Sourcing in the Banking Industry: Drivers and risks in outsourcing

Ensight Management Consulting, affiliated member of Eurogroup Consulting network, was part of the team preparing the European study for Sourcing in the Banking Industry. The main purpose of conducting this study was to identify the best ways for banks to outsource activities in the context of increased presure on cost reduction.

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For several years now, banks have been dealing with growing pressure, facing many regulatory measures in the context of a severe economic crisis, forcing them to reduce costs in order to maintain their profits. As a consequence, most banks have started to deleverage by selling non-core business or downsizing business lines in order to reduce costs by all means, with or without restructuring plans. In this environment, outsourcing relying either on internal or external solutions,was perceived as a highly justified way to reach these goals since it enables banking groups to reduce costs and focus on core business, leaving other non-core activities to the relevant field specialists.

 

 

The Sourcing in the Banking Industry Study indicates the top reasons to perform outsourcing in the banking sector, emphasizing that, additional to reducing costs and focusing only on core business, outsourcing provides access to new technologies and more efficient overall management, it can be an appropriate answer to the need to free-up resources from non-core activities, and it also represents a solution for reducing the necessary time invested in performing technology changes.

 

 

As compared to outsourcing, best sourcing encompasses a more holistic view of the impacts on the business entity, representing more than a P&L or process centered issue. Such aspects as HR, environment, market, regulations, have to be taken into account when assessing the risks and context of sourcing.

 

 

The study also illustrates how the scope of the banking “core business” tends to shrink, leading banks to focus on areas where they offer true added value, where they have the direct relation with the client. In fact, the stronger the degree of interaction with clients, the more the activity is considered to be core business. In this way, support functions like IT, HR, Finance and Facility Management (FM) are the biggest suspects for outsourcing in the banking sector, but not only.

 

 

Besides the benefits of outsourcing and the areas it applies to, a very important aspect is represented by the risks implied by the process. While loss of control is the main risk mentioned by outsourcing candidates in all major studies, operational risks such as communication issues between the client and the supplier, explain why outsourcing can be a rather difficult process. Other pitfalls may refer to: the loss of expertise and flexibility, risks of non-compliance, social issues such as resistance to change, technical or confidentiality risks.

 

 

Given all these dimensions, for a successful implementation, each bank must act accordingly to its maturity in outsourcing (the maturity in outsourcing is driven by the number of years of experience, scope of the activities outsourced, governance model). With a more complete description available in the full version of the study, the progressivity approach on outsourcing can be observed in the table below:

 

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