Evolved Outsourcing for Financial Services
Research presented today at the Gartner Financial Services Technology Summit in New York suggests that financial services providers must take a more strategic approach to outsourcing. Only about 30 percent of them will do so by the end of 2006, according to "Financial Services Outsourcing: Good Alternative or Overhyped Pitfall?" To gain maximum benefit, these businesses need to know when and how to use outsourcing; how to balance onshore, nearshore, and offshore alternatives; and how to choose the best partner for a particular task. "Outsourcing has been evolving for years. It allows us to grow and do things to be more profitable. But on the other side there's lots of negatives we need to be aware of, [including] political backlash involved with offshoring. People are fearful of [the company] eliminating their jobs, and it puts an organization at a heightened risk of privacy and security breaches," said Kimberly Harris-Ferrante, research vice president at Gartner and author of the report.
"Today's outsourcing is very tactical," Harris-Ferrante said. "Most of the tasks are considered ugly--it's out of site, out of mind. The outsourcer is considered a doer and not a thinker, so they built what we wanted, but it wasn't what we had in mind, because it wasn't bidrectional communication." Failure to communicate is one of the biggest reasons outsourcing projects fail, along with bad contract management, unrealistic expectations, staff turnover, and incomplete or invalid metrics. Harris-Ferrante explained the three-level outsourcing evolution companies must mature through to differentiate themselves:
Efficiency--This is the most basic and most common type of outsourcing. It provides organizations with positive benefits targeted at efficiency, productivity, and cost savings. Financial service providers that want to build, maintain, or consolidate systems can benefit at this tactical level, because the tasks aren't key competitive differentiators.
Enhancement--At this stage the goal is to improve business results or enhance processes and performance to get more value. The projects hit the company's bottom line and could include building core systems, developing a more rules-based architecture; or e-business initiatives.
Transformational--This is the most advanced level, but also the most risky. The goal is to create new processes or opportunities by changing the core components or structure of the organization and is much more strategic in nature. Projects may include customer-facing BPO application development; joint ventures; or realignment of competencies.
The first step to strategic outsourcing is to build a strategy: Have clear policies and gain support from business management. Next is selecting what to outsource and to whom. Having three to five outsourcing partners allows companies to ensure they have a range of skill sets, global options, and a combination of competition and cooperation, ultimately maximizing results. Third is to have an exit strategy, create a contract management office, and clarify the relationship. Finally, make sure management is a continual process, and look at outsourcing as part of the planning process.
"If used properly, outsourcing can be a strategic tool to help financial service providers transform their organizations, gain operational efficiencies, respond to shifting industry conditions, and better meet top-level business objectives," Harris-Ferrante said. "If outsourcing is used incorrectly or not properly managed, it is a risk endeavor and can lead to wasted time, money, project failures, and business failures."
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