Old-world outsourcing

Outsourcing in Europe may lag behind the USA, but it looks set for robust growth, writes Stephen G Racioppo, Accenture.

By tradition, European financial services operate in a conservative culture, resistant to sharing control with others. Despite that reluctance, however, many firms are increasingly embracing outsourcing to deal with the competitive challenges confronting the industry.

In 2003, a record number of outsourcing deals valued at over $1bn were signed across industries in Europe. Western Europe, in particular, is catching up to the USA in terms of the volume and total market value of outsourcing contracts. While the UK remains Europe’s most robust outsourcing market, the German and French markets will likely accelerate in the next two years. Other countries will fold in closely behind.

Outsourced IT spending in the financial services industry globally is expected to grow over the next four years from nearly $28bn in 2004 to $49.3bn in 2008, according to TowerGroup. In some European countries, financial services providers are going beyond conventional IT infrastructure and applications outsourcing. In Germany and Switzerland, for example, human resources and salary administration are being outsourced, while some UK banks are out-sourcing back office functions including fund administration, collections and mortgage origination processing.

Further benefits

While cost-cutting is still the primary driver behind most outsourcing, banks are seeking other benefits too. For example, Barclays recently outsourced IT application development and management to Accenture in order to:

• Lower the cost of developing and maintaining its software applications
• Integrate new technologies to meet market demands more easily
• Improve resource flexibility
• Help ultimately to launch new products and better serve customers

Under the arrangement, valued at more than £400m, Accenture will support most of Barclays’ back office systems, including applications enabling current and deposit account systems, payment systems, and customer information systems.

Business process outsourcing

Traditionally, the decision to outsource has been driven by cost as a point solution for a particular problem. Looking ahead, however, forward-thinking banks will use outsourcing as a strategic tool for delivering broader change and achieving goals such as enhanced business performance, cost management and growth.

Moving beyond outsourcing of IT functions for even larger efficiencies, banks are likely to engage more fully in business process outsourcing (BPO) – the delegation of an entire business function to an outside vendor that operates with client oversight. BPO seeks not only to cut costs but also to engage both bank and outsourcer in a strategic relationship that will transform and improve the bank’s way of doing business.

Through BPO, banks can:

• Manage costs
• Integrate with the business lines
• Increase IT efficiency/effectiveness
• Create new value
• Embrace emerging technologies
• Ensure business continuity
• Enable enterprise integration
• Allocate personnel more efficiently

While banks have limited BPO primarily to back-office functions in the past, leading providers will drive value with new and innovative programmes for the middle and front offices of key financial services industry segments, such as cash management and mortgage origination.

Overcoming concerns

The path ahead, however, is strewn with challenges. Still prevalent is the concern that outsourcing will result in a loss of management control and a weakening of the bond between employer and employees. Many banks, hampered by strained relations between their internal IT and line of business staffs, are uncomfortable with outsourcing until they can get their own house in order. Union reaction and rigid labour laws that severely limit personnel reductions are other potential stumbling blocks.

Early outsourcers, however, are finding that working with the right vendor – one committed to training, methodologies and career progression – actually offers new options to their employees that are not available internally.

No one has invented a magic formula for making an outsourcing arrangement successful. But success is more likely with a governance model that is flexible and responsive to all the various stakeholders – senior management, bank employees and customers.

Further information

Accenture
Tel: +1 917 452 4515
Email: stephen.g.racioppo@accenture.com
Website: www.accenture.com