The ongoing global recession and financial crisis has stressed out all organizations within financial services — from vendors to banks, as well as consumer and commercial customers. Some say these market conditions shifted the role of outsourcing from one of cost optimization to a necessity of survival. As we look at the current condition of the financial services industry and into the future, what role with the outsourcing of processes, systems and intellectual property have? How are the decision factors around the build, buy or rent decisions changing?
Historically, outsourcing a process has created business arbitrages of time, quality and cost. Outsourcing a business activity saves money as it leverages a vendor's economies of scale and enables organizations to implement solutions much more quickly, while sacrificing some customization or development bragging rights for teams that would handle the projects internally. But one assumption holds true most of the time: a vendor that specializes in a focused application will provide a higher level of quality than if the organization was to attempt to develop the project internally, if for no other reason than the vendor has implemented many cycles and is aware of all the attendant bugs and process pitfalls. The bottom line is because of specialization, an outsourcing vendor's solution should bring economic benefit to the table for the organization.
Following this theory, renting quality should be cheaper than trying to build it yourself. Certainly it can be stated that over the years outsourced hardware solutions such as data centers and software products have brought advantages of time, quality and cost to banks that otherwise might have been tempted to conduct internal development.
When we look at business processing, though, these advantages might be a bit more obscure as business processes often require greater levels of up-front definition and organizational interaction to be create business effectiveness. This level of required interaction erodes the time and cost components of the arbitrage while hopefully maintaining a high level of outcome quality.
Moving forward through the next few years, the condition of the global financial services system is likely to remain in fair-to-stable condition — not critical, but not in good condition either. The fact that most institutions have slashed cost structures across the board ensures increased levels of outsourcing going into the future. Unless there is a complete collapse of the global financial services system (not likely), customer activities will continue and the pressure from investors and owners for economic returns produces a business physics problem of sorts. Improvements in business execution will be demanded but increasingly organizations will not have the internal teams to deliver, thus the flow of projects will increasingly fall to vendors providing outsourcing services.
The risk implications associated with outsourcing have changed over the past couple of years and need to be fully assessed and monitored by organizations with an outsourcing strategy. Vendors should also be well aware of risks that financial institutions face with outsourcing and integrate the recognition and management of these risks into their solution discussions and project execution.
By far the two most notable types of risk with outsourcing are operational risk and sovereign risk. The wide scope of operational risk includes legal, regulatory, compliance and technology risks. Does the solution meet governance and compliance regulations? Is the technology implementation stable and likely to remain compatible with other applications? From a sovereign risk perspective what programming or support activities are being executed on offshore? What is the risk profile of that local country hosting these activities?
FinTech vendors through the global financial crisis and longer term economic cycle will be suffering from their own financial woes but also must recognize an opportunity that comes around very rarely. While they are exposed to intense pressure for returns and performance, while they are strapped for resources to innovate and develop new applications, they also have a rare market opportunity where outsourcing is a preferred option for many financial services companies.
While total demand should be increasing, it should also be increasing horizontally across solutions areas as more and more areas within financial services are beset with the improvement versus cost problem.
Credit risk, market risk and enterprise risk are all areas that are ripe for vendors to gain ground. As government regulation and oversight becomes tighter, regulators will, if not require, strongly suggest that analytics around predicting defaults be developed or validated by external third parties. Outsourcers' role in protecting financial services organizations against market risk factors will also grow over the next few years. Finally, FinTech vendors with solutions that enable organizations to quantify risks across the enterprise and match those to stated objectives will find rapid growth in the coming years.
Modest outsourcing growth is expected through the remainder of 2009 and into the first half of 2010; but long-term, permanent changes to cost structures within banks, combined with an economic recovery, could boost the growth prognosis from modest to strong into 2011.
