Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Capital Markets Best Practice > Outsourcing and the Banks

Capital Markets Best Practice

Outsourcing and the Banks

by Shamus Rae

Executive Summary

The article examines the growth of the outsourcing phenomenon in the financial services sector and looks at the next wave of “value-added” outsourcing, where banks seek to outsource more highly skilled jobs done by higher-paid employees, thus gaining more from wage arbitrage. The emphasis is on:

  • The benefits of taking the long view (strategy) rather than looking for quick piecemeal gains (tactics).

  • The value to be gained from outsourcing more highly paid work.

  • The erosion of the benefits of “simple” process outsourcing due to rising salaries in major outsource markets like India.

  • The impact of consolidation through M&As, when several outsourcing contracts may need to be rationalized.

  • The differences between onshore, near-shore, and offshore outsourcing.

Introduction

The major banks in developed markets have been extensive users of outsourcing and have been at the forefront of pushing the boundaries of outsourcing onshore, near-shore, and offshore (near-shore in this context refers to outsourcing to a country location that has a time differential of not more than three hours from the bank’s main business locations). High-profile examples here include Barclays Bank’s outsourcing arrangement with Accenture, and Citibank’s outsourcing operations, which it sold to the Indian outsourcing giant, Tata Consultancy Services (TCS), in October 2008 in a deal worth US$505 million.

In 2004 Barclays signed a £400 million deal with Accenture to outsource applications development for its UK banking systems. A year earlier, in a £230 million deal, it outsourced its desktop management to IT services firm EDS.1 Citibank’s sale of its outsourcing arm was planned prior to the global downturn, since in the spring of 2007, while the world was still in a boom phase, Citigroup said that it wanted to cut US$10.4 billion off its spending over the next three years. This would be achieved by disposing of its own outsourcing operations and instead moving more of its jobs to outsourcing providers offshore. As part of the deal with Tata, it was agreed that TCS would provide offshore services to Citi, using Citi’s former operation, in a contract reportedly worth US$2.5 billion over nine and a half years.2

Today it would be difficult to find a major or even a mid-range bank that does not have fairly extensive outsourcing at least of its IT function, and generally of some business processes as well.

The Development of the Next Wave of Outsourcing

The development of the next wave of outsourcing centers on the idea of moving up the value chain and outsourcing higher-end, more highly skilled work. Much of the impetus for this came from the big investment banks just prior to the current global banking crash. There was tremendous pressure on banks to increase margins and profitability and to cut costs, and the way to do this was seen to be to move more highly skilled work offshore. There are very substantial salary savings to be made by organizations that can achieve high-value outsourcing to low-wage economies.

The challenges are formidable, but the process is now well underway and it seems inevitable that there will be a greater use of shared service centers—locations that support more than one department or business unit for the same organization. In the late 1990s and until around 2000–02, banks found that they could outsource moderately skilled parts of retail banking offshore and achieve savings of the order of 40–50%, as reported by market analyst organizations such as Gartner and Forrester Research.

Salary pressures in offshore countries like India and the Philippines have reduced the level of savings that can be achieved for moderately skilled outsourcing arrangements. On top of this, for UK banks, the depreciation of the pound has further eroded savings from overseas outsourcing (translating pounds into almost any other currency requires more pounds today than it did two years ago, so those contracts have become more expensive).

Large Savings Lie Ahead in New Wave Outsourcing

However, price pressures simply add to the banks’ incentive to move more highly skilled, and therefore higher-paid, work offshore, since this is the area where really substantial savings can be made. In the case of banks involved in securitization and merger and acquisition (M&A) work—in other words the old-style investment banks, and whatever may come along to replace them, since they have now all switched to become deposit-taking institutions—the high fees and high remuneration structures in those banks could generate savings of up to 65% through offshoring. Although bank remuneration packages have come under pressure due to the economic downturn, the salary differences between more highly skilled functions and clerical functions are still considerable. From the banks’ point of view, another really attractive feature of offshore working environments is that they are free of the bonus culture that permeates the financial services sector in developed economies.

Generating maximum savings, however, is not always the major driver for offshoring. Increasingly, particularly in a world driven by compliance issues, organizations are looking to achieve greater standardization of processes—i.e. having all operations of a certain kind run from a shared services center, or “center of excellence.” This term is used for a specialized central function with a developed ability to execute specific business processes, such as accounts payable, to a high level. By using such a center to service many business units, the company gains efficiencies and economies of scale. A center of excellence enables standardized procedures to be shared throughout a global organization. At KPMG we are talking to global chief finance officers (CFOs) about outsourcing to Asia precisely in order to drive greater compliance and control. That such an arrangement does also produce cost savings is seen by some organizations as a secondary rather than as the primary benefit.

Back to Table of contents

Further reading

Report:

Websites:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share