October 4, 2016 6:47 pm | Updated 3 weeks ago.
Offshore IT Outsourcing in BFS Space
Not only have the companies in the BFS sector been the early adopters of offshore outsourcing, the volume of outsourcing by these companies have grown steadily over the years. Large application outsourcing transactions in the banking sector hit a record five-year high last year, according to a recent report by outsourcing consultancy Everest Group. “There were 54 new big application outsourcing projects in the sector with a total contract value of $5.9 billion in 2015—an increase in the volume of 45 percent and in the value of 25 percent over the previous year.”
While these numbers may attract new offshore vendors to enter this outsourcing space in the BFS vertical, there are substantial challenges for the new entrants. In this blog, we analyze the nature of outsourcing in this space, the possible challenges for new entrants specific to outsourcing in BFS space and then our recommendation for the new vendors to this vertical.
A. Offshore Outsourcing Opportunities:
Being one of the early adopters, this vertical has seen almost all types of work being outsourced to offshore vendors, specifically:
1. Business Processes: Business Processes that have been outsourced include Transactional Processes ( e.g. application receipts, account opening, account entry etc.), Customer Services, Credit Underwriting, Finance and Accounting to name a few.
2. Custom Application development, Maintenance, QA/Testing.
3. Product selection, Product implementation and roll-out (e.g. Core Banking Systems)
4. Remote Infrastructure Management including hosting in a cloud environment
6. IT Security functions, both operational and governance
7. Research projects including Analytics, Big Data Analytics, Market research, and competitive analysis
8. Consulting projects
The vendors who derive a significant portion of their revenues from this vertical especially the Tier 1 vendors have not only developed substantial industry experience, but also a deep knowledge of their client’ business and the IT applications supporting the client’ business. This makes any effort by the new vendors to replace these vendors extremely difficult unless there are some extraneous circumstances.
B. Offshore Outsourcing Challenges:
We have categorized the challenges that the new vendors to this vertical will face into three broad categories:
1. Entry Barrier: The deep domain knowledge (often captured in form of products that are also sold commercially), intimate knowledge of customer’ applications, close customer relationships developed over decades, makes it difficult for the new vendors to replace the existing vendors, at least from the space where they are well entrenched. The new vendors, therefore, need to look for new emerging white spaces to make an entry.
2. Functions that cannot be outsourced by Banks: There are regulatory restrictions on Banks preventing them from outsourcing functions like corporate planning, organizational management, and control, according to sanctions for loans, management of investment portfolio etc.
3. Risks that the Banks need to manage when they outsource any function:
– Reputation risks from poor service provided by the offshore outsourcing vendor
– Compliance Risk from the outsourcing vendor not complying with privacy or consumer laws
– Operational risk resulting from technical failures, fraud or inability to fulfill obligations on part of the offshore outsourcing vendor
– Exit strategy risk arising from loss of skills within the bank due to outsourcing and, therefore, inability to bring the activity back in-house when needed
– Strategic risk arising from the outsourcing vendor conducting business on his own behalf.
C. Recommendations for new entrants to the BFS Vertical:
Given that most of Tier 1 and Tier 2 banks have outsourced a lot of their activities and the existing vendors are deeply entrenched having acquired intimate knowledge of the client’ applications, we are seeing a number of opportunities for the new entrants, where they can provide innovation leveraging the advances in technology. We are giving a couple of examples below, just to illustrate our point.
– Automation in remote infrastructure management space: A number of vendors are developing products and solutions to automate significant portions of infrastructure management based on predictive analytics leading to Zero Incident Framework.
– Automated complaint resolution: A number of products are now available that leverage Artificial Intelligence techniques coupled with natural language interface to resolve most of the customer complaints and queries without having to need human intervention.
D2E’ Aggregator platform has a number of specialty vendors that focus purely on BFS vertical and also a number of specialty vendors that provide innovative solutions leveraging current advances in technology for the customers in BFS vertical.