main driver for outsourcing” [p. 6] Nevertheless, other goals of outsourcing have been identified by the participants such as [p. 8]:
- specialization,
- reducing complexity and risk,
- operational goals in the area of improving process quality and performance.
Outsourcing risks
A fear often mentioned, also in other contexts, is to lose control. In this study, ‘losing control’ relates to “unwanted dependencies on third parties” that are reinforced by the “lack of exit and fallback options”. [p. 6]
More specifically, outsourcing risks perceived as most important differ among the types of banks surveyed:
- For the retail banks, the main risks are ‘reduced customer service’, ‘insufficient business case’ and ‘interface management’.
- For the large private banks, ‘interface management’ is also part of the key risks, but jointly with ‘no suitable partners’ and ‘bank secrecy and data security’.
- Finally, small to medium-sized private banks join the retail banks in considering ‘reduced customer service’ as an important risk and agree with the large private banks on the importance of ‘bank secrecy and data security’.
Critical success factors
Based on their consulting experience, the authors mention several decisive factors for successful outsourcing initiatives:
- “top management support is key to successful implementation of different sourcing solutions.” [p. 8]
- “preparation of appropriate business cases and their communication to senior management remain important challenges” [p. 8]
- “Prepare a sourcing strategy that addresses short-term needs without jeopardizing long-term goals.”
- “Define a small but consistent set of metrics for monitoring existing and justifying planned sourcing solutions and aligning incentives.”
Preferences re. service providers
The study adequately addresses some structural issues of the Swiss bank outsourcing market, mainly due to its size and to legal restrictions. In the past, some of these aspects had direct implications on the selection of outsourcing service providers, especially preventing market entry of some vendors with US origin. - Specific study results include:
Limited market: “Many of the respondents complained about the perceived oligopoly structure of the restricted service provider market in Switzerland.” [p. 14]
Independence: “For ITO, the service provider ownership is considered less critical, with independent service providers being the preferred solution. For BPO, bank-owned service providers are suggested mainly to ensure access to specialist knowledge.” [p. 14]
In addition, “mandatory Swiss (respectively Liechtenstein) location of BPO and ITO service providers due to jurisdiction concerns.” [p. 14]
“Bank expressed the need for a better regulated service provider market offering in Switzerland.” [p. 14]
Future developments and issues - ITO
“The majority of banks surveyed currently use ITO to varying degrees and plan to extend the scope in the future, in particular in the area of IT operations.” [p. 12]
“Some banks are evaluating increased offshoring of selected IT related services (e.g., development).” [p. 10]
Issues with the current orientation of Swiss bank ITO include [p. 12]:
- “Since ITO models are still highly customized, the know-how for one-time and ongoing parameterization requires considerable efforts by the banks and the service providers.”
- “Reducing the number of different IT platform providers remains an important objective.”
- “The different systems needed to support a bank’s operations require internal know-how, discipline and effort to keep up with costly and complex platform releases developed by the vendors.”
Future developments - BPO
As a general trend, “most respondents plan to (further) outsource and/or centralize business processes in several areas of the banking value chain.” The study confirms what has been identified in earlier market surveys: “Execution and settlement is currently the major BPO area and is considered to have the highest outsourcing potential in the future, together with payments and product development.” [p. 10]
A possible new area is risk management with “partial … outsourcing focusing on methodology improvement and access to specialized know-how.” [p. 10]
Clarification required
The following findings of the study are intriguing, but are not fully clear to me (I hope to get a chance to clarify them with the authors of the study):
- lack of standards [p. 6]
- “Ensure transparent service offering addressing the areas of controversial expectations between banks and service providers. [p. 8]
- more precise regulations [p. 6], “more specific benchmarks and guidance … are required” [p. 14]
- the role of ‘adapted incentive solutions’ [p. 8]
- “preference for larger regional/national BPO infrastructure offerings, including the related IT” [p. 10]
- the ‘barriers’ for implementing centralized/outsourced business processes [p. 10]
- lowered financial attractiveness for the PROVIDERS of current core banking outsourcing leading to complex systems [p. 12]
Population surveyed and data collection approach
The survey included 27 banks/service providers located in Switzerland. The participating banks were divided into 3 groups: large private banks, small and mediumsized private banks, and large retail banks. Were also included Swiss based service providers for banks offering business process outsourcing (BPO) and information technology outsourcing (ITO) for banks.
Data was collected using structured interviews with executives from the before mentioned participants.
Additional information
The following E&Y Partners were the sponsors of this study and should be able to provide additional information about it:
bernhard.boettinger(at)ch.ey.com
juerg.brun(at)ch.ey.com
LINK
The study can be downloaded here.
