Making the Call on Outsourcing; Outsourcing Bank Processes like Risk Management Is in Vogue, but Isn't without Its Own Inherent Problems
Wiklund, Dana, American Banker
Byline: Dana Wiklund
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. …