Consider the Source

How to Be a Partner to the FS Sector Through Recovery

By: Paul Reynolds, Director and Chief Research Officer, TPI Momentum

We at TPI have said before that outsourcing adoption in the financial services industry is critical to the growth of the overall market. With active annualized outsourcing contract values worth more than $11 billion collectively, it is one of the largest buyers of outsourcing. The decline in activity during the 2^nd quarter is indicative of just how much stronger regulation and weaker balance sheets have adversely affected financial institutions.

Like most other sectors, senior leadership is mandating initiatives to reduce costs while also increasing productivity and quality. Profitability for banks has and will be reduced as consumer demand shrinks and more cautious lending practices are enacted. This is leading banks to look within to improve how their capital base, liquidity, risk management and market-facing entities are managed while also looking outward to better understand existing customers’ preferences so that expanded services (mainly online & mobile banking) can be made available.

Companies in this sector with active outsourcing contracts (one third of 307), will need to take these steps to reshape its business model as it recovers from the financial crisis. Due to its maturity in outsourcing, more value-added and complex analytical work is outsourced, though many firms are also looking to shared services, process improvements, and offshoring to captive or lower-cost domestic service centers for solutions.

Cloud computing is a hot topic for many firms looking at its offerings closely, but the pressure to rapidly respond to market opportunities is pushing firms to commit more to long term infrastructure transactions such as SaaS. Flexibility, innovation, continuous improvement and process reengineering are all deliverables that banks will look for particularly as banks try to optimize their global delivery strategies and M&A takes them in and out of markets. Opportunities for service providers exist in being able to show evidence to support their claims that technology/services offered will deliver on its promise.

For more information about outsourcing activity in the Financial Services sector and other industries, please contact Paul Reynolds at paul.reynolds@tpi.net.

Technorati Tags: TPI Momentum,Financial Services,banking,outsourcing,service providers

The New U.S. Senate Finance Bill ― Five Potential Effects on Financial Services Companies that Outsource

By Sean O’Sullivan, Director, TPI

The finance reform bill currently awaiting final action by the U.S. has been delayed for a number of reasons and has seen significant change during debate this summer, including the removal of a proposed US$19 billion tax on banks. Overall, the legislation would overhaul U.S. financial regulations at a level not seen since the 1930s. It proposes to close holes in regulation and to curtail some trading practices that many believe led to the crisis in the financial markets in 2008.

Today’s TPI Top 5 outlines major components of the bill and their potential implications for financial services companies that outsource.

1. New regulatory authority. A "too big to fail" provision would give regulators new authority to seize and break up large financial firms that could cause systemic risk to financial markets and the overall economy. According to The Wall Street Journal, the ratings of firms historically deemed "too big to fail" could be downgraded and, therefore, would incur higher borrowing costs that would put pressure on both margins and profits. As vendors see more risk in large firms, will they use price increases as a mechanism to mitigate the risks?

2. Derivatives. The bill would require most derivatives trading to be executed on a public exchange as opposed to the current method in which derivatives trades are completed privately between banks and customers. This provision has come under scrutiny because of enforceability issues and questions about whether or not all derivative contracts would be posted on a public exchange. Will a new level of compliance be required to conform to new regulations?

3. Financial stability council. A new board would be established to recommend to the Federal Reserve stricter regulations on capital and leverage and other requirements for large firms that are considered a threat to the financial system. An additional level of reporting and compliance may be required to satisfy these new regulatory requirements.

4. Hedge funds. Hedge funds with more than US$100 million under management would be required to register with the U.S. Securities and Exchange Commission as investment advisors and disclose information about their trading and portfolios. The funds would face additional regulatory, compliance and reporting requirements that could provide an opportunity for service providers to bring best practices and solutions to the outsourcing industry.

5. Insurance. The bill would create a new Office of National Insurance within the U.S. Department of the Treasury to monitor the insurance industry. This new department would flag insurers that should be treated as systemically important and coordinate international insurance issues. This new entity would produce a study and recommendations to Congress on ways to modernize insurance regulation.

TPI’s seasoned Financial Services outsourcing experts can help you achieve your sourcing and governance goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. E-mail Sean O’Sullivan, Director, TPI, or phone him at + 1 347 949 0713 to learn more.

The Senate Finance Bill and Potential Implications for the Outsourcing Market

by Sean O’Sullivan, Director, Financial Services

The Senate recently passed a bill that would overhaul U.S. financial regulations at a level not seen since the 1930’s. The legislation proposes to close holes in regulation and curtail some trading practices that many believe led to the 2008 crisis in the financial markets. The Senate bill differs from the House bill in that the Senate eliminated the $50 billion fund that firms would have been required to pay into for use as a bailout for troubled financial firms. Proponents of this bill claim that this legislation will enable the financial system to avoid systemic collapse, which they claim was avoided only with government-provided TARP funds to prop up weaker firms. Opponents state that the bill does not address Fannie Mae and Freddie Mac; not only the largest recipients of tax payer bailouts, but seen by many as the root of the problem in the 2008 collapse. 

Some major components of the bill, and its potential implications for the outsourcing market, are as follows:

1. New Regulatory Authority

Fed regulators would be given new authority to seize and break up large financial firms – previously referred to as “Too big to fail” – that could cause systemic risk to the financial markets and the overall economy. The WSJ has noted that the ratings of firms deemed “Too big to fail” could be downgraded due to this provision and therefore would incur higher borrowing costs. These higher costs would put pressure on both margins and profits.

Outsourcing Market Implications:

• “Too big to fail” firms will need to reduce expenses to cover the shortfall in profit margins, which may be an opportunity for additional outsourcing.

• Is a government takeover covered in outsourcing agreements or is this a force majeure?

As service providers see more risk in large firms, will they use price increases as a mechanism to mitigate these risks?

2. Derivatives

The bill would require most derivatives trading to be executed on a public exchange as opposed to the current market whereby derivatives trades are done privately between banks and customers.  Another provision in the bill would require large commercial banks with access to a Federal discount window to spin off its derivatives trading businesses.

Outsourcing Market Implications:

• Would captives need to be split up to separate derivatives trading operations?

• Would existing outsourcing arrangements need to be terminated?

• What would the mechanism be to separate the trading business out from a shared service center?

• Will this create an opportunity for a specialized service provider to purchase and leverage a “derivatives” captive?

3. Financial Stability Council

A new board established would recommend to the Federal Reserve stricter capital, leverage, and other regulations for large firms deemed a threat to the financial system.

Outsourcing Market Implications:

An additional level of reporting and compliance may be required to satisfy these new regulatory requirements, leading to an increased demand for outsourced systems development projects or even an opportunity for BPO /KPO service providers.

4. Hedge Funds

Hedge funds with more than $100 million under management will be required to register with the SEC as investment advisors and disclose information about their trading and portfolios.

Outsourcing Market Implications:

• Hedge funds will face additional scrutiny from a regulatory, compliance, and reporting requirements standpoint that will provide an opportunity for service providers to bring best practices and solutions to the industry.

4th Quarter Global Index Signals Gradual Recovery for the Outsourcing Industry

By Mark Mayo, Partner & President,  TPI Global Operations, TPI

 

Today I am happy to report that fourth-quarter contract values have signaled the beginning of a gradual recovery in the outsourcing industry. Contract values are up 47 percent – its highest value in 18 months. After the market reached its bottom in the first half of 2009, the second half clearly showed positive momentum as businesses became more confident about making strategic decisions in this economic environment. The main factors driving the market’s upswing in the broader market were:

 

Strong IT outsourcing (ITO) demand. Activity in this area dominated the broader market for the entire year with total contract values (TCV) up 54 percent from the previous quarter.

The Europe, the Middle East and Africa (EMEA) region was significantly impacted by a number of large deals in the fourth quarter, delivering its best quarterly performance since the second quarter of 2008. The UK – like the U.S. – has seen its TCV steadily decline over the last five years due to the maturity of both markets, but other markets in the region are maintaining decent performance levels.

A resurgence in mega deals and mega-relationships was a positive sign that contributed to the market turn with fourth-quarter total contract values at their highest in six quarters.

It is also important to note that financial services, manufacturing and telecom & media  -

industry sectors that have traditionally driven the outsourcing market - all showed a strong second-half upturn in total contract value. These sectors have traditionally driven the outsourcing market so a continuing positive curve for all three will be crucial for new growth in the market.

With companies growing more confident and the market stabilizing, we expect to see growth in 2010.

Check out the full Q4 TPI Index presentation at:

http://www.slideshare.net/TPIIndex/4q09-tpi-index-presentation-final?from=share_email

 

Considerations for Financial Services Operations (FSO) Outsourcing

By John Clements, Director, TPI, EMEA

Although many of the considerations that apply to Financial Services Operations (FSO) outsourcing apply to any type of outsourcing, certain considerations are amplified because of the regulated environment in which financial services institutions (FSIs) operate.

Here are the TPI Top 5 considerations to take into account when outsourcing an FSO process.

1. Institute, maintain and demonstrate control

In most jurisdictions, FSIs will not be able to outsource their regulatory responsibilities when undertaking a material outsourcing project. Regulators are likely to require early communication about a potential outsource and will want to know how the FSI is going to maintain control in the outsourced environment. Therefore, it is important that structures and processes are put in place pre-contract to maintain control (e.g., your governance team, management information and reporting, compliance and audit plans, risk management, etc.).

2. Manage regulatory change

No organization can predict the entirety of regulatory change that may be coming down the road in an outsourcing relationship. Therefore, in an outsourcing agreement, a certain amount of regulatory change can be bought from a service provider via a contractual concept called “regulatory buyout.” This means that the service provider assumes the risk of making regulatory changes to its outsourced environment. 

3. Factor in the end-user experience

It is probable that the outsourcing of an FSO process will result in end-user contact (e.g., the people who buy or advise on financial products) being outsourced to a service provider. Therefore, it is vital that the end-user experience is a critical part of the contractual service level agreement regime, and effective process handoffs should be planned into transition so as not to impact the end-user experience. 

4. Actively manage operational risk

Operational risk can be introduced into an outsourced arrangement via a multitude of channels such as staff attrition leading to loss of key skills, data protection risks (particularly as customer data may be processed by a third party), cutover of operations to the service provider, unsuccessful system re-platform leading to the loss of customer data, and more. Therefore, an FSI must manage operational risk by instituting and enforcing an effective risk management framework that encompasses the outsourced environment.

5. Know how you will exit the arrangement

Understanding your exit strategy is a crucial part of any FSO outsourcing project — even before service transition has begun. This involves more than just ensuring that the service provider has contractual obligations to produce an exit plan. What are the trigger events for bringing a service back in-house? How would you bring the service back in? What team would you set up, and with what skills? How long would it take? How are you maintaining the knowledge that you have outsourced? 

TPI’s seasoned FSO experts can help you achieve your sourcing and goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. E-mail John Clements, Director, TPI, EMEA, or phone him at +44(0) 7879 424 075 to learn more. 

Decreasing overhead in 2010, where will banks turn?

 

By Brian Smith, Partner & Managing Director, FSO Services North America, TPI

The economic situation in 2009 has changed the game for banks of all sizes. Going into 2010 they are all looking for new business strategies to rebound.  Across the board, banks will be restructuring in 2010, but what types of strategies will they look to employ and will they turn their eyes to “the cloud”?

Onshore operations have always provided the lowest margin of risk – but at a higher cost than offshore operations.  Offshoring, now a generally accepted approach to multi-process IT and BPO services for top-tier banks, will draw in more mid-tier, regional banks interested in taking advantage of the managed services that are now widely available.

 

The anticipated service provider consolidation in the next year will also allow single large providers to become a tempting comprehensive solution for financial institutions.  The need to minimize costs and reduce risk may lead the banking world in two distinct directions:  a flight toward larger, more established providers or toward niche players to distribute risk.

And, of course, we can’t ignore the enormous “cloud” in the room.  As more and more services and products are made available online, financial services firms will experiment with the level of security, service management and contract challenges they present.  It’s possible that this could be the year of true paradigm change meaning broad acceptance of cloud based services – which could significantly disrupt established service delivery models.

2010 will truly be a year of balancing onshore and offshore services with Captives and third-party solutions while dipping a toe into the world of cloud based services.  The potential opportunities available by the cloud and consolidation of service providers could set banks up for a delivery model hybrid not yet experienced in financial services.

Captive Sales Continue with UBS Sale to Cognizant

By: Brian Smith, Partner & Managing Director, Financial Services, TPI

Today’s news that UBS has sold its captive to Cognizant is the continuation of a trend – following captive sales by Aviva to WNS in 2008, Citigroup to Wipro earlier this year, and AIG to HP-owned MphasiS in August. It’s clear that the idea that offshore services can only be provided from within a captive wholly owned structure is dead – certainly for IT services, and probably for most BPO services. 

One of the big challenges with this type of transaction is that an internal organization suddenly becomes a third party – and that comes with associated management challenges that are often missed in the heat of executing the transaction. It’s a big change, but often slowly executed – in essence nothing changes on day one - but as the buyer seeks to leverage its investment, conflicts with the former parent can emerge. We therefore recommend paying a lot of attention to governance, and implementing a strong approach to governance from inception.

We anticipate that the trend of captive monetization will continue, and that the capabilities of the captives, once commercialized, will increase the maturity of the overall market – particularly in terms of domain expertise.

Outsourcing Observations on Insurance

By: Paul Reynolds, Director and Chief Research Officer, TPI Momentum

Having just completed a detailed review of outsourcing activity in 26 different vertical industry groups, I want to share some interesting findings from my research. The Insurance vertical sector has been hard hit by the economic issues of the last year, so I will share my observations on this industry segment first.

A quick look at the companies in the Forbes® Global 2000 reveals that there are more than 100 companies in the Insurance vertical sector, of which just less than half have an active outsourcing contract with a total contract value (TCV) of $25 million or more, according to TPI Research. As a group, these companies have increased their spending on outsourcing in each of the last 13 years, reaching an all time high of nearly $5 billion in annualized contract value in 2008. Compared to other industry groups, however, the typical insurance company spends about $10 million less per year than the overall market average, indicating that this vertical may be well-positioned for increased spending in the future.

 

Companies in this vertical sector have been somewhat slow to the BPO party, though TPI has recently observed increased attention being given to processes that can be offshored due to board pressure to reduce costs. Companies are also considering onshore options; especially those have taken TARP funding. This shift may benefit the US-based multinational service providers, who can market their US-based delivery centers.

To sum up, the Insurance vertical sector is a large market that already spends significant dollars on outsourcing. TPI sees opportunities for increased spending among companies that already source and expects more Insurance companies to adopt outsourcing during 2009, especially those positioned in the mid-market.

I’d be very interested to hear your thoughts on outsourcing in the Insurance vertical sector.

Source: TPI Momentum Q109 Vertical Industries Report
For more information visit: http://www.tpi.net/pdf/resources/TPI-Momentum-Market-Trends-Insights-1Q09-Verticals-Summary.pdf

Accounting Considerations in Sourcing Environments: Compliance and Controls

By: John Klee, Senior Advisor, TPI

One of the most critical points in an outsourcing environment is often one of the least addressed.  U.S. public companies receiving outsourced services have statutory requirements to substantiate that proper controls are in place to assure the integrity of data, systems, etc.  Additionally, there are requirements for a firm’s external auditors to report on the reliability of a company’s management assertions regarding these internal controls.  Both clients and service providers need to understand these requirements and it is best to address them during negotiations rather than after services begin.

Why is this issue being discussed in this entry?  As noted, it is always better to address issues upfront in negotiations than after the contract has been signed.  Part of a client strategy should be to have the best compliance and controls built into the contract requirements.  This exhibits foresight and evidence to auditors conducting reviews and positions both clients and providers with built-in controls, which is far easier accomplished beforehand than attempting to build in these requirements once delivery has begun. 

The three main regulatory or organization issuances that define and standardize these requirements - The Sarbanes-Oxley Act of 2002, SAS70 (AICPA Statement on Auditing Standards – Issued 1992), and COSO (1992 Committee of Sponsoring Organizations Internal Control - Integrated Framework). The crux of these regulations and standards are to certify and assert that public disclosures are truthful and reliable and  management is satisfied that they have taken the appropriate steps to ensure that the processes and controls in developing this data are consistent so that stakeholders can rely on it.  Additionally, they can provide transparency into financial statements, offer companies a framework and guidance in the design, implementation and test of control mechanisms, and offer a common ground in which clients and service providers can work from.

Compliance and control is important since it offers assurances to investors and more often than not, it is the law. 

Points and Reminders:
• Clients and service providers need their accounting experts to sign off on any accounting treatments.
• Every contract can be different; slight nuances to contract language can alter accounting treatments.
• Recognizing and addressing these issues upfront, in the client’s sourcing strategy, improves their RFP and negotiation position. 
• Everyone benefits from a clearly defined strategy.

And one last parting thought, “It’s an Accounting Issue.  No, it’s a Contract Issue.” 

Contact Center Outsourcing Consolidation- Where Are the Benefits?

By: Mike McMenamin, Associate Partner & Director, Contact Center Services, TPI

  In the past 3-5 years contact center outsourcing, a $60 billion market, has experienced significant consolidation. Here is a timeline of how the consolidation progressed:

1. Stage 1: (10 -15 years ago) -  Large buyers of contact center outsourcing services, i.e. Fortune 500 firms with more than 500 agents (many with more than 1,000), initially outsourced for cost savings and to reduce large employee populations of agents; moved work out to one or two service providers.

2. Stage 2: (5-10 years ago) - These same buyers realized that using multiple service providers created ongoing price and performance competition; workload was split between multiple service providers (sometimes as many as 10 based on their size).

3. Stage 3: (3-5 years ago) – As a significant portion of the work portfolio has migrated offshore and all major providers have established a global footprint of some kind, buyers have begun to consolidate their stables of multiple service providers.   They see and realize the benefits (i.e. knowledge transfer, global standard processes / tools / technology, improved global account management) of moving toward fewer and usually larger, more capable service providers. 

In this market, the Tier-1 service providers have been the beneficiaries of this move towards consolidation on large accounts.  The large telecommunications companies (Sprint, AT&T, and Verizon) have consolidated and now rely on two to three major providers, as opposed to 10 different firms in the past.  Firms like GM and HP (with > 5,000 agents) have also consolidated using a smaller number of service providers.  This allows the buyers to move their workload around the globe (onshore, offshore, nearshore) with a single service provider as their markets, demand, and business priorities change from year to year.