A cornerstone of today's outsourcing agreements is collaboration between the bank and the third party. "It's the partnership concept, rather than the supplier type of deal," Kopp says. "Teamwork is part of this partnership."
Success in today's outsourcing market is contingent on bringing new dynamics to outsourcing relationships, according to a recent study, Outsourcing Comes of Age: The Rise of Collaborative Partnering from PricewaterhouseCoopers (New York). "Outsourcing is still very much the game, but the rules have changed," says Pat McArdle, global outsourcing partner at PwC. "Traditional [outsourcing] models are gradually being replaced by multisourcing, joint ventures and best-of-breed arrangements. ... High collaboration between customers and providers yields increased confidence in overcoming the challenges of outsourcing, broader business model innovation and expanded outsourcing investment."
Building collaboration into the outsourcing agreement was a priority for R. Patrick Lamb, president of Scottsdale, Ariz.-based First National Bank of Arizona's ($3 billion in assets) mortgage division. In spring 2006, Lamb visited Chicago-based Accenture's operations in India as part of a partnership between the bank and the vendor to build the mortgage industry's first end-to-end, post-closing business process outsourcing (BPO) assignment, he explains.
"We had been doing the [post-closing] functions in-house for a long time," Lamb says. "It was a painfully manual process." Operating with a directive to grow the mortgage business by 30 percent every year, the bank's biggest obstacle was scalability, according to Lamb. As a result, it chose to outsource to improve operations and efficiency.
First National Bank of Arizona already had established a comfort level with Accenture, which had provided consulting services during the bank's loan origination system migration, Lamb notes, so the fact that some of the processes would take place in India wasn't discouraging. "The people in India have a strong relationship with those in the U.S., and they know our business really well," he says.
Despite these kinds of advances, managing outsourcing arrangements has its own challenges. "The types of skills you need to manage offshoring and outsourcing are different than managing the things in your four walls," Oliver Wyman's Subbakrishna says.
First and foremost, warns Darren Knox, VP and IT manager for Bristol, Pa.-based First Federal of Bucks County ($500 million in assets), "Don't take the relationship lightly." As a community bank, First Federal of Bucks County "is a total outsourcing company," he says.
Knox advises banks to hold vendors to the same standards that the financial institution would maintain in-house. "They must adhere to your [quality] level," he stresses.
Knox has dealt with failed outsourcing deals in the past, mostly as a result of a lack of established standards, rocky transitions and unmanaged expectations, he says. "It takes a while for it to really hurt you, but it will happen," Knox relates. "I have switched from outsourcing and gone to internal. ... [The outsourcing providers] just didn't meet the service level agreements -- they just didn't really care."
But Knox says he has learned from past mistakes. In a recent outsourcing deal, First Federal of Bucks County implemented the OnBase enterprise content management solution from Hyland Software (Westlake, Ohio). The bank tapped OnLine, the software-as-a-service offering of OnBase. "[Hyland] treats us just like a partner," Knox says. "They own a big stake in our losses and any issues that we would have."
"Partnership means having a stake in the game," TowerGroup's Kopp says. "This is about both sides winning." In the past, according to Kopp, service-level agreements between banks and vendors tended to be very basic. But another lesson learned, he says, is that basic compensation formulas don't work. Where there once were penalty clauses, now there are incentive clauses, in which vendors and banks share in the benefits of the relationship, Kopp relates.