FOUR QUESTIONS BANKS SHOULD ASK BUSINESS PROCESS OUTSOURCING PROVIDERS. An ebook that examines the answers

Transcription

1 FOUR QUESTIONS BANKS SHOULD ASK BUSINESS PROCESS OUTSOURCING PROVIDERS An ebook that examines the answers

2 To learn more about FIS, please visit FIS and/or its subsidiaries. All Rights Reserved. 2 Four Questions Banks Should Ask Business Process Outsourcing Providers

3 CONTENTS Introduction The questions to get to the right information The advantages of both approaches...15 Question 1: How flexible is your pricing in terms of providing a variable cost per unit?...6 Global outsourcing top 10 list...16 Expenses in technology investment and Find a partner that offers both alternatives...16 people must be accounted for...8 The size effect of onshore versus offshore...17 Software as a Service enables variable technology pricing...8 A different approach for evaluating partners Extending Software as a Service Question 2: What capabilities do you have to help us extend our business model or reach? Examples of one-time events The business case for outsourcing an after-hours call center...11 Questions to ask to uncover opportunities for extending business models...13 Seek out innovation in BPO...4 More executives seeking innovation from BPO Question 3: What flexibility do you have to staff onshore, offshore or a combination thereof?...14 Definitions of offshore and onshore Questions to ask providers relative to onshore and offshore...17 A final word from TowerGroup Question 4: How can you help me mitigate risk? Strategic risk Reputation risk Compliance risk Operational risk Bringing it all together Vendor Risk Management, Consumer Compliance Outlook, First Quarter Summary Outsourcing Guiding Principles...25 Four Questions Banks Should Ask Business Process Outsourcing Providers 3

4 68 PERCENT OF THESE EXECUTIVES SAID THEIR OUTSOURCING PHILOSOPHY WAS A SELECTIVE USE OF IT AND BUSINESS PROCESS OUTSOURCING (BPO) Given the tremendous pressures facing U.S. financial institutions to hold down costs while generating revenue, it should come as no surprise that many plan to expand their efforts to reduce operational costs. Outsourcing of discrete business processes to lower costs associated with providers offers an easily available expense management tactic to bank executives. Recent research from Aite found increased interest among senior financial technology executives in lift-out outsourcing an offering in which vendors supply fully managed versions of their product internally or via partnerships. This activity is reflected in the finding that 68 percent of these executives said their outsourcing philosophy was a selective use of IT and business process outsourcing (BPO). Their preference is to selectively outsource as not only a cost take-out strategy, but also as a means to add value to their existing banking products and services (see chart). 4 Four Questions Banks Should Ask Business Process Outsourcing Providers

5 OUTSOURCING PHILOSOPHY Q: Which statement best describes your outsourcing philosophy? We generally refrain from outsourcing IT and business processes. We generally use outsourcing to fix our IT and business process problems. We generally use IT and business process outsourcing very selectively to add value to our existing capabilities. Source: Aite Group s survey of 178 financial technology executives, Q % 17% 68% The questions to get to the right information Bank executives must take this expanded viewpoint as they seek to evaluate potential BPO partnerships and providers. Much like entering into a marriage with a prenuptial agreement, the partnership needs to be well defined and based on what each party brings to the table. As bank executives define their unique business requirements for a request for proposal, they must also rigorously evaluate BPO vendors. Due diligence on the front end will ensure both cost containment and value-added service emerge from the potential partnership. This ebook looks in depth at four key questions financial institution executives should ask potential BPO partners: 1. How flexible is your pricing in terms of providing a variable cost per unit? 2. What capabilities do you have to help us extend our business model or reach? 3. What flexibility do you have to staff onshore, offshore or a combination thereof? 4. How can you help me mitigate risk? Four Questions Banks Should Ask Business Process Outsourcing Providers 5

6 HOW FLEXIBLE IS YOUR PRICING IN TERMS OF PROVIDING A 1VARIABLE COST PER UNIT? 6 Four Questions Banks Should Ask Business Process Outsourcing Providers

7 One of the primary advantages of outsourcing is that it allows banks to match expenses to fluctuating demand, thus removing the burden of managing overhead and costs in fluctuating market conditions. The mortgage business provides an excellent example of this variability based on interest rate changes. When interest rates are low, mortgage origination volume rises and banks in this business have to ramp up staff quickly. Conversely, when interest rates go up, origination volumes slow, creating expense reduction challenges for mortgage-intensive banks. The interest rate effect on mortgage origination volumes is depicted in the graphic at the side. TRADITIONAL MORTGAGE LENDING BUSINESS MODEL Mortgage Origination Volumes 1% 2% 3% 4% 5% Interest Rates Four Questions Banks Should Ask Business Process Outsourcing Providers 7

8 Expenses in technology investment and people must be accounted for Beyond the people side of this expense equation, mortgage technology investments must also be taken into account. Banks with growing origination volume need the latest mortgage origination applications in order to keep up with demand. This technology requires integration into their core banking system and mortgage servicing applications in order to streamline business processes and help keep the bank s overall efficiency ratio low. Software as a Service enables variable technology pricing An emerging technology that enables the variable pricing of a specific application, such as mortgage origination, is Software as a Service (SaaS). SaaS delivers applications hosted by a service provider or technology vendor that are made available to customers over a network, typically the Internet. This service, when fully integrated with outsourcing resources familiar with the technology, provides the foundation for comprehensive and variably priced alternatives. In this mortgage banking example, outsourcing solutions that include one variable price for both technology and people would help a bank reach true cost variability. The bank executives must determine the outsourcing partner s ability to bundle all the cost elements of mortgage origination into one per-unit price, e.g., cost per mortgage application. Not only do bundled costs help match fluctuating demand, they also remove a management oversight burden on the bank s staff. They no longer have to constantly evaluate and shop for new technology. They depend on the outsourcing partner for that investment (which the outsourcing partner is able to spread among many clients). 8 Four Questions Banks Should Ask Business Process Outsourcing Providers

9 A different approach for evaluating partners As Everest Research suggests, banks must take a different approach when evaluating outsourcing partners on their ability to combine both technology and people into one variable price. They must thoroughly evaluate the outsourcing partner s ability to offer these types of solutions. They also need to ask questions such as: Does the outsourcing partner own the banking technology integral to the solution being offered? What product road maps exist for the technology platform? How are the human resources trained on the technology? Combining SaaS and BPaaS allows for creativity in solution delivery and pricing. Bank executives must understand how the components of the variable pricing fit together. This understanding allows them to suggest creative pricing models that best fit their bank s unique situation. EXTENDING SOFTWARE AS A SERVICE The consulting firm, Everest Research, combines the SaaS model with BPO to create the concept of Business Process as a Service (BPaaS). It is fundamentally different from traditional outsourcing models as it seeks to merge the labor arbitrage value proposition with technology solutions. BPaaS is a sourcing model in which buyers receive standardized business process services on a pay-as-you-go basis by accessing a shared set of resources (people, application and infrastructure) from a single provider. Given the fundamental differences compared to the traditional BPO as well as the IT plus BPO model, a different approach is required to evaluate, select and implement a BPaaS model. Four Questions Banks Should Ask Business Process Outsourcing Providers 9

10 2WHAT CAPABILITIES DO YOU HAVE TO HELP US EXTEND OUR BUSINESS MODEL OR REACH? 10 Four Questions Banks Should Ask Business Process Outsourcing Providers

11 Bank executives need to consider BPO providers as partners that can help their organizations add value to customer relationships, sales and service situations. The outsourcing arrangement no longer reflects just labor arbitrage (to borrow a phrase from Everest). The partnership should contribute to growing the top line as well. The questions bankers ask in this area can open new avenues of possibility. Examples of one-time events Outsourcing partners can provide resources to help banks with one-time events such as answering customer questions during the conversion of an acquisition to a new banking system. These services from the partner remove a cost burden from the bank and create flexibility to manage through the unusual circumstances that a conversion can create. Outsourcing partners can also extend call center availability after hours to support online and mobile users during the time they bank most comfortably. This offers a clear case of adding value by increasing service levels to an important customer segment. And this service makes economic sense too, as seen in the following simple example. The business case for outsourcing an after-hours call center In order to analyze the economics of providing 24/7 support, the following is an example of a bank that provides customer support during normal business hours from 8 a.m. 6 p.m. If this bank wants to extend its support model to 24/7, it will need to add staff to cover support from 6 p.m. 8 a.m. Monday Friday and from 6 p.m. Friday 8 a.m. Monday morning. This reflects an additional 118 hours of support 14 hours each day from Monday Friday and 24 hours each on Saturday and Sunday. Four Questions Banks Should Ask Business Process Outsourcing Providers 11

12 This amounts to an additional three full-time equivalents (FTEs), each working 40 hours a week. Since these people will take time off for vacations, illnesses, etc. (and, to account for multiple calls coming in at the same time), the bank really needs at least six FTEs. In a highcall-volume environment, the number of FTEs required will be even higher. For the sake of this discussion we will assume this is not a high-call-volume environment. The following analysis compares the monthly minimum in a shared services environment typically about $15,000 per month to the monthly costs of running an after-hours call center in-house. The annual savings in this simple model equates to $60,000. In a high-volume call center, the savings realized would be even greater. 25% RETURN ON INVESTMENT $180K IN-HOUSE SALARIES, BENEFITS, ETC. Includes training, management overhead, facilities, supplies, equipment, quality assurance, management reporting, call recording and monitoring, etc. OUTSOURCED MONTHLY MINIMUM 12 Four Questions Banks Should Ask Business Process Outsourcing Providers

13 How familiar is your staff with banking regulations governing certain products such as Reg E and the FDIC s overdraft guidance? Can you supplement our existing staff in order to meet demands of a new regulatory requirement, such as overdraft opt-in requests? How will you train your staff on my unique and finite requirements? What are your minimum requirements for entering into outsourcing agreements? Questions to ask to uncover opportunities for extending business models Bankers need to get creative when looking at outsourcing partners and think about unique situations where outside assistance can add the right mix of additional value and cost management. Questions bankers should ask include: What ability do you have to supplement my current call center environment? Can you support a new product launch effort that includes support calls on the new offering? Seek out innovation in BPO Engaging potential partners with these types of questions should open doors to new thinking and possibilities. These discussions shift the focus to value creation, the new vision for BPO according to a report from Morrison and Foerester. More executives seeking innovation from BPO In their 2011 report, Global Trends on Sourcing, Morrison and Foerester describe innovation as a key aspect of outsourcing: Innovation is back on the agenda. For the past two years, all the talk in the outsourcing sector has been about cost saving, and all the projects have been about restructuring or renegotiating outsourcing contracts. That is changing. A recent U.S. study about companies seeking innovation in business processing outsourcing shows that 43 percent of executives in outsourcing customers view innovation as a critical element of BPO. Four Questions Banks Should Ask Business Process Outsourcing Providers 13

14 WHAT FLEXIBILITY DO YOU HAVE TO STAFF ONSHORE, OFFSHORE OR A COMBINATION 3THEREOF? 14 Four Questions Banks Should Ask Business Process Outsourcing Providers

15 Definitions of offshore and onshore Offshore BPO is the exporting of work from the U.S. to areas of the world where there are lower labor costs, tax savings or both. In this type of arrangement, the foreign-based firm provides services for a U.S.-based company that could also be, or usually have been, provided in the U.S. Onshore outsourcing keeps the business process that is being outsourced in the U.S. and utilizes a partner to supply U.S.-based labor and expertise for the completion of the work. The advantages of both approaches One primary consideration bankers must make when contrasting onshore and offshore alternatives is to ask themselves if they are seeking purely a labor savings solution or if they desire a combination of labor and automation savings. The advantage of work completed through an offshore BPO relationship is generally realized through labor arbitrage the difference in labor rates between where the work is performed and the home country. Low labor costs allow overseas firms to offer a comparative labor cost advantage versus having the work performed in the U.S. with U.S. labor. Appropriate processes to outsource offshore include those with well-defined requirements and specifications and those with routine end-user interaction. Alternatively, onshore outsourcing providers have had to develop and rely on technology and automation to a much greater extent to offset their relatively high labor structures. The technology-grounded business model completes work in an efficient and effective manner with fewer employees and offers clients automation and process transformation advantages. Offshore firms certainly offer labor savings, but bankers must not ignore the hidden, ongoing costs for long-distance communication, training and travel. Establishing and then maintaining a long-distance business relationship can be very costly and time consuming. Onshore providers have much lower communication, training and travel costs, which in combination with a technology offering, deliver a total cost structure (both direct and indirect) that can be competitive with offshore providers without the hassle of an overseas engagement. Four Questions Banks Should Ask Business Process Outsourcing Providers 15

16 WHICH SHORE? DEFINITION IS ALL RELATIVE Depending on their proximity to your business location, you can outsource work to an offshore, nearshore or onshore locale. Find a partner that offers both alternatives Bankers should also evaluate the outsourcing partner on their ability to offer either offshore or onshore alternatives. This could provide a community bank with the ability to source any client-facing processes domestically and the potential to source back-office functions overseas. Offshore refers to a foreign locale that is far away in distance and, more importantly, far apart in time from your primary location. Nearshore also refers to a foreign locale, but one that s much closer to you geographically. Onshore is a locale in the same country as yours. Source: Nearsoft 16 Four Questions Banks Should Ask Business Process Outsourcing Providers

17 The size effect of onshore versus offshore The traditional large BPO providers offer a substantial presence offshore. In fact, of the top 10 leading outsourcing firms, not all are headquartered in the U.S. As bankers question which country their outsourcing solution will come from, they should also question the banking focus of their potential provider. All of the providers in the top 10 service other vertical markets in addition to financial services. Questions to ask providers relative to onshore and offshore Do you offer a combination of both onshore and offshore resources? How do you train personnel on banking functions and technology both offshore and onshore? Can we sit in on a training session? Can I visit your facilities and meet with the staff that would provide our outsourcing partnership? How would you transition work done here in the U.S. to a facility overseas? How do you manage your overseas operations? What size staff do you have in each location, and what business processes are performed in each? A FINAL WORD FROM TOWERGROUP TowerGroup believes that the offshore/ onshore BPO model will keep growing. Continued federal regulation, the need for local market knowledge and political imperatives will drive increased demand for onshore BPO operations. BPO providers will need to blend their offshore operating cost model with an onshore model in low-cost regions of each client s country to serve their customers while meeting their own shareholder growth demands. (From Offshore BPO is Moving Onshore by Craig Focardi) Four Questions Banks Should Ask Business Process Outsourcing Providers 17

18 4HOW CAN YOU HELP ME MITIGATE RISK? 18 Four Questions Banks Should Ask Business Process Outsourcing Providers

19 As banks evaluate outsourcing partners, they need to assess each vendor on the relative risk of doing business with them. Indeed, the Federal Reserve has authored an article for banks called Outsourcing and Vendor Management. In it they state: Even though mature banks may have successfully passed through the de novo years, several risks associated with outsourcing must be understood and carefully managed. For many mature banks, the decision to outsource and the application of the service can be complicated, particularly when the bank has become more complex in its products, services, and customer base. Mature banks will also experience strategic risks, reputational risks, compliance risks and operational risks. Banks should look to their outsourcing partners to help them mitigate these risks. The background, contracts and service levels a partner can provide should go a long way to assuage the risk anxieties of banks and regulators alike. Taking a closer look at each risk category provides insight as to the questions bank executives can ask potential outsourcing partners that help them build a risk profile. Four Questions Banks Should Ask Business Process Outsourcing Providers 19

20 STRATEGIC RISK REPUTATION RISK Strategic risk can arise from adverse business decisions and may result in adverse effects to earnings or capital. Not choosing the right service provider may result in unnecessary costs to the institution. Unexpected costs are the downfall of any partnership. Early on in discussions, the bank and outsourcing partner must work together to uncover all the cost elements of a proposed solution. Questions to ask and steps to take at this stage of the partnership include: What is the size and financial history of your firm? How long has your firm been in the outsourcing business? Research the background of the principals of the organization. How many other banks are outsourcing this business function(s), and can I visit with them to get a handle on cost from their perspective? What do your typical contracts look like, and can I review a generic version? Would your organization be willing to participate in an assessment of my business requirements prior to creating a more precise proposal? Reputation risk can result from poor service from third parties or from customer interaction that is not consistent with the overall standards of the bank. Sometimes third-party practices may not align with a bank s desired image. To counter this risk, bank executives must assess how experienced the potential partner is in the banking industry. Does the majority of the BPO come from U.S. banks? What have you read recently about their organization in the banking trade press? Other questions to ask include: What type of service level agreements do you offer for business requirements like ours? How would you resolve differences in standards that might arise? Find out what lawsuits may be pending against the firm you re considering. How has your firm handled a potentially damaging situation to your own reputational risk? Give a specific example. 20 Four Questions Banks Should Ask Business Process Outsourcing Providers

21 COMPLIANCE RISK OPERATIONAL RISK When consumer or legal compliance controls are inadequate, or if an outsourced provider has inadequate control systems in place, compliance risks may occur. It is imperative the bank reviews their provider s understanding of banking compliance and regulation. They need to understand how their partner stays abreast of changes in the industry. They also need to find out what compliance controls are in place for the banking customers they serve. Questions to explore include: How is your firm monitored for compliance? Do you have a chief risk officer and chief compliance officer? And what is the governance structure? How does your firm stay current on existing and pending bank regulations? Does it monitor those regulations? How do you train your staff on bank compliance issues related to the BPO arrangement? Do you employ former bankers? Operational risk may result from technology failure, inadequate financial capacity to fulfill obligations or provide remedies, and fraud or error. This type of risk needs to be assessed, especially in the case of the BPO provider that s offering a combined people and technology solution. The technology component must offer redundancy and security levels your bank is comfortable with. Key questions to ask include: Does your firm have a business continuity plan, and can I review it? Does your firm participate in SAS 70 (or similar types of) audits? What security measures does your firm follow to safeguard customer data? Does your firm have a chief information security officer? And what governance structure does your firm have for enterprise risk management? Four Questions Banks Should Ask Business Process Outsourcing Providers 21

22 Bringing it all together The risks associated with outsourcing are really not that different from the risks inherent in maintaining the functions in-house. Strong controls will help maintain the following: The discipline to conduct proper due diligence The ability to communicate performance standards to your partner The ability to maintain a residual organization to govern the outsourcing relationship Even with strong controls it becomes important to manage and monitor the BPO partner relationship and their performance on an ongoing basis. Performance monitoring controls to mitigate risk according to the Federal Reserve Bank of St. Louis are listed at the right. VENDOR RISK MANAGEMENT, CONSUMER COMPLIANCE OUTLOOK, FIRST QUARTER 2011 Performance Monitoring Controls to Mitigate Risk Ensuring that the vendor is complying with consumer protection laws and regulations Periodically analyzing the vendor s financial condition and performing onsite quality assurance reviews Regularly reviewing metrics for the vendor s performance relative to service level agreements Reviewing customer complaints for services or products handled by the vendor and conducting anonymous testing if applicable (mystery shopper) Assessing whether contract terms are being complied with Testing the vendor s business contingency planning Evaluating the adequacy of the vendor s training to employees Periodically meeting with the vendor to review contract performance and operational issues The ability of an outside provider to function as an extension of a bank s organization gives them an inherent responsibility acting on the bank s behalf. It s incumbent on the bank s management to continually monitor the provider to ensure they are up to the above tasks. 22 Four Questions Banks Should Ask Business Process Outsourcing Providers

23 AS BANKS CONDUCT DUE DILIGENCE, THEY SHOULD SEEK PROVIDERS THAT CAN BRING TECHNOLOGY, PROCESS AND PEOPLE TOGETHER INTO A SINGLE, UNIFIED SOLUTION. Four Questions Banks Should Ask Business Process Outsourcing Providers 23

24 SUMMARY As banks conduct due diligence, they should seek providers that can bring technology, process and people together into a single, unified solution. According to Everest Research, there are four primary drivers of future change in financial services BPO. More complex scope Changing business environment Broader and deeper organizational engagement Increasing role of technology These drivers will create a renewed emphasis on vendor due diligence and management because the questions asked prior to finalizing an agreement have implications well beyond a bank s immediate future. 24 Four Questions Banks Should Ask Business Process Outsourcing Providers

25 ONCE THE DEAL S DONE OUTSOURCING GUIDING PRINCIPLES A last thought from the Federal Reserve on banks following guiding principles to manage an outsourcing partnership: 1. Implement a comprehensive policy to guide the assessment of whether and how activities can be appropriately outsourced. 2. Establish a comprehensive outsourcing risk management program to address outsourced activities and relationships with providers. 3. Ensure that outsourcing arrangements do not diminish the bank s ability to fulfill obligations to customers and regulators. 4. Conduct appropriate due diligence in selecting third-party providers (such as asking the four questions discussed in this ebook). 5. Ensure that outsourcing relationships are governed by written contracts. 6. Develop and maintain contingency plans, which should also provide for periodic testing of backup facilities. 7. Take appropriate steps to require that service providers protect confidential information. Four Questions Banks Should Ask Business Process Outsourcing Providers 25

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