Inside out

Business Process Outsourcing (BPO) within the financial sector has mushroomed over the past decade. FST’s Julian Rogers investigates the benefits and pitfalls that institutions face.

The world’s major financial institutions have grown into global behemoths with a myriad of operations and services spanning the entire globe. With fierce competition between the financial powerhouses and shareholders demanding cost savings, outsourcing has become big business. Whether it is back-office IT, customer service or ATM management, banks are always looking to shave costs by outsourcing parts of the business. Nowadays, outsourcing can involve offshoring chunks of the institutions’ business to overseas companies, leading to job losses over here. The banks can save millions each year by employing lower-waged foreign employees to do the same work – small comfort to those axed by the banks. Analysts predict that the top 15 global financial institutions will spend US$3.9 billion on IT offshore outsourcing by 2008. Last year, Deutsche Bank said it was slashing more than 6000 jobs worldwide as part of efforts to consolidate and outsource its IT infrastructure. And it was a similar tale at Dutch bank ABM, which announced 1500 jobs losses following a deal to outsource its global IT to the US and India.

Indeed, technology evolves at such a rapid pace that the institutions are often forced to outsource to specialist IT providers in order to stay on top and deliver a fast and reliable service. Online banking has become a significant part of their operations and any downtime can be seriously costly in terms of lost business. Paul Court, Director of Operations at managed hosting and security provider Globix, says that the financial houses that he works with have very little option but to outsource their rapidly expanding IT needs. “Since 9/11 and since Sarbanes-Oxley they are taking a completely different view of how these systems run and there is more power in the systems and networks run better. Now they see that as an unacceptably high risk.

“Historically, these guys did all this stuff in house, but are now being pressured in audits look at ‘B sites’ and disaster recovery sites and to mitigate risks. They are getting an awful lot of pressure to do this but they just don’t have the time, people or inclination to set up complete departments again.” Court says that the lack of space is often the stark reality why financial firms are forced to outsource IT. “I think you are going to see more of this style because you look at Credit Suisse, Barclays and Morgan Stanley over at Canary Wharf and see that they have not got anywhere else to go. They couldn’t build a data centre even if they wanted to because there is not the square footage, the risk is too high and the costs to go and build one elsewhere are massive.”

The opportunities that the internet offers institutions has elevated banks’ IT needs like never before. Customers are able to log on and with a few clicks of a mouse check their account statement, pay bills and apply for loans. If the banks’ websites suffers a disruption or is attacked by hackers then the lost business can be disastrous. Of course, security has to be ironclad in order to reassure customers and ward off potential fraudsters. This is where specialist IT outsourcing firms are able to help. “You imagine an online bank or betting house that is down for eight hours and how much that costs in lost business,” Court asserts. “The web industry gone from a ‘nice to have’ to being a situation where high street shops are showing 50 percent of sales are online. The financial institutions are going the same way – you can pretty much book a mortgage, manage your account and trade stocks online. People are expecting to be able to do much more online nowadays and the banks have to react to it.”

Alex Merriman, a Director for Wholesale Markets and Infrastructure at the British Bankers’ Association (BBA), says banks have to have the means to keep an eye on the function being outsourced. “Once you outsource something you don’t have the direct control over the activity that you use to have when it was being run in house. You have to firstly understand what it is that you are outsourcing and you understand the business of the outsourcing firm that you are using.” He adds: “For banks outsourcing critical functions, whether it’s to do with IT or accounting or another front-end business stream, then you can never quite outsource the responsibility for that activity. Ultimately, senior management within the bank has to have the means to supervise it properly. It is one thing outsourcing it but you have still got to keep tabs on what is going on in the outsourcing company.”

India c
The effects of outsourcing in the banking sector has been felt none more so than in customer service. In the early days, the banks outsourced customer service to call centre firms operating in the same country as the bank’s customers. However, it was soon realised that massive costs savings could be made if the customer calls were re-directed to a call centre operator in another country altogether. India, with its cheap labour and abundance of English speakers, has become a hotbed for customer service offshoring. The country’s economy is booming with an estimated 300,000 people working in call centres for British companies. Financial firms can slash costs by paying Indian graduate US$200 a month to answer calls and carry out administration work. Malaysia too is emerging as a popular choice for offshoring call centres. But while the savings are obvious, customers argue can a worker sat thousands of miles away deliver the same level of service as a domestic call centre operator?

Matthew Vallance, EU President of India-based outsourcer ICICI OneSource, whose clients include Lloyds TSB and Prudential, argues that foreign call centres can provide customers with the levels of service that they expect. “I think they definitely can but it depends on how it is done. If you are a financial services organisation and you are looking to set up operations offshore it is very important that the right levels of investment are made in skills transfer and training. An offshore operation supported properly can and does service UK customers very effectively.”

Despite Vallance’s assurances, Merriman takes a different view. “I personally don’t think that call centres outsourced to India can give customers the right level of services that they want. Quite simply, because if you are thousands of miles away, you might have the customer details up on the screen but you don’t have the customer and product knowledge that you would necessarily have if you were sitting in an outsourcing centre in the UK. I think banks and other firms are starting the realise this. Some companies are bringing back call centres because they realise that customers don’t want to talk to someone thousands of miles away who perhaps does not quite have the expertise as opposed to someone much closer to the business here. I think that is something that customers are undoubtedly demanding now.”

Security
Then, of course, there is the issue of security and the worrying spate of data breaches. Last year, four US Citibank customers were given a shock when US$350,000 was stolen from their accounts by staff working in an Indian call centre. Also, an undercover journalist working for a British newspaper claimed he bought personal details of 1000 UK bank customers for UK£4.25 each from a Dehli-based IT worker. And in June a Bangalore employee was arrested in connection with £233,000 stolen from bank accounts belonging to HSBC customers. These headline-grabbing cases do very little for customer confidence and the banks know it.

The Indian Government is thought to be looking into tightening cyber laws to prevent highly sensitive data falling into the wrong hands. Under the five-year-old information technology act a call centre worker found guilty of leaking and selling confidential data, could face three years in prison and a fine of 100,000 rupees (€1700). Vallance believes that outsourcing firms do everything possible to prevent security breaches and data leakages but no system is ever foolproof. “No systems are 100 percent secure against malicious activity where individuals and deliberately trying to defraud or steal money. One has to make sure one is doing the maximum to minimise the risk of security breaches – whether accidental or malicious.”

Vallance continues: “In our offices, for example, the staff don’t have access to email, internet or floppy drives, and CD drives are disabled to stop data being carried away. There is no connectivity between the network we are running and any client’s network. There are physical security procedures such as surveillance cameras and we have security guards at the entrance to all our buildings. We also have photo access cards and turnstiles. There is the physical and data security aspect but it is clearly make sure that there are adequate checks on employees and during the hiring process there needs to be a structured means of verifying and checking somebody you are about to hire is bona fide and trustworthy.” It is a similar situation at Globix’s London HQ, as Court explains: “We have multiple levels of security here once you get into the data centre with fingerprint scanners that look for heat and pulse too. You have got to have a card and your face and fingerprint has got to match. It is these sort of security challenges that are hard for the institutions to mitigate.”

Homeward bound
Despite the obvious cost savings, some high-street banks have dragged their customer service operations back home. Others have never gone down the offshoring route, arguing that a more personal relationship with the customer is more important. `While people will usually vote with their feet when they suffer poor service, this is debatable when it comes to the banking sector. Statistics show you are more likely to get divorced than switch bank accounts. However, Abbey National has brought its call centres home, while Royal Bank of Scotland, in particular, emphasises as part of its advertising campaigns that its telephones are manned by UK-based operators. Surveys have found that customers get frustrated with foreign telephone operators accents or their unfamiliarity with British geography or colloquialisms. This is hardly surprising considering India is 5000 miles away.

“It’s not yet clear whether there is a trend towards onshoring,” says Nigel Roxburgh, co-founder and Director of Europe’s National Outsourcing Association. “There have been cases of this phenomenon occurring, but it has often proved to involve corporates’ captive facilities overseas, not professional outsourcers. Reasons vary but there could be cases where cost savings are not achievable or managing churn overseas is too challenging for the customers management. The NOA believes that the trend towards professional outsourcer based offshore will continue in the financial sector for both front and back office processes. The benefits this gives the customer in freeing resource to concentrate on the core business, gain guaranteed savings and process innovations are compelling enough in themselves.”

The institutions, and in particular retail banks, face mounting pressure to reduce costs and deliver value for money for shareholders. So, will outsourcing continue to mushroom or have the institutions reached a plateau?

The experts still see room for growth it seems. “We certainly see an increased tendency towards outsourcing,” says Vallance. “You will probably see an increased provision of niche outsourcing services around HR, payroll processing and dealing with certain transactions within financial services companies. There will be more developing and maturity in terms of the specialist service providers.” And what about IT? With technology so intrinsically linked to the banking sector nowadays, outsourcers will have their hands full for a few years yet, says Court. “Just the calculation machines that they (institutions) use have gone from a few PCs to whole banks of PCs, while their stock trading has to be 100 percent reliable with multiple sites. They can’t do it in their traditional mindset so you are getting more and more of these people looking elsewhere. Outsourcing is not going to go away, unless someone can invent a computer chip the size of a thumbnail than can do what these big machines do.”