The U.S. financial sector is increasing its focus on applications outsourcing and BPO.
 
by Phil Fersht
 
Despite the uncertainty and gloom that are consuming us today, these times offer great opportunities for the global IT and business process outsourcing industry. Outsourcing thrives on mergers, disruption, corporate restructuring, cost-containment needs and business change, and historically, tough economies have proved to be lucrative markets for increased outsourcing: Remember the 2001 recession and subsequent deal activity?
The financial services industry is finally ready for that change, and our recent study of financial institutions and outsourcing services providers—taken over the two weeks that followed the U.S. government’s bailout package—demonstrates this (see Figure 1). In addition, most service providers are polarizing their sales efforts on the beleaguered sector to increase their market presence and defend existing business. Moreover, this financial crisis is driving a new culture of long-term change into the financial services sector that will favor long-term ITO and BPO contracts that reduce costs and add core focus to re-emerged enterprises.

Traditionally, this sector has been very reticent to adopt much outsourcing outside of IT areas, but this meltdown will surely drive a new era of change, and an embracing of long-term cost-containment strategies.

Executives will need to be seen to be implementing radical change, and outsourcing fits the bill. And while many firms will initially move into smaller-scope engagements, the major difference is that we will see firms adopting an outsourcing culture that they would never have previously contemplated. Figure 2 shows the beleaguered U.S. banking sector is clearly the most motivated sector to embrace outsourcing opportunities.

When we delve deeper into the data, it’s the major U.S. banks that are clearly the most aggressive in ramping up their plans to pursue outsourcing strategies. The main service lines where they are focusing are banking-specific BPO services, application outsourcing, and finance and accounting BPO. Insurance companies also stated a strong focus on adopting insurance-specific BPO services in a six- to 12-month period. Service lines not being so aggressively pursued are primarily HR outsourcing and IT staff augmentation projects (see Figure 3).

Bottom Line: Tough times call for tough measures, and outsourcing really does the trick for some financial organizations.

The financial services sector has held back from many outsourcing opportunities in recent years through a stubborn resistance to change and a fear of losing control over noncore business processes. However, in this current tough financial climate, executives have little choice but to embrace global opportunities that afford long-term cost savings, access to process acumen and new technologies.   

Outsourcing Drivers: Merger activity is going to provide new outsourcing opportunities; for example the Bank of America, with its acquisition of Merril Lynch, will surely look to move Merrill’s support functions onto
third-party resources, as BoA has a strong and effective outsourcing culture. And the newly merged entity may have to look at additional or new providers to support the broader global presence of the new firm—especially when you take into account Merrill’s international operations. We can also expect to see a host of other M&A events taking place in the coming weeks, similar to the JP Morgan deal with Washington Mutual, and the Wells Fargo takeover of Wachovia and its global BPO operations). In addition to M&A activity, there will be some financial institutions looking to reduce SG&A costs quickly, which will opt for outsourced solutions that quickly impact the bottom line .

Outsourcing Inhibitors: “Short-termism” is rife. One concern is that most financial services firms are pursuing survival on a month-to-month basis, and will not be looking to move into any complex long-term initiatives. This includes staff-augmentation projects that can be considered “discretionary spend,” ERP upgrades,  and some BPO and ITO engagements.  

All things considered, we see this crisis as having a largely positive impact on outsourcing adoption among financial services firms, provided the situation does not spiral even further out of control, the government’s bail-out package has the desired effect, and the majority of financial services firms can maintain a long-term strategy.