More banks will be outsourcing key business processes to
keep costs down, driven by the impact of the credit crunch and a
continued focus on improving efficiencies. As banks look to deliver
more innovative services, innovation in outsourcing itself is also
taking on greater importance, as Victoria Conroy reports.

Last October, CI reported on how the credit crunch, which at
that time had been in evidence for only a few months, was already
influencing banks to outsource more of their operations in a bid to
keep costs down (see
CI 388
). Outsourcing vendors reported that organisations were
beginning to outsource activities previously performed adequately
in-house in order to make further cost savings.

In the following months, this trend has accelerated considerably,
according to a slew of recent studies which underline the
continuing focus on streamlining operational efficiencies, which
has taken on new urgency in the current economic climate.

A survey of 70 British Bankers’ Association (BBA) members, released
by Management Consultancies Association (MCA) of the UK, found 41
percent of respondents expected to increase outsourcing

“The credit crunch has created something of a wake-up call to the
financial services sector,” says Fiona Czerniawska, a director at
MCA. “Many institutions which have so far ignored the benefits of
outsourcing are being forced to revisit it because of financial
constraints and liquidity problems.”

New urgency in outsourcing

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Meanwhile, another survey from business advisory firm EquaTerra
indicates that banks impacted by the credit crunch are looking to
outsource operations as a way of deferring investment in technology
infrastructure. EquaTerra says tough economic conditions will
contribute to annual spending rises of between 7 and 8 percent in
financial services outsourcing over the next five to seven

More and more organisations are looking at outsourcing at a time
when keeping costs down is more critical than ever. But the nature
of outsourcing itself is undergoing something of a transformation,
both in its implementation and in the benefits it is

Over the last few years, the financial services industry has seen
the maturation of certain markets which has brought about
multi-selective sourcing, consolidation, and the expansion of
business process outsourcing (BPO). One noticeable trend that is
picking up speed is the concept of ‘transformational outsourcing’.
Whereas previously companies selected to outsource a distinct and
single business process, more and more organisations are taking the
opportunity to employ a holistic approach to outsourcing in order
to achieve wider business benefits across the entire

CI recently met with Tata Consultancy Services (TCS), an IT
consulting, solutions and services organisation, and part of Indian
business conglomerate Tata Group. The company offers BPO,
enterprise systems installation, offshore software development and
systems integration services. TCS also provides product and
industrial process engineering services as well as strategic
consulting and project management services across a range of
industry sectors including financial services, retail, health care
and manufacturing.

TCS has set up an enviable global network delivery model of 90
delivery centres in 18 countries, in tandem with a broad portfolio
of software solutions and frameworks that have been refined in its
proprietary ‘innovation labs’ and ‘co-innovation network’.

This network is comprised of several stakeholders such as research
institutions, venture capitalists, industry bodies and alliance
partners, and start-up entrepreneurs. TCS’s model is based on
having a global, interconnected workforce, consistent project
management and processes, and a multi-tiered infrastructure
employing state-of-the-art technology. Its financial services
clients include the likes of ABN AMRO, Bank of America, Citi and
Deutsche Bank.

Roger Minty, TCS associate director of banking and financial
services, and Keith Sharp, marketing director for the UK, told CI
that innovation in outsourcing is something that TCS takes very

“Our view of innovation is that it has to be collaborative
innovation,” Sharp said. “Alongside our global delivery network, we
have also got a parallel network of co-innovation and collaborative
innovation. The thinking behind that is to set up the right
innovative structure – the innovation we are looking for tends to
be customised to our customers’ actual needs on a collaborative

In terms of the most common card-related functions to be
outsourced, Minty says that end-to-end management of the IT element
of card processing is one opportunity.

“We manage the end-to-end IT processing of a very large cards
processor and we’re talking to other organisations about the same
sort of functions,” he added.

“Wrapping other parts of the BPO around it, there are certain
things that could potentially be outsourced. The acquiring side is
a possibility. We are also working with organisations in the retail
sector where we’re running the BPO for the acquiring side of
loyalty cards. There are capabilities that are available, and we
are capable of providing complete end-to-end card processing

Main reasons for outsourcing

Cost reduction remains the primary reason for outsourcing, and
refers not just to the reduction of operating costs, which
constitutes a major factor in outsourcing decisions, but also lower
labour costs.

As an example, this is evident in the number of financial services
organisations that have offshored customer service functions and so
on to countries such as India. And as SEPA has demonstrated, banks
that delayed replacing legacy systems are now paying a heavier
price than perhaps they would have done earlier.

Minty told CI: “In the discussions we are having with some of the
big western banks, they have had their core banking solutions and
their main applications probably for the last 20-27 years. They
have been continually tweaking them to meet demand in the market
and they have got to the point now where they are really getting to
the end of their life spans. People now need to replace all that
and basically refresh everything and future-proof them for the next
20 years.

“I have seen organisations where they have got thousands of
enhancements on the list to be done, but they can’t even start to
look at them, because they have to do business as usual and contend
with other continuity issues, like daily maintenance and support
issues. That is costing them a lot of money at the end of the

“So rather than being able to invest all that money in
future-proofing, they are just standing still and maintaining the
old legacy systems. Because we have got the portfolio of products,
we can offer the capability to use these components to work with
the client in re-engineering their legacy systems.”

However, mistakes can be made when choosing to outsource, as
evidenced by the bad publicity surrounding Indian call centres
utilised by some UK banks. Although such decisions were taken on a
cost-efficiency basis, examples such as these highlight that, in
some instances, organisations may be too focused on the cost-saving
element of outsourcing and missing opportunities to streamline and
improve the entire business process.

Minty told CI: “It depends on the maturity of the organisation.
Some organisations are phenomenally capable, but there are others
which have yet to reach that level of maturity and they make
mistakes by trying to save costs by outsourcing something they do
not particularly understand themselves. Therefore they do not
understand the implications and are not ensuring that the capital
intellect that wraps around it is sufficient.

“I think organisations that understand what it is they are doing
and understand the complete end-to-end operating model can
carefully select elements which can be offshored and generate
serious improvements in service and cost savings. People are not
just looking for cost savings now, they are looking for service

Sharp added that organisations need to keep the bigger picture in
mind when selecting to outsource.

“Traditionally, the view has been to outsource your non-core
competencies and keep your core competencies,” he said. “That is a
perfectly rational approach, but if you take what we are talking
about as global sourcing of expertise, why would you deny your core
competencies access to that global expertise, as long as you have
security, governance and structures in place to protect the
integrity of the company?”

According to French banking group Société Générale, financial
services has been at the vanguard of outsourcing over the last five
years. In terms of total contract values, SocGen estimates that
financial services accounted for 29 percent of global outsourcing
deals between 2002 and 2007, compared to manufacturing (25 percent)
and telecoms (14 percent).

TCS says that around 45 percent of its contracts are from the
financial services sector, and in terms of revenues, the US
accounts for half of revenues at any given point.

Sharp said: “The UK is the second-largest single market with around
20 percent, then there is 9 percent or so in Europe. We would
certainly look for double-digit growth rates in the European

As globalisation sees economic power gradually shifting from the
west to the east, and with it consumer wealth, many banks and
outsourcing organisations have responded by investing more of their
resources in emerging markets.

According to global IT manufacturer and consultancy IBM, this is
creating an inversion – the developed nations’ share of the
worldwide population shrank from 33 percent to 20 percent between
1950 and 2007, so the imperative for a financial services
organisation to become truly ‘global’ is more important than ever.
And it is through outsourcing that a financial services
organisation can become a globally integrated business, as it
allows that organisation to enter new markets, locate new business
opportunities, and tap into local centres of skills and knowledge
to boost growth opportunities.

“You have to add value when you are trying to roll out major
projects on a global basis,” said Minty.

“Many of the big banks are looking at moving into emerging markets
– pure domestic banks are beginning to struggle in terms of the way
they manage revenue growth, sustainability and all the rest of it.
Banks that have a presence in the major emerging markets are now
drawing in fairly sizable growth and revenue rates and profiting
from those areas.

“What they are finding is that an organisation like TCS can help
them with their move into new countries. Firstly, they have ready
access to skilled labour, the language and the infrastructure is
there, and we can help them engage with the organisation on top of
everything else they have to do. It is a good coming-together of
organisations with a common theme.”

Other factors that drive outsourcing decisions are motivated by the
need for cost predictability, risk migration, scalability,
compliance improvement, the need for greater skills or platforms,
strategic flexibility or to focus on core functions. Knowledge
process outsourcing enables the ability to perform advanced,
knowledge-based processes to generate competitive advantages, and
business-specific context and knowledge. But according to Sharp,
although it is growing in importance, it is still a relatively
small component of the BPO market.

“The bulk of the BPO work we do lies in the business process
back-office functions, whether that is HR, finance and admin and so
on. It also depends on the reserves that a company has.
Increasingly, as technology improves and as the drive for
competitor advantage increases, we do see IT being regarded more
holistically as a part of what a corporation will investigate going

Changing market dynamics

Has the dreaded credit crunch forced more organisations to
outsource, or to play it safe and keep functions in-house?

Minty said: “I think it highlights the fact organisations need to
have more and more information and advanced systems in terms of
modelling and the products they need to bring into the marketplace.
The big thing facing the industry at the moment is that prices are
rising quite dramatically, and that is having an impact on the
availability of money. Transactions are becoming more complex,
there is a greater need for more information in order for
organisations to make the right business decisions, and that is
creating more opportunities for outsourcing.”

Globalisation does bring its own challenges, however. Outsourcing
can typically save an organisation anything between 30 and 40
percent in costs, but as the emerging market economies have become
wealthier, ironically through increased foreign investment and so
on, living standards and worker incomes in those markets have been
pushed up. As a result, companies that may have decided to offshore
some of their operations in India to reduce costs are now finding
it much more expensive to recruit and retain staff. However, it
would be foolish to state this will eventually mean the end of
offshoring to India, or other offshoring destinations that have
seen wages rising.

Sharp said: “There is no doubt that the Indian industry cannot
stand still and nor can a company like TCS, which is one of the
reasons we have diversified our global delivery capabilities. The
cost differential over time could well erode and there is some
pressure on wages in India. The key goal for Indian companies is
retention. The issue for us is attrition. TCS has got the lowest
attrition rates of any among the Indian companies.

“The real answer is not to get too commoditised. You have to move
up the value chain, hence our emphasis on our broad portfolio of
offerings, our consultancy and BPO capabilities. When combined with
the innovative approach, we are helping companies in a different
and better way.”