Banking outsourcing – a journey till date by Sutherland Global Services

Outsourcing by Banks – A Journey Till Date August 2013

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Outsourcing in the banking sector, which started in 1970s, has become a highly mature industry now Banking BPO Industry Overview • Banking Business Process Outsourcing (BPO) industry has evolved from the outsourcing of quasi-clerical activities (e.g., printing and data storage) in 1970s to high-end functions such as credit analytics and risk management by 2012 • Outsourcing activity in the banking industry started with the creation of centralized processing hubs (onshore shared services) in the country for full-fledged outsourcing to an offshore third-party vendor • The main driver of outsourcing by banks is cost reduction, which is 40% to 50% per transaction • At present, almost all the global top banks including JP Morgan Chase, Goldman Sachs, Bank of America and Citi Bank outsource their non-core activities to low-cost countries such as India, the Philippines, Russia and China • Banking BPO underwent several changes since its start due to: – Newer Technologies: Platform-based BPOs are increasingly becoming popular – Financial Meltdown: The global financial crisis, which started in 2008, made BPO vendors to come up with innovative engagement models ( e.g., outcome-based payment or pay-per-use) for clients who were facing extremely volatile market conditions – Emerging Destinations: New geographies are emerging as preferred destinations for different processes. The Philippines is competing with India for voice-based services, while India is still a preferred location for high-end analytical processes

Source: Sutherland Research

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Over the years, BPOs have evolved to offer solutions across the entire spectrum of Banking operations BPO Services in Demand by Banks

KPO Accounts Receivable

Accounts Payable

Budgeting & Forecasting

Customer Invoice

General Accounting

Compensation & Benefits

Learning & Development

Payroll

Performance Management

Recruitment

Workforce Solutions

Inventory Management

Logistics Support

Multidemand Management

Purchase Management

Supplier Management

Demand Planning

Data Analysis

Data Cleaning

Data Gathering

Report Design

Report Presentation

Insights Generation

Finance & Accounting

Human Resources

Supply Chain Management

Reporting & Analytics

Treasury

Financial Analysis

Source: Sutherland Research

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As offshore captive centers provided economies of scale and competitive edge, global banks made India their back-office hub • •

• •

•

Offshoring became acceptable More banks (e.g., JP Morgan, HSBC, and Standard Chartered) opened their captives in low-cost countries Model : Mainly captive Benefits: Cost saving and banking support around the clock

•

• • •

Capacity Expansion

Till 2002

Strategic Expansion

2002-07

2008-09

Early Adoption • • • •

Citi Bank and American Express successfully set up offshore captives Number of functions being outsourced gradually increased Model: Mainly captive Key Benefits: Cost saving through labor arbitrage

Banks again started strategic investment in captives Many critical processes such as analytics, credit risk management and anti-money laundering kept with captives Multi-country presence Model: Mix of captives and third party Key Benefits: Compliance, security, operational efficiency and costs

2009-Present

Capacity Contraction • • •

• •

Increased capex, soaring wages and high attrition made several captives unviable Global crisis required banks to generate liquidity by selling off non-core underperforming assets Citi Bank sold a big part of its captive operations to TCS; UBS sold its offshore development center to Cognizant Model: Mix of captive and third party Key Benefits: Cost saving and flexibility of business scale in an uncertain business environment

Source: Sutherland Research

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Citi and Amex pioneered offshoring back-office processes in India in the early 1990s Early Adoption of Banking BPO – Till 2002 • Banking business is becoming an industrial process; cost of production has become a key element of profitability, and banks are constantly experimenting to bring down the costs and improve operational efficiency Bank

• Citi Bank and Amex pioneered offshoring in the early 1990s to take advantage of lower labor costs in countries such as India

Name of Captive Unit • eServe

Establishment Year 1992

•

1994

•

• In the first phase, captive centers began as a consolidation of regional or global internal services/processes such as finance and accounting, human resources, and contact centers • Several companies reported that offshoring resulted in a saving of 40%-50% per transaction

•

Case Study: American Express

•

American Express (India) Private Ltd. Finance Centre American Express Global Service Centre

Operations Back-office solutions and services for five of Citigroup’s nine product lines – Cards, Consumer Finance, Retail Banking, Capital Markets, and Banking, as well as Global Transaction Services IT and Transaction Processing

•

In 1990, Amex had 46 regional processing centers performing tasks related to card and other transactions. Amex decided to consolidate processing centers to three regional hubs. Gurgaon, India was chosen as the location to provide services to Japan and the Asia-Pacific centers

•

In the Indian operation, Amex observed that apart from improvements in service quality, cost per transaction in the center was lowered by 40%-50%. The center registered higher first call resolutions

Source: Sutherland Research

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During 2002-07, all the leading banks were looking forward to open their offshore utility centers Capacity Expansion at Captives: 2002-07 • Amid the increasing cost pressure and success of Citi and Amex captive centers, several global banks started opening their shared service centers in low-cost countries • Besides customer care and transactional processing, banks started outsourcing asset management, human resource, and loan and mortgage processing • Banks also started outsourcing core activities like treasury and investment banking activities such as research support • JP Morgan, Standard Chartered (Scope), ABN Amro, Bank of America and many others opened their shared service centers in India to provide IT and back-office support

Bank

Establishment Year

Process

JP Morgan Chase

2002

•

Research & analytics, transaction processing, investment management

HSBC

2002

•

Electronic data processing, voice based services, cash management

Standard Chartered

2002

•

IT, HR processes, F&A

ABN Amro

2002

•

IT and back office operations

Llyods TSB

2003

•

Back office operations

Morgan Stanley

2003

•

Transactions processing, research support

Deutsche Bank

2003

•

Back-office trade processing centre

Bank of America

2004

•

Transaction processing

Rise of Third-Party BPOs • It was the period 2002-08 when third-party BPOs became mainstream. Progeon from Infosys, Mphasis, Wipro BPO, TCS, etc. started snatching market share from captives • Many captives, which were considered as cost centers, became revenue centers as a third-party BPO. Genpact (a GE spin-off, 2004), HP GlobalSoft (from HP BPO) and WNS (from British Airways) are some of the prominent examples • Towards the end of this period, third-party BPOs seemed winning the outsourcing battle as captives were unable to contain increasing cost and meet the desired scale. However, the banking sector still preferred captives Source: Sutherland Research

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Several banking captives were sold during 2008-09 as they struggled to meet desired economies of scale and cost efficiencies Divestiture of Captives: 2008-09 • Many BPO processes such as basic HR processes, data entry, accounts payables/receivables, etc. became commoditized, and only those BPO firms who could attain a certain economies of scale (say 10,000+ FTEs) remained commercially viable

• Under pressure from third-party providers and uncertain business environment, several banks exited their captive operations

Bank

Acquirer

Year

Value

Citi

TCS

2008

USD 500 Mn

Amex

EXL

2009

USD 30 Mn

• Banks’ balance sheets were stressed due to global liquidity crunch; many banks chose to sell captives to third-party providers

UBS

Cognizant

2009

USD 75 Mn

• Citi sold its BPO operations to TCS, UBS to Cognizant, Deutsche Bank to HCL and Amex to EXL

Despite adverse economics, majority of banks kept their captive centers running • Even though cost structures of banking captives are typically 30%-40% higher than traditional BPOs, banking outsourcing was dominated by captive center solutions • Banking industry is highly regulated, and banks are extremely cautious while outsourcing to third parties as it possesses risk of data leakage, intellectual property theft and lack of required domain expertise

Source: Sutherland Research

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Contrary to the sell-offs in recent years, banking captives are still being strategically expanded Strategic Expansion of Banking Captives: 2009-Present • It was predicted in 2008-09 that there would be no captives by 2010 or in the near future. But contrary to the expectation, banking sector outsourcing still remains within in-house centers

Bank

Expansion Plans

• Majority of the banking BPO work that arises from the US and the UK is being grabbed by onshore BPOs such as Fiserv and Fidelity National Information Services, which have strong expertise in banking technology

Citigroup

• Plans to add custody services to existing projects for consumer banking, transaction services, risk management and investment banking

• Also, there is lack of banking domain-specialized talents, when banks move up the outsourcing value chain

Standard Chartered (Scope)

• Plans to increase headcount by 10% in its India's captive operation

• Banks now keep core operations within the captive centers, while outsource standardized work to third-party vendors

Deutsche Bank

• Deutsche Bank is moving a portion of its back-office processes from Infosys BPO to its captive center

Goldman Sachs

• Plans to increase headcount

• Many banks are hiring temporary staffs to manage sudden rise in the work flow

Huge Addressable Banking BPO Market • Outsourced banking BPO market is estimated to be around USD 12-16 Bn, with third-party BPOs accounting for just 15% of this market • As banking outsourcing is becoming mature, banks are expected to outsource increasingly complex projects, which may require innovative pricing and delivery structures

Source: Sutherland Research

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Virtual captive offers best of both captive as well as third-party outsourcing Virtual Captive: An Emerging Model • Both captive and third-party outsourcing come with their pros and cons. Setting up a captive requires a huge amount of investment and long-term commitment, while in third-party outsourcing, there is a risk of surrendering the control of the team to the outsider. To overcome the challenges offered by the traditional outsourcing routes, there is an increasing demand for virtual captive • Virtual captive combines the benefits and strengths of captive and third-party outsourcing models. It makes use of the expertise, facilities and other resources of a third-party provider, while the decision-making power and control stay in the hands of the parent company • In virtual captives, the parent company can customize operations as per its preferences. Once the virtual captives are established, some providers allow the parent company to acquire full ownership, from management to all other processes. As the offshore team grows in size and the company processes stabilize, ownership can be transferred • Use of the term “virtual captive” gained prominence with the announcement of a BPO agreement between Wachovia and Genpact in late 2005. Even after a decade, virtual captive has not taken off in a big way. Division of accountability between the parent company and service provider is the major hurdle to the widespread adoption of virtual captives

Parent Company

Service Provider

Agreement Year

Description

Wachovia

Genpact

2005

• Genpact provided a dedicated center, resources and backing infrastructure to support Wachovia’s back-office business processes globally. Wachovia retained a degree of control over the offshore operation and in the hiring and retention of employees

Credit Suisse

Wipro Technologies

2006

• Credit Suisse leased Wipro’s Pune facility to set up captive-like operations, working under the Credit Suisse brand name. Wipro supported in the acquisition and training of talent, IT infrastructure and help manage finance-related processes

Source: Sutherland Research; CRM

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Choosing the right model is key to the success of BPO outsourcing Centralization (1970s)

Shared Services (Late 1980s & 1990s)

Outsourcing & Globalization (1990s-Present)

Portfolio Approach (Leading)

Cost

Plus or Minus 5%-10%

10% -30% savings

20%-60% savings (outsourcing & globalizing)

Additional 10%-15%

Service

Single accountability & focus

Standardization & increase in service level

Defined service levels, 24/7 & KPIs

Best in breed depending on solution

Technology

Desperate solutions and ad-hoc solutions

Consolidate ERP and data marts

Web-enabled; Middle-ware; Standardization

Cloud computing solutions

Service Delivery Model

Replicated corporate and SBU activities

Single country with single & multi-center structure

Multi-shore, partnering, and single global provider

Multi-shore; Multi-delivery; Multi-solution

Fortune 500 Adoption

Done

Many outsourcing & exploring globalization

Forward thinking companies

• Currently, banks are facing two major challenges – improve capital quality required by regulations and improve profitability – With the implementation of tough regulations (Dodd-Frank Act) in the United States and implementation of Basel-III globally, banks are required to raise 2-3 times more capital from their current base, and at the same time they have to remain profitable and grow business – These challenges require banks to cut operating costs to the extent possible and maximize the value of current customer base • The capital constraint will not allow banks to invest in shared services, and probably it may not be a recommended option too, when similar cost saving and data security can be achieved with partnered virtual captive • Maximizing the value of current customers will entail use of high-end analytics, which will enable them to cross-sell & up-sell to existing customers – Banks are also required to come up with innovative products to cover their increasing costs on traditional products – Customers need similar experience across channels, viz. branch, online, IVR, mobile and telephone • Banks are expanding their operations, and in the process they have to comply with regulations of multiple countries • In such scenario, high-end virtual captives with ability to provide complex knowledge-driven analytical solutions and business-critical processes will help banks market their services at speed • Banks will seek business-outcome based or pay-as-you-go engagement model for commoditized services such as customer service and back-office processes Source: Outsourcing Info, Outsourcing Blog, Shared Services Outsourcing Network (SSON)

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