My interest has been piqued by the recent announcement of Sunlife of Canada outsourcing its UK customer services operation to TCS’s Diligenta subsidiary in a $200m deal. This comes hot on the heels of some financial services captive buy-outs in India. The financial services sector has long been the problem child of the BPO industry, with operational executives extremely reluctant to relinquish control over business processes – especially finance and accounting. As I have said on record several times, it will only take a few big deals to hit and many others will follow in a domino effect. Bottom-line, the large BPO providers have capacity and are willing to invest in clients to gain an edge in this market. Most of the near-term deals will more likely be captive acquisitions like the two mentioned above, but this is the clear strategy some of the providers are following to build out a global delivery infrastructure. (Hey – I managed to avoid saying lift n’ shift).
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So why do I think this sector is poised to become a BPO hotbed?
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- Competition is too fierce and the incumbents are looking at all options to contain costs and improve margins;
- Decreased shelf life of products;
- Business impacts and high costs of maintaining non-strategic and closed blocks of business;
- Rising wage costs and attrition within captives is proving too costly and taking up far too much management resources – the outsourcing option is becoming increasingly attractive and less risky from a business perspective;
- The sub-prime fiasco has really changed the game with several FSI firms – they are now prepared to take on more risk to remain profitable;
- BPO models can help firms scale up and down quicker – particularly with a looming economic downturn. Having that flexibility could prove vital, especially in times when FSI firms need to get product to market quickly;
- Improved service levels from providers and their willingness to take on more customer risk;
- Improved technology add-ons at no incremental cost, for example analytics tools, that can sweeten the BPO opportunity.
More on this issue shortly….
Posted in : Captives and Shared Services Strategies
I agree that it’s inevitable, but I’m not sure if it’s poised to do so right now. I do know of a Media company that is in the process of outsourcing their accounting and back office functions to India, but in general it’s still a possibility more than a likelihood for the financial services sector in the near-term.
Mike,
The looming economic downturn is going to drive more urgency into FSI firms. There is no reason for them NOT to get more aggressive with BPO and they key reasons for the slow uptake are more cultural, than business-oriented. We will see several of these “captive sell-off” style deals this year,
Phil
Hi Phil,
I think its too early to call it a trend, but the outsourcing deal that you highlight is a significant one. The challenges in BPO outsourcing are two-fold:
1. on account of regulations that prohibit financial institutions from decentralising too much that might make it difficult for them to contain the risks (because of Sarbanes Oxley, audits & other norms).
2. on account of their own internal challenges of outsourcing i.e. SLAs, is customer service core or non-core, security risks, etc.
I think these challenges are far more grave than the advantages you highlight. Financial institutions have been one of the early adopters of outsourcing and their “optimal offshoring ratio” is already higher than most other sectors. It seems logical that the only way they can further reduce costs is by outsourcing business processes, but there are potential issues that need to overcome. The regulatory one is key, and I am not aware if a concerted effort is being made by the industry to influence regulations.
Ideally, captives do provide a certain amount of mitigation to these issues, hence I think quite broadly, financial institutions will prefer to get captives right, rather than go on an outsourcing expedition when it comes to BPO.
Regards,
Amit
Phil,
Beyond doubt, FSI companies need to re-align themselves in order to achieve all the benefits that you have mentioned. But I don’t think that Outsourcing is the answer to it.
I agree to Amit’s viewpoint that FSI sector is already very heavy on outsourcing. If I look back at my previous projects, all my teams were off-shore heavy. So probably, there is less scope of further outsourcing specially with companies like Goldman Sachs and Morgan Stanley, who have large accounts with Offshore vendors or Offshore captives.
FSI companies need to evaluate and adopt new emerging methodologies like Service Oriented Architecture (SOA), Agile Software Development etc in order to become more flexible to the dynamic business environment. Indeed, offshore vendors will also have to keep pace with these companies and success of offshore vendor will depend on their ability to match steps with innovations in technologies and software development practices in Financial Services sector.
But thanks for initiating the discussion on this topic. I would be interested in reading answers posted to this question.
Regards,
Anil Piplani
Hello Phil.
I always tell people who are thinking of outsourcing offshore to start with small tasks or operations that are repetitive and mundane. Creativity and specialized local skills (local to the client’s location) are something you don’t toy around with outsourcing offshore. A creative project may still contain repetitive and mundane tasks–then, that’s a possibility for outsourcing.
Cheers!
Raffy
Anil and Amit:
Good input – and viable points for financial services. Firstly, there has been very active IT Outsourcing for years in this sector, but there has been very limited BPO – mainly restricted to industry-specific process such as claims / credit card processing. Secondly, BPO is a logical way for many firms in this sector to go – most large FSI firms have captive operations in India and other lower-wage countries. Many firms are realising the cost and management-resource drain of trying to manage captives themselves and are more interested in selling them off to an outsourcing provider, which is often better equipped to maneage them. Thirdly, as I mentioned in an earlier piece on consolidation, most of the leading BPO firms are targeting catpive acqisitions as their preferred vehicle of growth. I see this tredn contiuing for another couple of years before they reach saturation point.
Phil