Want to free up your time and resources so you can focus on driving customer loyalty and growing your business?

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1 Want to free up your time and resources so you can focus on driving customer loyalty and growing your business? Addressing self-service channel challenges with managed services and outsourcing An NCR White Paper 2010 Experience a new world of interaction 2010 NCR Corporation

2 Introduction Market drivers 1 This white paper focuses on one of the most critical areas for successful business performance in the next decade: how banks and other self-service deployers can fully exploit the operational and business advantages offered by current and future self-service technology through complementary managed services and outsourcing. This white paper provides a comprehensive assessment of the market drivers, benefits, and service provider considerations. Banks can use this paper when considering managed services and outsourcing options to address their self-service channel challenges in a changing economic landscape. This new decade presents many and varied challenges for banks. What has been called The New Norm is a particularly acute and real operating landscape. Banks and other self-service deployers need to look across their product offerings and channels through which they are delivered to extract maximum value from investments to address current business challenges. Banks self-service channels are central to thriving in this new environment; in fact, the self-service channel can help banks in four key ways; Providing relationship growth resulting in customer loyalty Delivering customer-centric, value-added products and services Accessing new markets through differentiation Restoring brand image and credibility Very recently, Paul Volcker, the former U.S. Federal Reserve Chair, cited self-service as the most successful financial innovation in the past 20 years (Future of Finance Initiative Conference, West Sussex, UK, December 8, 2009). This recognition is warranted since self-service banking has stood the test of time and remains a critical part of a bank s channel strategy. Global financial services technology spending is continually being evaluated as banks are now faced with decisions in addressing rising capital costs, margin pressures, and, at the same time, driving cost out of their services, operations, and infrastructure. This environment brings considerable pressure on overall capital expenditures and attention to driving operational efficiency. According to a 2009 Forrester report, overall IT budgets continue to decline as the global economic downturn continues to put pressure on budgets. Despite having lower budgets, banks are being asked do more; drive higher productivity, achieve more efficiencies, and increase customer satisfaction. Over the last two years, the global economic environment has changed markedly. Western Europe and North America have seen the deepest recession since the 1930s. As for other parts of the world, while impacted by the same financial crisis, they have experienced rapid growth and are now seeing their economies expanding once again. These varied aspects of the new economic landscape have caused banks to experience the following: 73% of CIO s expect their 2010 IT budget to remain the same or be reduced (Society for Information Management, November 2009) Unpredictable business volumes, tight credit, and rapid technology change have buyers looking at managed services to power them through the recession and emerge more successful (Forrester, The Managed Service Market Continues to Percolate, July 14, 2009) 48% of Enterprise decision makers are using or are moving to a single provider or a more consolidated approach for their sourcing strategy (Forrester, The State of Enterprise IT Services: 2009, November 17, 2009)

3 2 Despite lower budgets driven from this unprecedented economic environment, banks are still looking for creative solutions to improve their customer value propositions and service experience. According to a 2010 Gartner CEO and Business Executive Survey, the top 5 CEO and senior business executive priorities include: 1. Retaining customers and enhancing existing relationships 2. Maintaining competitive advantage 3. Attracting new customers A recent outsourcing report on the top drivers for outsource initiatives align quite well to the senior business executive priorities noted above. It is no surprise that banks are looking to managed services and outsourcing to help meet their priorities for According to a Gartner 2010 study, outsourcing can enable enterprises to reduce costs, accelerate time to market, and take advantage of external expertise, assets, and/or intellectual property. Clients who execute successful sourcing strategies have achieved business results between 10% and 30% Attracting and retaining skilled workers/talent Reducing costs via better efficiency 70% 60% Primary Drivers of Outsource Initiatives 64% 56% 50% 40% 49% 37% 40% 30% 20% 10% 27% 19% 15% 20% 0% Reduce costs Leverage Technical Experience Labor (Cheaper) Improve Customer Value Gain Competitive Advantage Consolidate Assets/Resources Increase Shareholder Value Lack of In-house Resources Flexibility Source: Deloitte Consulting 2008 Outsourcing Report

4 3 In the U.S., with the stabilization of average automated teller machine (ATM) transaction volumes in recent years (limiting the ability to generate incremental revenue on dispensing cash alone) and the commoditization of the self-service market, banks are looking for ways to grow new revenue streams and drive cost savings. According to a TowerGroup study, a new theme has emerged regarding the accelerated pace of change demanded by the consumer market. Consumers are voicing their delivery channel preferences and banks must transform the technological realities of their networks to focus on these relationship-building aspects. Delivering an integrated multichannel strategy for enhanced customer experiences requires banks to keep pace with innovative self-service software, architecture design and leadingedge technology. This puts extra burden on an everchanging IT landscape and aging ATM infrastructure. Given this need, banks are deciding to focus on the differentiating aspects of self-service solutions such as location, functionality, and usability and have service providers manage the technology roadmap, expertise requirements, feature and upgrade implementations, and improvement processes. By contrast, other parts of the world are seeing substantial growth through increased adoption of the self-service channel. This is particularly the case in the Middle East, China, India and other parts of Southeast Asia. In these regions and countries, there is no less focus on cost containment, which is why managed services and outsourcing are seen as crucial alternatives for core operational services, leaving the strategic aspects of channel management with the bank. Moreover, in these regions, managed services and outsourcing opportunities not only include the self-service channel but also other infrastructure devices such as teller cash recyclers, routers, switches and telepresence equipment. Single provider strategy It has long been the practice of banks to outsource specific, discrete functions, such as hardware maintenance and cash replenishment, but most have been reluctant to relinquish full operational control to providers. This has been due to concerns over security, control and visibility, as well as confidence in the competency of third-party providers. Unfortunately, the downside of this multi-sourcing strategy has often resulted in fragmented organizations, multiple contracts, competing goals, and an inability to see, forecast, and report across the entire banking enterprise. This type of arrangement requires an added layer of oversight in governance mechanisms, management tools and internal processes, which would not be needed with a single provider model. Estimates based on NCR s own industry consultants suggest up to 20% 25% of the total cost of ownership is locked up in this channel support model. With the fast pace of change in delivering ATM services, the traditional way of managing multiple vendors and processes not only inhibits natural synergies for the business, but is, in fact, financially and practically unattractive. In a recent survey by Aite Group, 73% of bank executives indicated that managing their operations is their greatest challenge and 31% said that it s important or extremely important to outsource ATM operations, up from 5% five years ago. Twenty-six percent of surveyed North American banks say that it s either likely or extremely likely that they will outsource to a single source service provider within the next five years. According to a 2010 TowerGroup report, they predict a greater emphasis by North American financial services institutions on external sourcing of software, services and outsourcing than on internal staffing. For Europe and the United Kingdom, they see financial services institutions revisiting plans for increased outsourcing that many put on hold in 2009

5 4 due to other priorities. It is clear from statements like these that there is a demand for moving from a traditional in-house service model to that of an externally provided, integrated service for the future. Such a move enables the outsourcing of day-to-day technology operations to a specialist organization in order to optimize the cost of operations across the channel on an ongoing basis. It provides continuous productivity gains and reduces the complexity and cost of managing multiple providers. As banks look to a single provider for self-service operations, they will become more efficient and productive, capture savings via operational synergies, manage costs across their processes, and achieve economies of scale. Outsourcing operations to a single provider ensures clear accountability for service level adherence, continuous improvement programs, efficiency gains, and overall program success. Most importantly, as a result of these productivity gains, banks will be able to provide higher customer availability and an enhanced service experience. Over time, the economics of outsourcing will become more evident, especially as banks face declining ATM revenues, increased costs of delivering services, and declining capital budgets.

6 Success through managed services and outsourcing In today s highly competitive climate, banks and 5 Accessing new markets through differentiation other self-service providers are looking to improve The most discernible trend in banking for the past effectiveness and efficiency, enhance their customer 10 years has been the move toward a spectrum of interactions, reduce costs, and generate more revenue customer-centric products and services. In the past, through their self-service channel. A successful special student accounts touting unique benefits self-service channel will deliver the following were used on college campuses. However, today, significant advantages: there are entire distribution channels devoted to a wide range of customer segments focused on Providing relationship growth resulting in targeting particular status groups, income bands, customer loyalty lifestyles and demographics. This enables banks to While banking customers have historically reach new market segments, offer differentiated been relatively inert, it is becoming easier to services, and attract new customers. change banks, for example, customers may open secondary accounts with other banks as a Restoring brand image and credibility way of optimizing their interactions with their Due to geographical differences, banks and money. Therefore, many banks are using their providers should be cognizant that the issue of self-service channels to retain customers and keep restoring credibility may vary across global regions. them loyal. They offer exceptional service with The credibility of banks in North America and the highest availability, deliver a personalized Europe is at an all time low whether the issue is experience, and allow customers to decide when, due to bonuses, bail out, or poor lending decisions, where, and how they d like to interact with this new economic landscape is underpinned by a the bank. need to restore consumer confidence in banks. Delivering customer-centric value-added products and services A significant reason for opening an account with a separate bank is the additional valueadded services they may offer, for example, ATM locations, the availability of reliable online banking functionality, etc. As a result, presence is king and presence awareness is equally important. Alongside presence is reliability attrition rates increase as reliability worsens. Many banks are starting to move away from targeting average uptime or daily availability; best-in-class banks are now measuring downtime in terms of lost transactions and lost revenue; in broad terms, negative customer impact is now the basis of measure for banks.

7 Key benefits of managed services outsourcing 6 Reducing the total cost of ownership For most banks with a self-service channel, their business case for change will start with cost reduction and end with customer service improvements. Optimizing return on operational investment is instrumental in transforming service delivery both in terms of service perception from the user and financial value. By adopting a productive managed services model, the benefits include: Improving current operational profit and loss analyses Optimize cash utilization by decreasing cost of cash services and cash management Reduce the volume of cash processing in the cash vaulting cycle Reduce first and second line maintenance call volumes Reduce/remove branch staff involvement from self-service device management Reducing infrastructure and operational investment costs Implement integrated incident management with real-time proactive monitoring Reduce the costs of long-term operations and capacity planning Reduce/eliminate the costs of staffing, training and certifications for in-house resources Eliminate the costs associated with compliance, security and regulatory guidelines Eliminate capital spending for equipment upgrades, refreshes and obsolescence Increasing productivity across the banking enterprise Simplified day-to-day management of the self-service channel empowers banks to concentrate on the business of delivering value to their customers Online, real-time access to key service management information enables critical decision making A single point of accountability for the customer s self-service network operations offers end-to-end services support and provides efficiency and responsiveness Enhanced customer experience Higher availability of self-service channel minimizes negative customer impacts Satisfied customers result in higher customer loyalty Subject matter expertise, economies of scale, and continued service improvements are designed into the delivery model to continuously drive down cost and leverage efficient enhancements. Moreover, the additional flexibility to grow the size and functionality of the self-service channel quickly and easily, without the worry of whether the bank has the necessary technical expertise, is a significant benefit. From a customer loyalty perspective, optimized ATM availability from a more efficient self-service channel ensures customers can perform transactions where and when they need them. Providing innovation and thought leadership A qualified services provider must have a welldocumented record of market leadership, driven by sound product and services innovation within the self-service sector. Through their services, providers will develop solutions to not only address operational efficiencies in the self-service channel but to form new strategies and future roadmaps to enable evolving banking strategies. Having visibility and access to future product features, updates, innovative services, and advanced technological developments are critical elements of sustained business transformation. Innovation not only includes technological improvements but also creative solutions for business processes. So while the bank concentrates on improving their distribution strategy, the services provider focuses on uptime, return on investment, and delivering

8 7 continued improvements. These roles, however, are not mutually exclusive; channel knowledge gained through service delivery is critical in providing intelligence needed to guide strategic decisions and investments. Improvement ideas are often borne out of in-depth benchmarking analyses of existing processes. For example, from a currency management perspective, there could be opportunities to optimize the balance between the cost of replenishment and the cost of providing and transporting cash. Adjusting cash replenishment frequency and fill volume can result in cost savings and positively impact availability (especially during high cardholder demand periods). Another example is a bank focusing on the negative customer impact metric, whereby understanding high cardholder demand periods, they can scale service delivery to minimize failed customer interactions. Undoubtedly, tracking availability is extremely important but there is value in measuring the impact to the actual customer. Partnership and shared vision A managed services and outsourcing solution is not simply a standard services agreement. It is a representation of a long-term partnership between a bank and an established service provider who has the capacity and expertise to manage some of the largest and most complex self-service networks in the world. The shared vision of both the bank and service provider will enable a consumer enriched and more profitable relationship through proven experience in providing timely and relevant transactions, product offerings and services. By understanding the bank s internal processes, the service provider can work collaboratively with the bank to affect the following areas: Area Customer service, availability Cost of ownership Operational efficiency Channel strategy and organization Measurement Transaction volume Downtime Times of customer demand Availability Performance against peer networks Annual channel costs Total operational costs Cost per transaction/device by region Mix of capital and operational expenditures Average incident rates Incident management Currency management Cash forecasting Field operations effectiveness Channel management structure Business owner for operational and profit and loss responsibility Branding visibility

9 Choosing a services provider 8 A Morgan Lewis financial services study found that 55% of corporate executives surveyed had either finalized plans or are considering outsourcing significant business processes and/or activities at their respective firms in the next few years. Thus, it is important to identify the necessary services that are required to support such a deployment. Although not all services may be needed, a managed services model that spans across broad business process areas will drive results across the enterprise, yielding significant, overarching gains. Services to consider may include: Category of Services Innovation services Description Business impact modeling Branch performance modeling Customer experience design audit Branch and transaction design Design services User interface design and usability Solution and architecture design Application design Integration services Network audit and analysis Application development customization Solution integration Test and certification Deployment Support services Education and training Maintenance services Software services, Multivendor services Management services Remote monitoring Incident management Help desk services Cash, currency, content and consumables management Software and communications management Hosting SaaS (software-as-a-service) Processing and e-commerce services Asset outsourcing and managed refresh

10 9 When considering a service provider, it is important to evaluate a provider s market position, experience, and delivery capabilities to ensure they can deliver tangible competitive advantages to the business. Banks should carefully review the service provider s technology leadership, ability to offer innovative cross-channel solutions, a track record of proven solutions specific to the environment, business foundation, historical background, and global presence. A bank not only needs to be aware of a service provider s capabilities but also be confident in their ability to successfully deliver the services required. Managed services and outsourcing requires very specialized financial services and banking expertise which includes understanding customer behavior, implementing multichannel strategies, supporting mission-critical networks, and meeting regulatory requirements. Four possible types of service providers for managed services and outsourcing: Types Advantages Disadvantages Self-service solutions providers Self-service technology and solution expertise as a core business Wide services portfolio across multichannel solutions Familiarity with relevant regulations and guaranteed compliance Global technology processes, methodology, and knowledge management for self-service solutions Deep financial services expertise Minimal exposure to non-self-service banking solutions Requires a partner for cash-related services IT business outsourcers Switch providers Cash In Transit (CIT) companies Coverage across global regions Economies of scale to leverage best practices Capability to support other infrastructure investments Consolidated services for item and payment processing, core banking, and branch services Positioned to provide services across the banking enterprise Expertise in cash logistics and cash cycle management Willingness to accept cash liability Hardware and software neutral Lack of deep financial self-service and customer touch point expertise, compliance issues Lack of self-service device management expertise Requires a partner for cash-related services Requires a partner for field support, maintenance services, parts logistics, and onsite technical expertise Lack of self-service device management expertise Requires a partner for cash-related services Gaps in hardware, software, and services management capabilities Lack of knowledge on compliance issues

11 Conclusion 10 In the end, banks must consider all viable options The concept of outsourcing in the global financial for outsourcing and which provider type will meet services industry has been around for years, but it is their unique and specific requirements. Service now more compelling than ever before. Banks especially providers must demonstrate their market leadership are increasingly focused on their core skill sets and areas position, geographical reach, experience in translating of expertise which do not include highly specialized operational performance into business benefits, and service delivery functions and processes. The strategic ability to support all self-service channels, including alternative of managed services and outsourcing online, mobile, and call center, not just ATMs. Moreover, frees up banks capital and human resources and if banks are considering outsourcing their entire branch allows them to squarely focus on their core business. operation, including areas beyond their self-service In these increasingly competitive times, competitive channels, it is important to understand the provider s advantage, whether driven by new products or having capabilities and skills in adjacent activities and functions. an operational edge, can often be all it takes to The providers that can articulate how they, through separate a bank as a best-in-class organization. managed services and outsourcing, can positively impact the experience of a bank s end customer will have the most success in the market.

12 About NCR Corporation With over 125 years of experience and knowledge, NCR is the leading global provider of managed services for financial self-service solutions. With deep industry experience in self-service customer touch points and a comprehensive portfolio of services, NCR provides managed services on more than 500,000 points of service for hundreds of businesses worldwide. We help our clients around the world improve their customer interactions, implement change quickly and proactively, and transform their businesses to become leaders and change agents. NCR Corporation 2651 Satellite Boulevard Duluth, Georgia USA For more information on NCR, please visit: Experience a new world of interaction NCR continually improves products as new technologies and components become available. NCR, therefore, reserves the right to change specifications without prior notice. All features, functions and operations described herein may not be marketed by NCR in all parts of the world. Consult your NCR representative or NCR office for the latest information. All brand and product names appearing in this document are trademarks, registered trademarks or service marks of their respective holders NCR Corporation Patents Pending EB