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John P. RomponManaging Principal - BPOHewlett-Packard Company
Insourcing / Outsourcing: Changing What It Means To Be A Bank
Panel Discussion
BAFT 2005 Conference83rd Annual Meeting
April 18, 2005Miami, Florida
With You Today
John Rompon - Moderator
Managing Principal - BPO
Hewlett Packard Company
Ken Alverson
Managing Director
Alliance Solutions Group
ABN AMRO
Darin Narayana
Chairman
ANSRSource
Michael Busch
Vice President
Booz Allen Hamilton
Agenda• Definitions
• Key Trends in Financial Services Sourcing
• Framework For Thinking About Sourcing
• What Processes Do FS Companies Outsource
• The Make v. Buy Decision
• Statement of Questions for Discussion
1. What Is A Bank?
2. The US Always (Never) Leads
3. To Each His Own: Different Models for Different Regions
4. With This ERP I Do Thee Wed: Sourcing’s Role In Consolidation
• Panel Discussion
Definitions• Business Process Outsourcing
– The transfer of management and execution of an entire business process to an external service provider, including technology, people, and process. In engaging BPO services, clients are buying access to executed business processes and business outcomes from their BPO providers. (IDC)
– The delegation of one or more IT-intensive business processes to an external provider that owns, administrates and manages the selected processes that are based on defined and measurable performance metrics. (Gartner)
– The transfer of a function previously performed (or considered to be performed) in-house to an outside provider.
• Nearshore Sourcing: sourcing services from geographies within close proximity to the location in which the services are consumed or contracted.
• Offshore Sourcing: sourcing services from geographies at a considerable distance from the location in which the services ar consumed or contracted.
• Global sourcing: a corporate sourcing strategy that identifies and leverages those human resources and assets, regardless of geographic location, most appropriate for meeting the organization’s needs, often coming from both nearshore and offshore locations.
• Insourcing: sourcing services internally as opposed to through a third-party BPO provider. Often provided in a a centralized shared services environment.
Decentralized (1990-95)
Regional Consolidation
(1996-99)
Off-Shore Global Consolidation (2000-
03)
Commercialization/Digitalization (2004-05)
• Consolidated general accounting processes into country-based shared services
• Consolidated regional service centers into four regional centers
• Focused on improving, standardizing processes
• Consolidated regional centers into a global transaction processing model with centers in low-cost locations
• Focus on taking expertise to the market
• Focus on improving transaction processing automation and self-service
HP achieved global shared services excellence over 15 years; and now offers customers an opportunity to
leverage this learning
Outsourcing experienceInsourcing experience
Overnight Success – HP’s Fifteen-Year Shared Services BPO Journey
Scale of Operations: 5,000+ professionals
Presence: 8 Global Delivery Centers (56 Local Front-Offices, 7 Regional Business Centers – not
shown)
Language capabilities: Expertise in 30 languages Main Global HubLow-Cost, Transaction Processing Center
(Bangalore & Chennai)Activities• Finance & Accounting• Billing• Order & rebates
management• Customer fulfillment• Employee services & payroll• Procurement/SCM• Reporting
Workforce• 4,000 FTEs, HP
employees• Attractive to employees• Language fluency in
English, French, German, Spanish, Japanese, Chinese
Support CentersSpecialized Language Transaction Processing
(Barcelona, Singapore, Guadalajara, Dalian, Wroclaw & Costa Rica)
Workforce• 250 FTEs Barcelona
150 FTEs Singapore 450 FTEs Guadalajara
75 FTEs Dalian 300 FTEs Costa Rica• Poland center in 2005
Activities• Country-specific
regulatory transactions• Customer support for
exotic languages (e.g., Serbo-Croatian, Chinese)
• Back-up and disaster recovery services
Onshore Centers (Colorado Springs & Houston)
Activities• Call center support (A/P)• Vendor refund & escalation• Tax reporting• Mail room & scanning
Workforce• 70 FTEs, contract
labor• 1 year to scale
HP: Global Structure With Regional Specialization
Trends• Enforced compliance with new regulations like Basel II, Sarbanes-Oxley and
International Accounting Standards (IAS/IFRS) will stretch business unit and internal IT resources to their limits.
• Increased competition for customers among financial institutions is creating a greater focus on innovations that can enhance customer loyalty by providing a superior customer experience. BPO releases FS companies from mundane business activities to concentrate on these more sophisticated requirements.
• The evolution of FS companies from vertically integrated companies into extended enterprises that collaborate in financial services value chains.
• BPO providers have continued to mature and demonstrate competence in business processes management.
• The recent economic downturn forced FSPs to compress budgets and evaluate BPO as a route to freeing internal resources to prioritize on strategic initiatives.
• Evolution of what it means to “be a bank”• Banks becoming service providers• EMEA leading the way in terms of outsourcing and Offshoring
Key Trends By Region
North America• Large players in
banking, securities, and insurance
• US-based global investment banks drive spending in multiple geographies
• Insurance companies and their infrastructure are often fragmented due to state-level regulation
• Highly sophisticated “early adopters” require custom development and often unbundle solution offerings; 2nd tier “fast followers” more inclined to purchase packaged solutions
• High demand for outsourcing and off shoring due to high labor costs
North America• Large players in
banking, securities, and insurance
• US-based global investment banks drive spending in multiple geographies
• Insurance companies and their infrastructure are often fragmented due to state-level regulation
• Highly sophisticated “early adopters” require custom development and often unbundle solution offerings; 2nd tier “fast followers” more inclined to purchase packaged solutions
• High demand for outsourcing and off shoring due to high labor costs
Europe• Many large banking and insurance players
• Consolidation across borders and within
specific markets will create opportunities for IT consolidation
• 10 additional countries joining the EU will need to upgrade their systems to EU standards/ requirements
• Adoption of International Accounting Standards and Basel2 will drive new systems requirements
• Strong interest in outsourcing & off shoring in select countries
Europe• Many large banking and insurance players
• Consolidation across borders and within
specific markets will create opportunities for IT consolidation
• 10 additional countries joining the EU will need to upgrade their systems to EU standards/ requirements
• Adoption of International Accounting Standards and Basel2 will drive new systems requirements
• Strong interest in outsourcing & off shoring in select countries
Asia• Large banking sector,
but less well developed securities and insurance industries
• Asian financial institutions are transforming their organizational structures in response to rapidly changing market dynamics
• Many banks still run core banking applications on mainframes, but are increasingly look to Open Systems migrations
• Strong propensity to engage outside advisors and purchase integrated solutions
• In-bound Global FIs
Asia• Large banking sector,
but less well developed securities and insurance industries
• Asian financial institutions are transforming their organizational structures in response to rapidly changing market dynamics
• Many banks still run core banking applications on mainframes, but are increasingly look to Open Systems migrations
• Strong propensity to engage outside advisors and purchase integrated solutions
• In-bound Global FIs
Perceived Demand Is Growing
FS Outsourcing Is Emerging Through A Series Of Unique Deals
Evolving Expectations for BPO
Tactical Objectives Strategic Expectations
1. Contain administrative costs Improve overall competitiveness
2. Convert fixed costs to variable Support M&A activity
3. Avoidance of capital investment Benefit from new technologies
4. Prevent decline in service quality Continuous quality improvement
5. Permit greater management focus Tap underserved markets
6. Improve balance sheet Create shareholder value
7. Freeze administrative cost ratios Create new business processes
Framework: Three Strategic Sourcing Questions
StrategyDoes the operation or asset directly contribute to the organization’s competitive advantage, core competency or capability?
StrategyDoes the operation or asset directly contribute to the organization’s competitive advantage, core competency or capability?
FinanceDoes the investment in the operation or asset yield a return that is greater than the cost of invested capital?
FinanceDoes the investment in the operation or asset yield a return that is greater than the cost of invested capital?
PerformanceIs the operating performance of the operation or asset (quality of output, cost and cycle time) measurably superior to relevant industry standards?
PerformanceIs the operating performance of the operation or asset (quality of output, cost and cycle time) measurably superior to relevant industry standards?
The answer to each of these questions should be YES if your company is going to own an operation or asset
The answer to each of these questions should be YES if your company is going to own an operation or asset
Extending the Enterprise
How much should we do ourselves and how much should we
buy from others?
Ronald Coase1991 Nobel Laureate, Economics
Where should we focus our resources?
David Ricardo19th Century Economist
Organizational Boundaries and Efficiency
• Ronald Coase asked, “…why is there any organization?,” in other words, why do firms exist?
– Firms exist because the cost of a central authority organizing transactions internally costs less than organizing them externally in the marketplace
• Ronald Coase also asked, “Why is not all production carried on by one big firm?”
– Because, at some point the cost of organizing the next transaction internally will be greater than the cost of organizing that same transaction in the marketplace
• Thus, Ronald Coase defined the limit of the size of the firm using the concepts of transaction, or interaction, costs
* Coase, Ronald, The Nature of the Firm, Economica, 1937
Production and Transaction Costs– Production costs (45% of GDP)* -- the cost of doing, or transforming
inputs into outputs– Transaction (interaction) costs (55% of GDP)* -- the cost of
organizing, including:• Coordination costs -- searching, obtaining, coordinating and
measuring• Motivation costs, cheating, opportunism and agency behavior
amongst managers and debt holders– Technology helps to reduce transaction (interaction) costs
• The cost of operating across firm boundaries is declining• As firms bulk up to compete globally, the cost of organizing factors
at the margin, i.e., non-strategic factors, becomes greater than organizing those same transactions in the marketplace
* Measuring the Transaction Sector of the American Economy, Long-Term Factors in American Growth, (Wallis, J. and North, D., University of Chicago, 1986
Organizational Boundaries and Specialization
* Ricardo, David, On the Principles of Political Economy and Taxation, 1817
• Adam Smith stated, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them…..” (The Theory of Absolute Advantage)
• David Ricardo replied that it’s more than absolute advantage; it’s the comparative advantage of focusing on the commodity in which a nation has a differential advantage and relying upon trade to obtain other goods *– Even if a nation has an absolute advantage in commodities
that it acquires through trade– It’s a trade-off of opportunity costs, focusing on what you do best
• Thus, David Ricardo defined the benefits of specialization and the need to focus on core competencies
Expanding The Boundaries Of Business
Sawhney, Mohanbir, Kellogg School of Management, 2001
2020thth century century
Machine Bureaucracy• Integrated• Diversified
21st century21st century
Networked Organization• Disaggregated• Specialized
Several Factors Determine Which Processes Are Candidates For Outsourcing
• ‘Non-core’
• Transactional in nature– Rule-based
– High volume and repeatable
– Rigid deadlines
• Fairly standard operations (within and across industry)
• Measurable operations - Turn-around time, accuracy, etc.
• Specialist skills required – (e.g. knowledge of practices, laws)
• Poor track record of internal funding/support
F&A ‘Outsourceability’ survey¹
Accounts Payable 85%
General Ledger & Consolidation 74%
Accounts Receivable 73%
Fixed Assets 70%
Travel Expenses 68%
Credit & Collection 61%
Cash Management & Treasury 56%
Billing 50%
Payroll 48%
IT Operations 46%
Source: Analyst reports, HP Analysis
¹Atkins survey - indicates % of finance executives who view sub-function as outsourceable
HP Methodology: Outsourcing Decisions
Outsource process to
local vendor
Leave process in-place
Move process to shared services center
Outsource process to low-cost country
Importanceof ownership•Driver of
competitive advantage
•Extent of risk if process fails
•Relative competence
•BU-specific knowledge
Remote serviceability•Physical presence required?•Process interdependencies?•Local knowledge required?•Regulatory issues?
HighLow
Low
High
Destination model for outsourcingh Time frame and action steps
Hold/prepare for o/s if
synergies with other
processes
Prepare plan to increase feasibility
Act now!
Act, but at2nd priority
HighLowReadiness for outsourcing•Current documentation,
training support, duration of training
• Is the process followed or are there parallel shadow processes
• IT issues•Vendor capabilities
Benefits ofoutsourcing• Focus on
core• Low fixed
cost• Quality• Lower cost• Revenue
impact
Low
High
1 2
• Pressure to reduce costs and improve profitability
• Pressure from “the Street” to improve ability to forecast earnings
• Increased business control requirements due to Sarbanes-Oxley Act
• Strong M&A activity resulting in redundant back office capabilities
• Inefficiencies associated with legacy systems and processes
• High technology costs
• Rapidly growing outsourcing market
Market Forces• Pressure to focus on the core
business
• Requirement to focus support functions on strategic activities
• Need for ability to rapidly scale operations
• Industry consolidations
• Pressure on margins
• Pressure to exceed industry profitability and growth benchmarks
• Need to eliminate geographic constraints
Competitive Forces
IT
HR
Procurement
Finance
Back OfficeFunctions
Market Forces Are Driving Companies To Evaluate Their “Back-office” Functions
Insourced Shared Services And BPO Have Emerged As The Structures Of Choice
Source: Business Process Outsourcing and the Human Capital Management Opportunity – JP Morgan, HP Analysis
“Make”In-Sourcing/ Shared Services
• Strategic and transactional functions performed internally
• Cost savings and service level improvements driven through:
— Shared Services — Wage arbitrage — Centralizing departments— Technology improvements— Implementing best practices and
process improvements— Standardizing processes and
policies
“Buy” Business Process Outsourcing
• Management of non-core activities transferred to BPO provider
• Cost savings set in contract terms • Responsibility for “core” and
strategic functions retained internally
• BPO provider responsible for management and execution of specific processes and functions
• Service levels set through formal service level agreements
• BPO provider leverages global low cost delivery infrastructure
In Source/Shared Services Outsource
Business Focus RiskOperating Model
BPO And Insourcing: Risk and Reward
•Market-based pricing contractually set
•Capital investments and improvements absorbed as cost of doing business
•Scale advantages achieved by leveraging multi-client operations
•Full focus on the “core business” of BPO processing
•Continuous investment in process enabling technology and best practices
•Focus on meeting Service Level Agreement metrics measuring quality and cost
•Large providers operate a global delivery network with established disaster recovery infrastructure
•Extensive experience in migrating process and operating offshore locations
•Performance guaranteed through formal Service Level Agreements
BPO
In-S
ourc
e -
SSC
•Pricing to BU’s often set at corporate level and/or allocated
•Capital investments and improvements directly effect company profitability and must be approved at corporate level
•Scale limited to company volume
•SSC activities are considered “back-office” and not the “core business”
•Profits returned to the BU’s rather than reinvested in the Shared Service Center
•Focus on cost reduction
•Often lack of expertise in process migration and offshore operations
•Disaster recovery infrastructure must be established or run risk of extended down time and potential data loss
•Savings subject to achieving projected efficiency gains and labor arbitrage
“Make”
Benefits And Risks Of “Make” v “Buy”
Benefits:• Reduce costs and improve service
levels• Low risk of intellectual capital loss• High level of control• Cost savings retained in-house• Improved visibility into corporate and
business unit performance
Risks:• Large investment required to establish
infrastructure, technology and personnel
• 3-5 year time to market/steady state• Operational complexities of support
functions distract from core activities• High systems/technology maintenance
costs• Scale advantages limited by company
volume
Benefits:• Guaranteed and significant cost
reductions • Guaranteed performance, based on
SLAs• Low up-front investment• Quick time to market: 1-3 years • Focus on core competencies • Increased access to innovative
technology without major capital investment
• Maintain flexibility in tighter labor markets
• Obtain greater measurement/reporting capabilities
• Increased scale advantages from multi-client
Risks:• Higher risk of loss of intellectual capital• Costs savings shared with vendor• Level of control dependent on vendors’
capabilities and governance model
“Buy”
Build v. Buy Decision
Insource Outsource
Non core– low value add – not key to long-term successPoor track record of internal funding/support
No need/desire to control
Market capability and maturity
Low risk/uncertainty
Core – high value add - key to long-term Success
High risk/uncertainty
High levels of control required
Strong track record of internal funding/support
Strong capability
Pressures to Insource/Outsource
?
Why Providers Are Targeting The FSI Market
• Transaction oriented• Large addressable market• Technology intensive • Embraced outsourcing and
globalization• Cost driven and thin-margined
- products often differentiated on price
• Consolidating• Early adopter of IT outsourcing• Major consumers of hardware
and implementation / systems integration services
21% growth over period
33% growth over period
Infrastructure outsourcing
Application outsourcing
Application outsourcing growth from 2003 to 2006
Business process outsourcing
BPO growth from 2003 to 2006
The financial services outsourcing market will grow by $2.5bn from 2003 to reach $13bn by 2006
Infrastructure outsourcing growth from 2003 to 2006
28% growth over period
Source: Datamonitor
What Is Being Outsourced In FS?
What Can Be Outsourced In FSI?
Threshold Question: Can It Go Offshore?
FS Outsourcing Competitors
Focus
Provider Type
More Balanced Offering Across
Multiple Verticals
Banks NonBanks
Heavily Focused on FSI
What Is A Bank?
A number of banks, such as Mellon, Barclays, ABN AMRO and HSBC, have positioned
themselves as providers of outsourcing services, and in so doing have challenged
conventional notions of what a bank is and what it should do. How will the trends of
Insourcing and outsourcing impact the evolving notion of what it means to be a
bank?
The U.S. Always (Never) Leads
Just as the fathers of outsourcing – economists Adam Smith and David Ricardo – were not Americans, many of the leading initiatives
in bank Insourcing and outsourcing are coming from non-American banks. Does
the US still drive thought leadership in this area? Did it ever?
To Each His Own: Different Models for Different Regions
In spite of continuing consolidation, banking still follows the old axiom that “all politics are
local.” The regional differences in regulation, labor laws and custom have often lead to various
regions adopting different Insourcing and outsourcing models. How do these models differ and can we expect them to become more alike or
more dissimilar?
With This ERP I Do Thee Wed: Sourcing’s Role In Consolidation
As banks continue to consolidate, how they deliver back-officer operations has become
a material consideration in picking partners. What impact do operating
environments have on bank consolidation and what can a bank do in this area to increase or decrease its prospects for
consolidation?