Middle and back office outsourcing for banks and brokers. Preparing for the international stage Asia

Transcription

1 Middle and back office outsourcing for banks and brokers Preparing for the international stage Asia

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3 Managing editors James O Sullivan, Head of Client Development, Banks and Broker Dealers, BNP Paribas Securities Services Hong Kong Franck Lambert, Global Head of Marketing, BNP Paribas Securities Services Michelle Toy, Head of Marketing and Communications, Asia Pacific, BNP Paribas Securities Services Caroline McGarr, Senior Research Executive, YouGov Plc Leo Brownstein, Research Manager, YouGov Plc Special thanks Matthew Grabois, Global Marketing Manager for Banks and Brokers, BNP Paribas Securities Services Eric Roussel, Global Head of Local Clearing and Custody Products, BNP Paribas Securities Services Nathalie Gouttebarge, Head of Local Clearing and Custody Products Asia, BNP Paribas Securities Services

4 Table of contents

5 Table of contents Introduction and executive summary Section 1 Outsourcing: the picture now and in the future Section 2 Why outsource? Section 3 Outsourcing providers: what do decision-makers look for? Section 4 Is outsourcing meeting needs and can it be moved to do so? Section 5 What are Asian organisations focusing on? Project methodology About BNP Paribas Securities Services About YouGov Plc

6 Introduction and executive summary

7 Introduction and executive summary Introduction and executive summary The provision of financial services is both competitive in its very nature and relentless in its change of pace, driven by the international ambitions of both the financial services firms and the clients they service. This is changing how service providers are structuring themselves to provide solutions which not only solve an operational or technical requirement but provide additional value. This report focuses on banks and brokers in Asia (specifically Hong Kong and Singapore) and demonstrates how the outsourcing of middle and back office functions has become increasingly commonplace. Though the market for such services could be said to be mid-way to maturity, the research shows how banks and brokers have sought out trusted partners to prepare for their wider regional and international ambitions. The reason this situation has occurred is not simply down to internationalisation but also due to the increasing demands of local and international regulation. Regulation is already present but increased levels of outsourcing may also be a reaction to an expected increase of regulation in the future. It is clear that the growing risks from both regulation and internationalisation have led the majority of banks and brokers in these two markets to look to specialist providers to offer something that they believe is becoming harder to competitively deliver themselves. Moving to outsourcing of middle and back office functions remains however a challenge. Firms must be able to mitigate the loss of control felt by their clients when they pass operations to their chosen outsourcer. Price stands out as a prime mover of decision making over which outsourcer to use and this is currently a much more important concern for Asian respondents compared to UK respondents in a previous similar study conducted in the UK by YouGov on behalf of BNP Paribas. For a market which is still to reach maturity, the evolution of expectations around outsourcing will be central to what remains a learning exercise for many banks and brokers. As reliance on outsourcers looks set to grow, so should expectations vis a vis outsourcing providers, thus pushing for innovation in operating and service models. Many see outsourcing as vital to their long term strategy as it allows them to focus on their core expertise. Nearly all respondents either have a lot or a fair amount of trust in their suppliers to adapt to the pace of market change, the pervasive feeling from outsourcers being that suppliers are operating in a competitive market. Loss of control is a major concern for four-in-ten respondents when outsourcing post trade operations. Risk or losing business if clients are aware that you are outsourcing and developing a dependency on a particular provider are also cited concerns. Price is perceived to be extremely important by four-in-ten respondents when it comes to selecting an outsourcer, with product quality and reputation the next most important factors respectively. On the whole respondents feel that current outsourcing models are meeting their organisation s needs; however few feel their needs are currently met entirely. Nearly half feel price would help improve the middle and back office suppliers offer, while over a third think reputation and product quality would also enhance it. Internationalisation was cited as their organisation s top priority in the upcoming year aside from outsourcing. A quarter say it is growing their client base and footprint in Asia Pacific. 7

8 Section 1 Outsourcing: the picture now and in the future

9 Section 1 Outsourcing: the picture now and in the future Outsourcing has become a mainstream trend in Asia It is apparent from figure 1, that the outsourcing of middle and back office functions seem to be favoured by the majority of respondents surveyed. An overwhelming 97% indicate that they outsource these at least in part. Other results in this report indicate however that the number of firms that actually delegate all or parts of their middle and back office operations to outsourcing providers might actually be lower. Respondents defined outsourcing to include IT systems providers as well as operational outsourcing partnerships with clearers, custodians or prime brokers. This is consistent with previous surveys conducted in Asia by BNP Paribas which found that firms who had started to outsource all or part of their middle and back office operations was smaller with an upward trend to outsource year on year. Additionally, as a comparison, a recent BNP Paribas study conducted by YouGov in May 2014 on a similar group of respondents in the UK found out that 86% outsource their middle and back office functions in part as a common practice. Only one of the respondents in this survey claimed to outsource the entirety of these functions, with the final one keeping them entirely in-house. That final respondent, when asked if his/her organisation might be intending to outsource in the future, responded that they would consider it, but are not currently doing so. Figure 1 Overall current outsourcing (all respondents (n=67)) 1% 1% 97% Yes, all of them No Yes, some of them Don t know Q. Are any elements of your organisation s middle and back office currently outsourced? By outsourced, we mean any function which is supplied by a company that is not related to your company or to your wider group. 9

10 Section 1 Outsourcing: the picture now and in the future Back office functions are most commonly outsourced Four out of five businesses claim to have outsourced their back office, but very few have done this fully (2%) with most saying partially (77%). Slightly more than half (52%) declared they outsource the Clearing function, again this is potentially includes the use of clearing software from IT vendors as opposed to delegating the responsibility for clearing to third party clearers. Public data available via the Hong Kong and Singapore clearing houses confirms that the number of exchange participants who have appointed a third party clearer is increasing but remains limited so far. A relatively modest 12% outsource Custody (compared to 54% in the UK). This may be a reflection of respondents in Asia being focused on their home market with domestic custody being an integral part of their integrated service offering. This certainly has the potential to change with increasing internationalisation, across the region. Middle office functions, although significantly less likely to be outsourced, are passed on to third parties by 14% of respondents (3% in whole, 11% partially). Figure 2 Current and future outsourcing (all respondents (n=67)) Combined current + would consider Back office in part 77% 7% (84%) Clearing 52% 11% (63%) Back office in whole 2% 36% (38%) Middle office in part 11% 13% (24%) Custody 12% 11% (23%) Middle office in whole 3% (3%) 0% 20% 40% 60% 80% 100% Currently outsource Would consider Q. Which of the following functions does your organisation currently outsource? Q. Which of the following functions might your organisation consider outsourcing? 10

11 Section 1 Outsourcing: the picture now and in the future The widespread use of back office outsourcing looks like it will continue in the future. When asked which functions organisations might consider outsourcing in the future, 36% of respondents said that they would be interested in outsourcing their back office in whole. In a finding similar to the UK, there is also the suggestion that partial outsourcing of middle office functions could double with 13% prepared to consider this in addition to 11% who have already taken the step. One explanation for the finding that middle office outsourcing is so far behind could be the nature of the work handled in the middle office. Clearly transactions agreed in the front office are the starting point while the back office will be where final completion of the transaction occurs, prior to integration with accounting, reporting and compliance systems. The function of the middle office may in this context be an activity whose scope varies from one organisation to the other. In addition, to the extent middle office often involves an interaction with the ultimate client, it could be seen as a potential service differentiator, and therefore one that firms are less inclined to consider outsourcing. Unlike in the UK, where organisations use an average of 5.5 IT providers, the average for Asian organisations we spoke to is 3.3. This is slightly fewer than the 3.7 Clearing providers but greater than 2.9 Custodians. These figures present a picture of Asian based organisations using a consistent number of outsourcing providers across functions. Figure 3 Average number of outsourcing providers (all respondents (n=67)) Clearers IT systems providers Custodians Q. Thinking about your organisation s current post-trade operations, how many of each of the following types of providers does your organisation currently use? 11

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13 Section 2 Why outsource? 13

14 Section 2 Why outsource? Why outsource? The need to meet market and regulatory requirements is necessary in order to be able to both function and to enjoy the confidence of clients and governments. Standardisation across most if not (yet) quite all industry segments can thus drive the outsourcing of middle and back office functions. This is true whether in banking, insurance, asset management, broking in markets and products including among others, foreign exchange, commodities, debt, equities, derivatives. The financial crisis of 2008 and its aftermath have hastened this. As market infrastructures adapt to regulations and compete for attracting international investment flows, the number of projects impacting middle and back office operations for banks and brokers is also on the rise: Introduction of third party clearing in Hong Kong and Singapore over the past five years Introduction of increased central counterparty margin requirements and default fund contributions across Asia Introduction of central clearing and reporting to trade repositories for OTC derivatives with EMIR for European counterparties and Dodd Frank for American counterparties in 2014 Implementation of trade links between exchanges across the region such as the Shanghai-Hong Kong Stock Connect initiative in 2014, the ASEAN Link project launched in September 2012, aiming to create a single access point for trading between seven of the ten ASEAN countries Replacement of the Central Securities Depository technology in Singapore in 2015 and the expected replacement of CCASS/CHESS in Hong Kong and Australia Being able to adapt smoothly to these changes while managing long term expansion can therefore be a challenge, both in terms of IT spend and management oversight. The cost of bespoke, in-house IT systems and capabilities is not considered money well spent for many organisations, especially smaller and medium sized ones. It is more efficient to outsource to credible organisations who are committed and operate on behalf of many industry participants to stay abreast of new market and regulatory requirements. Lowering cost and risk is another driver. Outsourcing is not simply the performance of operational tasks. It is often much more sophisticated and goes beyond the simple reduction of investment or running costs. Indeed outsourcing is a way of reducing operational risk by transferring to a specialist. Increasingly, especially among banks and brokers, it is also a way for them to reduce capital requirements vis a vis the regulator and to access liquidity and collateral management solutions. 14

15 Section 2 Why outsource? In order to better understand the role of outsourcing within Asian financial organisations, respondents were asked to identify the underlying reason for using outsourcing. Three in five respondents (60%) claimed that outsourcing was a vital cog within their long term strategy, allowing them to focus on their core expertise. A further quarter (24%) stated that outsourcing middle and back office functions fell within both their short/medium and long term strategies, while 15% saw it as a cost-saving exercise. Figure 4 Basis of outsourcing strategy (all respondents (n=50)) Mainly a long term strategy, to help focus on core expertise 60% Both a short/medium term and a long term strategy* 24% Mainly a short/medium term strategy, to help with costs 15% I don t know 1% 0% 20% 40% 60% 80% 100% * Spontaneous option, not read out to respondents Q. Some people see middle and back office outsourcing as a mainly short or medium term strategy to help manage costs, whereas others see it as mainly a long term strategy that helps them focus on their core expertise. Which is closer to your view on middle and back office outsourcing? 15

16 Section 2 Why outsource? Focusing on core competencies and risk management is top of the agenda The strategic motivation for outsourcing was examined in greater detail through a question that asked respondents to rate the importance of a range of factors as potential drivers for outsourcing decisions. Figure 5 Outsourcing and drivers and potential drivers (all respondents (n=67)) Allowing the company to focus on core competencies Risk management Containing costs or benefitting from economies of scale Business growth Obtaining external best practice Protecting against market and regulatory change Optimisation of liquidity and collateral 12% 10% 42% 36% 34% 30% 27% 97% 99% 99% 99% 99% 93% 96% 0% 20% 40% 60% 80% 100% Total 10 out of 10 ( extremely important ) Total 7-10 out of 10 ( important ) Q. Regardless of whether your organisation currently outsources or not how important do you think each of the following factors are as drivers for deciding to outsource? Multiple factors are important to at least some degree here: on the 0-10 scale used, where 10 represents a factor being extremely important, all drivers are rated at 7 or above by at least 93% of respondents. This indicates that an outsourcing decision is usually underpinned by several strategic imperatives. Looking at the sample who believe a driver to be extremely important (i.e. rating it 10 out of 10), we are able to compare priorities. More than 4 in 10 (42%) rate focus on core competencies as extremely important. This picture is reflective of findings from UK organisations earlier this year. Outsourcing is clearly seen as a way of allowing firms to grow quickly and efficiently as the volume of their business and breadth of products increases. This is re-enforced by 3 in 10 rating benefitting from economies of scale (34%) and business growth (30%) as extremely important. 36% of respondents cite risk management as extremely important in driving outsourcing decisions. The concept of risk is very wide transferring the responsibility of operational tasks to a specialist is intuitively the most efficient way to reduce operational risk. But reputational risk should not be forgotten, especially in relation to regulation and compliance risk. While only 12% rate the protection against market and regulatory change as extremely important, 93% agree it is important. 16

17 Section 2 Why outsource? It is interesting to note that 96% view the optimisation of liquidity and collateral as important. Western regulations such as Basel III with the Liquidity Coverage Ratio to be implemented by 2015 or OTC derivatives clearing houses mandating the deposit of high quality liquid asset as collateral have started to push banks and brokers to turn to their outsourcing partners for solutions. Putting aside the critical importance to focus on core competencies, the above results contrast with the UK ones, where protecting against market and regulatory changes ranked second as extremely important for 30% of respondents. Conversely, risk management and business growth were cited as extremely important only for 16% and 8%. One could argue that UK market participants are probably feeling much more regulatory pressure domestically and this could materially affect their decision to outsource. Figure 5 also helps to paint an interesting picture of financial institutions in Asia prioritising the strategic role of outsourcing as a means to improve their current working practice (core competencies, risk management, cost-saving), and placing these ahead of the growth of their business. We are satisfied because our efficiency is increased and our data security is further improved. Well It has less risk factor. I think that we have mitigated our risk, we have increased our efficiency, our security is improved and we can better navigate the market fluctuations. 17

18 Section 2 Why outsource? Trust in suppliers is high As in the UK, trust in suppliers can be seen from the fact that 95% of respondents who currently outsource have either a lot or a fair amount of confidence in their supplier(s) to adapt to the pace of market change. Figure 6 Ability of providers to keep up with pace of market change (all outsourcers (n=66)) 2% 3% 24% Total A lot + A fair amount (95%) 71% A lot A fair amount None at all A little Don t know Q. Thinking about your organisation s current middle and back office supplier(s), how much confidence do you have that they are able to adapt to the pace of market change? Confidence in suppliers appears to stem from a wider view of the business market. Respondents feel that their suppliers are aware of the pressures of adapting to change, whether this be from a regulatory point of view or a technological one, and have the capabilities to meet the new market requirements. When asked to expand on their confidence in their supplier, one respondent stated that They have to keep the pace, else they will be out of the business race. From this we can infer that outsourcers view the market as competitive, and may be of the opinion that if a supplier is not capable of keeping pace, a suitable alternative will be sought. 18

19 Section 2 Why outsource? Loss of control biggest concern of outsourcing As the findings reported above show, outsourcing has become a mainstream trend in the Asian market. However, as with the implementation of all changes in process, there are risks associated with this movement, and respondents were asked to evaluate these. Not surprisingly, and consistent with previous research from BNP Paribas in the region, loss of control stands out as the biggest concern for organisations that outsource. Two in five respondents (39%) rate it as a major concern. Other concerns highlighted include the risk of losing business if clients are aware of processes being outsourced (9% and significantly lower than in past research), and developing a dependency on a single provider (4%). Interestingly, 19% of Singaporean respondents rate the risk of losing business as a major concern whereas in Hong Kong no-one agrees with this stance. This is perhaps less a demonstration of attitudes fostered by the organisations themselves and more attributable to their client base. Once again the contrast with the UK is stark, where only 24% indicated loss of control as a major concern, while lack of responsiveness, the strategy and the strength of the provider were seen as major concern by respectively 4 in 10 (42%), 3 in 10 (30%) and 1 in 4 (25%). This highlights the stage of maturity in Asia compared to the UK. UK decision makers have evolved to require a strategic partner who understands their business and is committed to meet their long term demands as a partner. Figure 7 Concerns over outsourcing (all respondents (n=67)) Loss of control Risk of losing business if clients know you are outsourcing Developing a dependency on a particular provider Lack of responsiveness from the provider The preference of others in our organisation to keep things in-house Not knowing enough about different providers to select one The strategy of the provider The strength of the provider 9% 4% 2% 1% 1% 0% 0% 39% 99% 90% 99% 97% 100% 90% 97% 95% 0% 20% 40% 60% 80% 100% Total 10 out of 10 ( major concern ) Total 7-10 out of 10 ( concern ) Q. When outsourcing post-trade operations, or if your organisation were to do so, to what extent would each of the following be concerns for you? 19

20 Section 2 Why outsource? The trend towards outsourcing in Asia allows firms to focus on core competencies Asia has previously been perceived as being behind Western markets in terms of its use of outsourcing. With this in mind, respondents were asked why they feel that outsourcing is less developed in Asia, and three key themes emerged. The first of these is awareness. Some respondents feel that organisations need to be more aware of the opportunities to outsource functions and this will in turn lead to increased development: Business process outsourcing is rapidly getting common in UK and US. I think there is a need to create more awareness in Asia about outsourcing. I would say that lack of awareness towards outsourcing might be the reason of its lower acceptability in Asia. The second theme is that the government and unions are reluctant to allow too much development of outsourcing. This is due to its effect on the jobs of those working in the most threatened functions in these organisations. Protecting the status quo is central here: In my bank, outsourcing trend is low because our bank is a government owned bank and unions always oppose outsourcing Since we are a government owned bank and outsourcing middle office operations are not very well appreciated by middle level management and unions. Outsourcing is always considered as a threat to jobs. However, not all respondents agreed with the sentiment of the question. Their response highlighted that the Asian market is developing a taste for outsourcing and that this is allowing organisations to return their focus to the functions that they are most skilled in: I do not think that outsourcing is less common in Asia. Many companies are getting their middle office functions outsourced in order to focus more on their core competencies. I think all businesses across Asia are increasingly looking to outsource some of their operations and focus more on their core competencies as an important feature of their global strategy. 20

21 Section 3 Outsourcing providers: what do decision-makers look for? 21

22 Section 3 Outsourcing providers: what do decision-makers look for? As outsourcing becomes more prevalent in Asia, and businesses decide which suppliers to partner with, it is important to understand what factors, outside of cost, might be driving those strategic decisions. Specialist providers the most-preferred set-up Three in five individuals (58%) state that, when choosing an outsourcing supplier, they look for a specialist in the field, compared to around half in the UK. Just under a quarter (23%) would choose to use a Custodian Bank, the same proportion as the UK, with 14% opting for a Prime Broker. Only 2% would take another outsourcing approach, considerably less than the UK (17%). The kind of providers that were mentioned in the middle and back office specialist section included a mix of pure IT and technology vendors and custodian banks. In no particular order: Pactera, PCCW, Avaloq Sourcing Asia Pacific, Opus IT, KPMG and BNP Paribas. Figure 8 Preferred outsourcing approach (all respondents (n=67)) 60% 58% 50% 40% 30% 20% 23% 14% 10% 0% A specialist middle/back office outsource provider A custodian bank A prime broker 2% 3% Other outsourcing approach Don t know Q [OUTSOURCERS]. Which one of the following is your most-preferred outsourcing approach? Q [NON-OUTSOURCERS]. Which one of the following would be your most-preferred outsourcing approach? 22

23 Section 3 Outsourcing providers: what do decision-makers look for? Price, product quality and reputation are key considerations when choosing providers Organisations looking to outsource are not just concerned about the type of provider that they are outsourcing their functions to, but also about the service that they are receiving from that provider. First and foremost, this is a question of the value that they are receiving. 43% perceive price as extremely important (10 out of 10), with product quality also considered fundamental (39%). A third of organisations (33%) consider the reputation of the provider when making their decision. As outsourcing becomes the norm for a number of middle and back office functions in Asia, it is expected that the quality of client service and relationship management will become more important. Progressively it will follow the UK where respectively 46% and 30% highlight it as extremely important versus only 22% and 19% here. Figure 9 Factors in selecting outsourcing providers (all respondents (n=67)) Price Product quality Reputation Client service Relationship management Scope of service Global reach Financial strength 7% 9% 19% 16% 22% 33% 39% 43% 100% 98% 100% 100% 100% 100% 98% 99% 0% 20% 40% 60% 80% 100% Total 10 out of 10 ( extremely important ) Total 7-10 out of 10 ( important ) Q. How important do you believe each of these factors is in selecting an external service provider? 23

24 Section 3 Outsourcing providers: what do decision-makers look for? Price and global reach are perceived as core differentiators Within the market of outsourcing services, a single differentiator has the potential to make a supplier stand out from the competition. Respondents were asked the extent to which they felt there is variation among the outsourcing suppliers. While price is perceived as a core differentiator (just as it was a key consideration when choosing a provider), it is interesting to note that global reach also varies among suppliers, according to a third of respondents (34%) in Asia. Price is not as much of a point of difference with the UK market, where global reach (30%), relationship management (28%) and client Service (26%) were all cited as greater differentiators than price (24%). At the other end of the scale, client services (40% saying hardly any variation) and relationship management (48%) are factors that are not perceived to vary greatly between suppliers. Again, could this just be an evolution of Asia towards internationalisation? Figure 10 Difference between suppliers of middle and back office functions (all respondents (n=67)) Price Global reach Product quality Financial strength Reputation Scope of service Relationship management Client service 37% 49% 13% 34% 52% 13% 34% 39% 27% 31% 46% 22% 30% 36% 34% 30% 49% 21% 22% 30% 48% 22% 37% 40% 0% 20% 40% 60% 80% 100% A lot A little Hardly any/none at all Q. Thinking about each of these areas again, how much difference do you believe there is between various middle and back office suppliers? 24

25 Section 4 Is outsourcing meeting needs and can it be moved to do so? 25

26 Section 4 Is outsourcing meeting needs and can it be moved to do so? The requirements and demands that Asian organisations have of their outsourcing providers are complex: product offering is vital, alongside excellence in client service. A provider is also expected to help the client keep up with the pace of increasing market and regulatory change. All this, while enabling the client not only to focus on their core competencies but also providing these services at a competitive price point. To what extent are providers currently meeting these needs? Provider satisfactions levels On an overall level, organisations appear to be satisfied with the level of service they are currently receiving from middle and back office suppliers (96%). However, breaking this down further, we see that three quarters (77%) are somewhat satisfied compared to just 19% who are strongly satisfied. The question here is that, as outsourcing continues to increase in Asia, and with it competition, will making your clients somewhat satisfied be enough? Figure 11 Satisfaction with provider(s) (all outsourcers (n=53)) 2% 2% 19% 77% Strongly satisfied Somewhat satisfied Somewhat dissatisfied Strongly dissatisfied Don t know Q. How satisfied are you overall with your organisation s current middle and back office providers/provider? Furthermore, to support this feeling of reserved satisfaction, respondents feel that their current operating model is adequate without being spectacular. Evidence of this comes through when they are asked to rate the level to which a series of statements describe their organisation s outsourcing model. Respondents rate them very much in the 7-10 out of 10 bracket, but very few hit the 10 mark. Satisfaction with providers is likely to become increasingly driven by the ability to provide an operating model fit for internationalisation: as explained in the previous section, global reach of providers is seen as a differentiator. In anticipation of the findings of the last section of this report, one could argue that the above scores already point to the difficulty for some suppliers to provide an operating model that matches client organisation requirements for internationalisation. 26