Banks and financial services companies are struggling to contain costs in the current recession whilst at the same time seeking to innovate in a fast moving financial marketplace. One major weapon in their armoury is the use of outsourcing and, over the last decade, financial sector firms have made increasing use of it to drive down costs whilst giving them a more agile and flexible infrastructure.

On the cost control side, outsourcing has been a major success for financial services firms. Therefore the outsourcing trend is likely to continue, as companies look to concentrate on their core competencies and offload the headaches of day-to-day administration, which will allow corporate focus to be maintained on innovating products and services to keep ahead of the market, whilst providing certainty around the costs of providing and administering the said products and services.

Innovation inhibited by rigid infrastructure

However, on the innovation side, the report card is not so good. One reason for this is that everyone underestimated the extent of technology driven change in consumer behaviour that has occurred over the last decade.

As consumer demand grows for new products and better access to existing products, in a world that is coming increasing focused on personal mobile technologies, the financial sector is no more immune from the need to adapt their offerings than other sectors.

All financial services firms are going to have to embrace new consumer models or stagnate. Unfortunately, financial services usually lag other sectors in adapting to new consumer habits. And the rigidity of their IT infrastructure and architecture is commonly given as a major reason for failing to respond rapidly to the changing business environment.

Outsourcing has exacerbated the problem

Aside from the cost issue, one of the main reasons that firms embrace outsourcing is to break out from the restrictions of bureaucratic IT departments and to have in IT infrastructure that is responsive and flexible and has the ability to support the use of new media and provide the new levels of services that the consumer market is now expecting as a right.

However, when drawing up outsourcing contracts, all the emphasis is inevitably put on the cost control factors and the service level agreements for existing services. This incentivises the outsourcing company to concentrate on providing the basic existing level of services and to pay little attention to supporting innovation in the client firm.

This has led to a disappointment with outsourcing projects, even where the SLAs are being met and the cost control promised is being delivered. Firms have been left feeling even more restricted than when they had full control of IT in-house. And so, they have re-examined the whole process in order to identify a solution.

Joint partnership

Many financial firms are now taking a better approach by involving their outsourcing partners more in the innovative side of their business. This means separating out the basic service provision side of the contract and ensuring some of the contract is left for the outsourcer to ‘earn’ by pitching new ideas at the firm or by involvement with the product / service development side and offering new services to support the emerging new ideas.

This model of working together is going to become more common as financial firms try to increase the level of products and services they supply to the mobile “i-Generation”. It refocuses the supplier away from a purely cost-driven approach that has supplied the bulk of their revenues to date, and onto broader thinking about new ways to offer value.

Changes in the financial services sector

Already the majority of personal and small business banking is done on-line from home and work PCs. Over the next decade, consumers will expect to have access to all financial products and associated services on demand; in whatever way suits them, wherever it suits them. Mobile phones and tablets are increasingly likely to take over from personal computers as the favourite way to interact with their banks, life and pension providers and investment brokers. Gartner have forecast that worldwide their will be 40 million tablets by 2012, accompanied by a corresponding drop in the sales of pcs, and the UK will be to the fore in this technological revolution.

This means that financial institutions need to be prepared to engage with their customers in the manner desired by the customer, not the manner defined by institutions.

Outsourcing companies bring value to the table

Outsourcers are in a position to supply the skillsets to exploit the new technologies, which would not necessarily be available or cost-effective for firms to have in-house, as they can spread the costs across multiple clients. Outsourcers can also use private cloud architectures to give financial firms scalability and agility that they need and would be unable to supply themselves; this will allow financial firms to access the flexibility and strength of the cloud model while maintaining high security levels over their data – a key compliance issue.

In particular, the ever-increasing need to handle new technologies means that a good partnership between firm and outsourcer allows the creativity of the firm to be supported by a rapid response from the outsourcer giving a short time-to-market and allowing emerging technologies and platforms to be embraced in the early stages.

Future provision

Over the next two years, we can expect to see a whole new approach to outsourcing as more financial sector firms seek to move beyond pure cost control and start to partner with their outsourcers in order to achieve the levels of innovation required in the market. Outsourcers need to be proactive in seeking to show that they can provide this level of value to the financial sector.

Those who succeed will be able to move up the value chain by increasing the level of services they provide and the value of those services to their customer base. Those who don’t will be left behind as financial firms find that pure cost control is not a compelling enough offering to make them include outsourcing as part of their future strategic plan.