New Face for Outsourcing: Even as They Explore New Applications, Banks Are Careful about "Offshoring" Jobs

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When it comes to reducing expenses, banks are open to a variety of cost-cutting options, including outsourcing. Banks have outsourced for years, of course, but what's changed is their willingness to outsource new functions and explore new outsourcing models.

That willingness does not extend to talking about outsourcing, however. Most bankers contacted for this story were reluctant to speak. For community banks, especially, outsourcing is perceived as taking jobs from the community, even though that's not always true.

Hybrids can avoid backlash

Well before their current round of reputational challenges, the largest U.S. banks faced negative publicity about "offshoring" jobs. Since the 1990s, they (and other businesses) outsourced generic, horizontal processes such as payroll and finance and accounting as well as banking-specific processes such as loan servicing and credit card processing to offshore destinations to take advantage of lower-cost labor. In addition to using third-parties, many of these tier 1 banks incubated offshore processing centers, or captives.

What's different today is that rather than offering only offshore outsourcing, large Indian third-party providers such as Genpact, Infosys, Wipro, and TCS are offering a combination of offshore and onshore options. In addition to Bangalore and Manila, providers are opening centers in Phoenix and Cincinnati, even though these U.S. locations increase their cost base. Vendors have little choice, as some banks want to keep more jobs at home partly in response to a weak job market and renewed public outcry against moving jobs off shore.

Broadridge Financial Services, Inc., operates four centers to serve bank clients: two in India and two on the U.S. East Coast, says Joe Barra, president of International Securities Processing and Global Outsourcing Solutions. He's seeing an uptick in business as banks realize that outsourcing commoditized functions that don't touch the customer enables them to focus more on customer-facing functions.

Outsourcing drivers have shifted

Cost is just one factor that leads banks to outsourcing, says Craig Focardi, senior research director in TowerGroup's Retail Banking and Cards group. If a bank is involved in a merger or acquisition, it may decide to outsource non-core competencies to allow management to focus on integration, for instance.

Also, as salaries rise in traditionally low-wage locations like India, labor arbitrage isn't what it once was. Although banks can still save on labor costs by outsourcing IT functions offshore, now they are also considering the expertise offshore programmers can bring as part of the outsourcing value proposition. David Albertazzi, senior analyst with Aite Group, says banks are looking for process improvements by using outside experts, even if they're halfway around the world.

Outsourcing also shifts fixed costs into variable costs, as it's much easier to scale back outsourced staff than internal staff.

Lending ripe for outsourcing

In lending, notes Focardi, the best opportunities for reducing costs are in traditional high-cost functions such as home equity and mortgage, and functions with scalable transaction volumes such as loan servicing. Loan servicing, with fewer customer touch points and more transactions than loan origination, makes up nearly 80% of the lending outsourcing market, says Saurabh Gupta, vice-president of research for Everest Group. In addition, consumer loans (including mortgages) account for almost 50% of the lending outsourcing market and credit cards for about 30%. Commercial lending, which is highly customized for each customer, accounts for the remaining 20%.

Banks should revisit outsourcing core lending processes, says Focardi. In a research note, "US Consumer Lending Efficiency and Business Process Outsourcing: Redefining Strategic Cost Reduction," he writes: "Many vendors have gained experience and domain knowledge and with their improved Web-based software, imaging, workflow, and reporting tools, can complete many tasks with the same or better process quality and customer service than the bank. …

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