Application outsourcing: riding the third wave
Accenture’s Adam Munton examines the dynamic forces affecting the global outsourcing market, the growth of offshoring and the qualities to look for when selecting an IT partner.
We are now entering a new phase of application outsourcing – what can be called the third wave – in which it is increasingly viewed by financial services companies as a springboard to help them achieve competitive advantage and high performance.
Application outsourcing – transferring the maintenance and/or development of a single critical software application, a group of related applications or an entire portfolio of applications to an outsourcing partner – is a well-established practice in the financial services sector.
In the first wave of application outsourcing deals, the banking, capital markets and insurance industries viewed application outsourcing primarily as a means of cutting costs through labour arbitrage. In the next wave, financial services companies looked for productivity improvements and greater flexibility for technology projects.
Today, in the third wave, leading financial services firms are looking to application outsourcing to support an increasingly aggressive growth agenda. As well as cutting costs and improving productivity, outsourcing enables these firms to make their research and development efforts a reality by supporting the building of new, differentiated products and services.
Leading financial institutions are also viewing application outsourcing increasingly as a way to overcome the challenges presented by legacy systems, which have long been a millstone around the industry’s neck. Indeed, many of our clients tell us that their ageing legacy applications are inflexible, expensive to maintain, difficult to staff and not aligned with business objectives.
Offshoring set to grow
Financial services companies are improving their value proposition by tapping sources of expertise that may be on- or offshore. Since outsourcing arrangements place value over cost, the market is putting a premium on the ability to leverage centres of excellence worldwide and the ability of industry leaders to form alliances with one or more best-of-breed providers. Offshore growth is also being fuelled by the need to develop new and differentiating capabilities and address complex legacy system challenges in a comprehensive, well-coordinated manner.
For many financial services firms, inexorable global competition, and shareholder demands to improve returns make offshoring a competitive necessity. According to Datamonitor, US-based financial institutions spent approximately $590m on offshore services such as contact centres and application support from third-party outsourcers in 2004, while their European counterparts spent about $480m.
The question facing CEOs is no longer whether to engage in offshoring, but rather how to use offshoring to maximise value creation for their companies. As confidence in offshore markets grows, the financial services industry will significantly increase its reliance on offshoring. By 2008, Datamonitor expects US and European financial services firms to nearly double their offshore spending to more than $2bn. The potential for growth is huge, with only around 3 per cent of the total global IT spend currently spent offshore.
Key to the success of the offshore market will be vendors’ ability to attract, train and retain a highly skilled workforce. According to the recently published NASSCOM-McKinsey Report 2005 – Extending India’s Leadership in the Global IT and BPO Industries, the ability of Indian IT companies to sustain their global leadership position may be compromised if the skills and quality of the Indian workforce are not improved.
Addressing the market
Increasingly, financial services companies are choosing their outsourcing partners based on their assets and performance, not just their ability to take out costs. Given the complexities involved in the third wave – unleashing the shackles of legacy systems and developing new capabilities – Accenture has invested substantially in building its own onshore and offshore capabilities, which uniquely positions the company to support its clients’ demands.
Accenture helps financial services firms move to a higher performance level by developing innovative application outsourcing solutions addressing diverse business objectives. Key differentiators include:
Over 15 years in the outsourcing business and recognition as a global market leader from clients and industry analysts: this experience enables Accenture to tap our global experts and achieve operational scale.
A global network of over 40 delivery centres in 30 countries (including India, the Philippines, Europe, Canada and the US), providing flexibility, round-the-clock access to industry-leading capabilities, management of geopolitical risks, and seamless cooperation between onshore and offshore practices.
The ability to help clients address complex legacy systems, both onshore and offshore, predictably and cost-effectively through best practice, repeatable processes, economies of scale and standardised methodologies and tools, allowing consistent global collaboration, regardless of location.
A flexible range of application outsourcing offerings, including basic management of both custom and packaged software (including enterprise solutions such as SAP), capability-based services such as testing, and full transformation and long-term management of clients’ IT applications and infrastructure.
Client choice: a range of assets, alliances with companies like Microsoft and the ability to handle complexity, which allows clients to operate anywhere along the continuum of application outsourcing.
Choosing the right vendor
A successful outsourcing arrangement hinges on partnering with the right outsourcing vendor. Ideally, the provider will have high-quality facilities, extensive industry knowledge, the ability to structure innovative and collaborative deals, and financial muscle. Risk mitigation is another key differentiator in global sourcing, as is onshore and offshore support.
Partnering with an outsourcing provider with global experience will help with the complex decision as to which onshore and offshore locations to use. The provider should be able to negotiate sensitive cultural differences that may arise at such locations, help the client realise the full potential that the opportunity holds, address immediate and long-term needs in a flexible framework, and execute a swift, effective transition. Providers that not only set up the outsourcing arrangement but also offer software assets or other solutions that can meet the client’s technology needs are better positioned to provide benefits that go beyond mere cost reduction.
Setting up and adhering to the appropriate global sourcing model helps facilitate cultural change and avoid duplication of work. However, to make the deal work, senior executives must stay the course and navigate internal change management.
The stakes are simply too high for financial services companies to take chances when it comes to selecting an outsourcing partner. The partner should have deep industry knowledge and a proven, pragmatic approach that will help clients create new business capabilities and address legacy challenges while transforming their business.
Key points to remember when seeking an offshore provider:
Ensure that the provider has an industrialised process for recruiting, training and retaining the best-qualified talent from the available labour pool.- Maintain tight governance and seamless connection between the onshore and offshore teams.
- Make sure the provider gets it right first time – don’t accept poor quality.
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Case study
Financial institutions have many different objectives, including increasing efficiency, reducing turnaround times, and improving their ability to convert data into intelligence and deliver it to the right people at the right time. Outsourcing with the right partner can help them improve their performance.
Today, when financial services firms outsource, they increasingly look for deep industry knowledge, familiarity with specific technologies or platforms, evidence that the vendor will be able to sustain and improve productivity over the term of the contract, depth of management talent, and the kind of field experience that comes from long-term client relationships.
Consider the case of Barclays, one of the largest financial services groups in the UK and a leading provider of global services to multinational corporations. Barclays has an ongoing strategy to differentiate itself by improving the agility, efficiency and capability of its retail and commercial IT.
In 2004, Barclays entered into a six-year agreement with Accenture, with a view to speeding up response to demands for technological innovations, improving resource flexibility, and lowering the costs of developing and maintaining software applications. Under this agreement, Barclays outsourced the IT applications development and management function relating to its UK-based commercial and retail banking systems.
Accenture’s goal is to make its skilled staff, IT development and maintenance tools, and delivery centres a seamless part of Barclays’ retail and commercial operating model. Offshoring is a key part of the new operating model. |
Author
Adam Munton is a partner in Accenture’s financial services application outsourcing practice.
He is based in London.
Email: adam.munton@accenture.com
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