There are only two ways to make more profit, grow revenue or reduce costs. When revenues and markets shrink the inevitable focus is on cost. This is universally true across all industries and geographies. During the boom times no one in banks thought about cost beyond the unit cost of acquisition. Bankers are smart so they won’t buy things that look expensive in isolation. They have also been able to ride out short term economic downturns by taking tactical cost reduction steps like the removal or contractors or using labor arbitrage sourcing solutions to India. Not this time. The downturn is more sustained and inflation in the traditional low cost locations means there is need for more ‘engineered solutions’.The bigger players are still able to use their own scale, product diversity and global reach to ride this out.

Easier said than done…

However this is not so easy for the National or Tier 2 banks that have previously looked to expand internationally laying claims to ambitions such as ‘the emerging markets bank’. During this period they have built back office infrastructure for global operations that is too cumbersome, inflexible and costly for the national and regional revenue stream they now are forced to focus on. The business volume and profit does not warrant this level of expenditure. Often these banks are ‘pillars’ of their national banking infrastructure and hold positions of political standing that make job loses very difficult to accept.

A globally competitive environment

The situation is compounded by true global players becoming more aggressive in their pursuit of market share by entering into local markets far more aggressively and with the benefit of scale. Examples include Santander in UK, Standard Chartered, Barclays and Citi in Africa and HSBC in USA (refer note). Inevitably these players also have more mature shared service and sourcing models as part of their global operating models where they as the service managers to their own scale. The winners will be the ones who have a strategic end in mind, while focusing on short term opportunity that builds momentum to this strategic goal. We see the winners acting strategically linking this business change to a whole new operating model and supporting sourcing strategy. They are targeting support infrastructure that is more ‘fit for purpose’ and can be flexed up or down more easily with changing volumes while avoiding unnecessary fixed costs. These banks are seeing strategic sourcing and shared services as the key enabler of this vision rather than the tactical cost reduction solution outsourcing and offshoring usually gets directed at.

Challenging traditional views IT

Traditional paradigms are being fundamentally challenged as follows:

  • Operations is unique to banks and is too connected with the business to entertain shared service or sourcing strategies. Insurance companies tend to lead the way here but there is a material shift in Europe to Operations areas with 61% of all BPO in Financial Services being Industry specific (refer note);
  • Technology is a core service upon which a bank is dependent to survive. While traditionally the large players have done large IT deals, most new transactions in the Financial Services sector in North America in 2010 were by regional/national banks and insurers, such as Fifth & Third and Hartford. Also 3 of the top 10 North American transactions were mid size Canadian banks;
  • HR in banks is so different to the service available in the market place from traditional 3rd party providers. The North American banks have tended to challenge this philosophy more readily where HR is the single biggest BPO area (46%). The European mid tier have a real opportunity here where HR represents 1% of the market; and
  • Operations processes for Retail, Corporate and Investment banking businesses are so different and shared services will not create any value.

A real opportunity for the mid-tier innovators

For these leaders, gone is the short term focus on using outsourcing and offshoring as a unit cost reduction tool. We are seeing a greater focus on using these shared services and sourcing strategies with the following additional goals in mind:

  • Process Efficiency within existing processing functions, also includes benefits from effective vendor service management (Lean and 6Sigma etc.)
  • Additional volumes through consolidation of business and better demand management to reduce consumption
  • Economies of scale and efficiency from creating standard processing across functions
  • Leveraging internal assets as revenue streams – offering services to 3rd parties, JVs and spinoffs and leveraging assets of 3rd parties to gain scale economies and access to innovation without investment

This becomes particularly interesting when you consider that two major Indian banks have outsourcing parts of their operations to Indian outsourcers (State Bank of India and Central Bank of India). The mid tier innovators are looking at the problem enterprise wide. They are building enterprise architectures to establish a common understanding of what the bank is focused on. They are then spending time on operating models that define how these architectures will be delivered. The final step is to establish a shared service and sourcing strategy that delivers to these clearly articulated goals capturing full scope of opportunity identified above.

Apart from the obvious additional cost savings we are seeing the following additional benefits to banks that adopt this strategic approach:

  • It brings together the support functions under one structure
  • A focus on a synthetic company provides the necessary service mind set and opens options to commercialise these assets in the future;
  • This service led change provides the platform to enable wider bank transformation
  • Smaller players get the opportunity to have greater flexibility with scalable solutions to meet changing business needs
  • The focus on a distinct entity creates the opportunity for a new culture and people proposition