Management Strategies

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Nancy Feig
Nancy Feig
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New Rules for Bank Outsourcing and Offshoring

New deal models and business imperatives, as well as opportunities in emerging markets, are inspiring banks to reevaluate the types of outsourcing and offshoring arrangements they make.

A New Viewpoint on Outsourcing

Perhaps the ultimate partnership, the concept of industry utilities and co-ops -- such as the bank-owned Viewpointe (New York) check archive and image exchange -- also is becoming more popular. Joe Brannan, EVP, processing services manager, at Winston Salem, N.C.-based BB&T ($121 billion in assets), says the bank outsourced its check image archive to Viewpointe in 2003 because it needed an "industrial-strength check archive" with the arrival of Check 21.

"We generally have a bias to build things inside," Brannan says. "To do pure outsourcing is relatively unusual for us." The sophistication of Viewpointe's archive, its "unmatched" disaster-recovery capabilities and the accelerated speed-to-market capability swayed Brannan, he recalls. And, as always, cost played a factor.

"Trying to replicate the reliability and technical aspect of what Viewpointe spent millions and millions building would" take a tremendous amount of time and money, Brannan says. "It just made sense to outsource this thing."

Another benefit of industry co-ops and other outsourcing service providers is their ability to bring their customers together to foster industry collaboration. At least once a year, for example, Viewpointe brings together representatives from 15 to 20 of its banks for a meeting of the Viewpointe Users Group, or VPUG. "It provides a forum for banks to come together and talk about the business we are in," Brannan says.

Despite all the praise that Brannan bestows on Viewpointe, he admits that outsourcing has its downside. "If we had built this stuff in-house, some portion of that expense we could have capitalized," he says, explaining that the cost of the archive would have depreciated year over year. Further, "You have to take what they give you," Brannan concedes. "You don't have final say -- they will be the ones that make changes or modifications."

Because the vendor has so much control, front-end negotiating is the most critical part of an outsourcing agreement, according to Brannan. If you have issues, bring them to the table before contracts are signed, he stresses. And, although he's never had to do it in his 25 years at BB&T, Brannan cautions that it is extremely difficult to bring something back in-house once it's been outsourced.

New Functions and New Markets

The function most often outsourced by financial services organizations is IT, followed by call centers and then human resources, according to research from EquaTerra (Houston). Other banking-specific processes commonly outsourced include transaction and check processing activities.

While IT outsourcing remains the most common form of financial services outsourcing, and traditional forms of IT outsourcing -- such as data center operations and software development -- are still growing at the greatest scale, growth is being seen in the area of knowledge process outsourcing (KPO), the outsourcing of high-level, specialized functions such as analytics and research, says Deloitte & Touche's Lowes. And, of course, BPO remains popular. "There are a lot of untapped opportunities for BPO in global finance," he says.

Outsourcing is a particularly attractive option for processes in which there are large volumes of routine transactions with lots of paper or information involved, TowerGroup's Kopp says. For example, "More and more, we see credit administration being done by third parties," he notes, adding that scale definitely is a factor in assessing the benefits of this kind of arrangement.

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