Financial Sector Outsourcing Is Poised for Growth but Political Hurdles Remain

Financial Sector Outsourcing Is Poised for Growth but Political Hurdles Remain

Te financial sector has long been a proponent of outsourcing. Particularly for technology overhauls, banks and others in the industry have been relying on the big firms in India and the United States for well over a decade at least.

But the pressure is on today like never before. Most banks are feverishly trying to undergo a digital transformation, and they are attempting to do so at a time when free capital isn’t abundant. So, according to recent report from research firm the Everest Group, they need to find savings elsewhere in order to outlay the massive investments needed to recreate operations for a tech-dominated future.

“Firms will need to invest in next-generation technologies while holding IT budgets steady,” says the Everest Group in its 2016 IT Outsourcing in Capital Markets study. “Saving money from run-the-business initiatives to fund change initiatives remains the only plausible way to continue technological advancement.”

This isn’t new. Citibank contracted with Tata Consultancy Services on a $2.5 billion USD deal in 2008 and rivals are already positioning to step in when that deal ends next year. IBM has bagged multiple IT-focused mega-deals with financial firms, including UniCredit, La Caixa, and ABN AMRO. In 2015, Deutsche Bank signed a multi-billion-dollar deal with HP to modernize its IT infrastructure.

“You’ve got a lot more outsourcing happening from people that were already buyers. You also see a healthy inclusion from first-time buyers, and it’s no longer just the traditional pieces.” – Anupam Jain of Everest Group

The trend is worldwide. In the United Kingdom, the Financial Times highlighted last year that RBS, HSBC, and Lloyd’s Banking Group all moved jobs to various locations in India, China, and Poland. Ireland’s Allied Irish Banks (AIB) signed a $150 million USD deal with Wipro in 2015. DNB Bank of Norway, that same year, and Commerzbank of Germany, in 2016, partnered with Infosys. And Sydney-based Insurance Australia Group last year began investing big in streamlining technology and outsourcing in hopes of finding cost savings of $250 million per year by the end of 2019.

But in addition to these massive deals, smaller contracts are now being signed. Less-famous capital markets firms are dipping their toes in the water for everything from customer service to systems management to higher-level services. It isn’t just the giant players signing structural overhaul contracts anymore. More are seeking providers to take on their back-office work and business process outsourcing (BPO) needs.

Anupam Jain, practice director at Everest Group sees this as being further driven by the difficulty that investment banks, asset managers, and large brokerage house have been having in the market. With low interest rates, the investment returns just aren’t there like they have been in the past. So they have no choice but to find savings elsewhere to help the bottom line. “Since the time man knew about money, this is the lowest interest rate that has ever been there, and therefore it’s now being incredibly difficult to make investment income,” said Jain.

So far, he says the larger buyers remain ahead in terms of moving towards outsourcing, but the smaller players are beginning to follow. Those that dabbled in outsourcing a few years ago are coming back for more, and market factors are pushing others to give it a try. “You’ve got a lot more outsourcing happening from people that were already buyers,” said Jain. “You also see a healthy inclusion from first-time buyers, and it’s no longer just the traditional pieces.”

BPO financial sector financial and accounting outsourcing FAO

Anupam Jain, practice director of Everest Group, says that some financial firms are even outsourcing functions such as regulatory compliance and risk management.

Financial Firms Embrace New Forms of Outsourcing

Customer service, IT, other non-core services are not the only work being outsourced by the financial sector these days. As banks fight against one another for profit margins and market share, the more aggressive are finding that areas once deemed in-house responsibilities can be sent to capable third parties. “Some of them are even dabbling into regulatory compliances or early stages of risk management,” said Jain.

Regulatory compliance is ripe for more offshoring, and a 2016 Research and Markets report forecasted that the global regulatory affairs outsourcing market will eclipse $5 billion USD by 2022. That represents massive growth from the $1.9 billion USD billed in 2014, per the study.

Jain explains the surge in interest by noting the typical life cycle of compliance efforts. First, after the government puts new rules in place, companies must adapt. There is a learning curve in the first year, during which the companies must pay a lot of lawyers a lot of money to interpret the regulations and ensure the firm can meet new filing demands. At the same time executive teams must determine how to obtain the disparate data needed for the task and craft a process to cross all the Ts and dot the Is.

In year two, this is streamlined. With the early mistakes and inefficiencies ironed out, everything can be improved and some of the initial costs can be reduced as the bulk of the process is handled by in-house personnel.

“The bankers now have a head-start,” said Jain. “They know what it is that they need, what data needs to be used. So they start setting up their internal centers of excellence, and from a capital market standpoint, that actually starts moving into the middle office. The next year is when it starts moving to the back office, and therefore after that, that’s when it starts moving towards the outsourcing side…You arrive at that place where the banks are ready to outsource.”

The Protectionism Risk of President Trump

The protectionist rhetoric emerging from the White House is being viewed as a troubling sign by some that rely on overseas providers. Firms — including General Motors, Toyota, and Rexnod — have found themselves mentioned by name in tweets from President Donald Trump. Thus far, the president’s scorn has targeted manufacturing operations as opposed to service providers, however.

Citibank, which last year announced a planned investment into its Banamex holdings in Mexico, is one financial firm that still sees great potential below the border. “The market’s view of Mexico perhaps is not quite as constructive right now as our view of Mexico,” said John Gerspach, Citigroup CFO, in a December conference call.

Still, the possibility remains that any company signing a large deal to offshore work could wind up in Trump’s crosshairs. Dublin-based outsourcing giant Accenture appears to be trying to head off some of that risk with its recently announced move to create 15,000 new “highly skilled” jobs in the United States, “as IT services firms brace for a more protectionist U.S. technology visa program under President Donald Trump,” according to Reuters.

Accenture appears to be trying to head off risk with its recently announced move to create 15,000 new “highly skilled” jobs in the United States, “as IT services firms brace for a more protectionist U.S. technology visa program under President Donald Trump.”

Others may be less concerned, with various sources in the Philippines saying that it is business as usual in the popular sourcing destination. Office space is even on the rise. “Demand from BPO companies is expected to push take-up of new supply to as much as 750,000 square meters, topping last year’s record of 630,000 square meters,” wrote the Manila-based Business World Online. Another developer in the country, Jericho Go of Megaworld, told the local ABS-CBN News that “we don’t sense hesitation” from companies looking to source work.

Whether the BPO world needs to worry about angering the new president remains to be seen, but another policy shift can be considered very encouraging. Trump has broken with former President Barack Obama on the area of regulation, vowing that he will try to force agencies to repeal two regulations for every new rule they want to put on the books.

The president again this week referred to the “job-killing” regulations that are hurting businesses and said that he is putting a “deregulation” task force in federal departments to identify and get rid of provisions that are deemed unnecessary. Based on his speeches, the two target areas to trim appear to be Environmental Protection Agency (EPA) regulations and those imposed on the financial industry by the Dodd-Frank Act.

Given the practical difficulty of cutting red tape, on top of the fact that the Congress has bigger fish to fry in terms of reforming healthcare and implementing Trump’s promised tax code overhaul, it may be some time before these banking regulations are actually repealed. But many in the industry are encouraged already. The message has already been sent: Regulatory enforcement against banks will be lighter over the coming four years than it has been for the past eight. This is one factor sending the stock market soaring in recent months and, if compliance soon becomes less of a burden, financial firms will have more funds to invest in the efficiency that BPO offers.

Providers Increase Their Capabilities

The other major factor driving more outsourcing from the financial sector is the improvement providers have made. Just a few years ago, few were able to offer high-level services, particularly in terms of compliance. And even certain customer service or back-office tasks were viewed as risky to send to a third party due to concerns about privacy, data breaches, or other downside expenses that could prove costlier than any savings gained.

As much as the increased earnings pressure, the change in mentality has come from outsourcing firms proving their mettle. Deloitte’s 2016 “Global Outsourcing Survey” succinctly summed up the new demands from banks, saying that “value, rather than cost, is the new watchword” and highlighting the progress that third parties have made. “In response to the increasing emphasis on delivering value beyond cost savings, service providers are rapidly evolving into innovation centers with the aim of creating improvement opportunities for their clients,” stated the report.

“Companies are redefining the benefits of outsourcing by asking their service providers to add value in ways beyond cost cutting.” – Deloitte

The survey found that cost savings remain the largest motivating factor for financial firms to outsource. But they are also looking to leverage the expertise that certain firms have developed around mergers and acquisitions, service quality, automation, and the cloud. “Companies are redefining the benefits of outsourcing by asking their service providers to add value in ways beyond cost cutting,” says the Deloitte study.

The question of cyber-risk has also been changing. While almost three-fourths of companies continue to weigh the risk of a data breach or other cyber-risk before they outsource, others are actually now using third parties to enhance their digital security. Only one-quarter of respondents said they would reduce their outsourcing due to such concerns.

Deloitte’s takeaway is clear: Service providers are better than ever and financial firms can benefit from partnerships. “As organizations examine their present service delivery environment, they should find clear opportunities to enhance organizational value by more fully accessing the innovation marketplace through the channel that outsourcing makes possible,” say Deloitte’s analysts.

How Providers Can Win the Trust of Financial Firms

For providers trying to win business from the financial sector, now is the time. More and more are ready to take the plunge or expand their investment. But they aren’t just giving the business away.

Jain says that firms, and destination countries, looking to win more contracts must first and foremost understand the industry they are jumping into. “You really have to know how the capital markets work,” he said.

This means knowing the regulatory environment, asset classes, and proprietary platforms that the client operates in. Offering customer service or benefits-related back-office work to any old company is one thing. But working with investment banks can be a whole other animal. “The number-one ingredient for positioning themselves well for this success recipe is the domain expertise,” said Jain.

For this reason, he suggest that hopeful providers and nearshore destinations strive to carve out a niche. ‘They may be setting themselves up for disaster when they decide that they will go and target all banks with all kinds of solutions,” he said. Instead, he advises providers to excel at one specific service. “Use that as the entry-point in the capital market-BPO space,” said Jain.

To win financial sector business, the final focus area must be technology. Given that many firms are still mainly looking for cost savings, being on the cutting edge of the tech side will given any company a leg up.

“Everything that you are seeing today in the investment banking world, or even the broader banking world for that matter, is moving to the technology side,” said Jain. He added that, “for the larger contracts, we see automation being played out really widely, and we don’t expect that change to really dampen down.”

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