Multi-Tasking Outsourcing Challenges – Core Banking Services Dr. V.P. Gulati.

Multi-Tasking Outsourcing Challenges – Core Banking Services

Dr. V.P. Gulati

Dr. V.P. Gulati 20th January 2007

Agenda• Economy and Financial System• CBS Architecture• Outsourcing• Why Outsourcing• Core Banking Outsourcing• To Outsource or not• Data Centre Outsourcing• Components of DC Outsourcing• Outsourcing Issues• The People Issue• Managing Risks


RETAILWHOLESALE(Corporate)

FOREIGN EXCHANGE MARKET

COMMODITIES MARKETCAPITAL MARKET

MONEY MARKET

BUYER SELLER

TRADINGDEAL MAKING

DEAL DECISION

DELIVERY

PAYMENT

BA

NK

SC

lear

ing

& S

ettle

men

t

PAYMENT SYSTEM (S)

DELIVERY SYSTEM(S)- OWNERSHIP TRANSFER

MARKET-RELATED TRADE-REPORTING SYSTEM(S)

INF

RA

ST

RU

TU

RE

‘‘E’-conomy and Financial E’-conomy and Financial SystemsSystems


Banks

TechnologyInfrastructure

BusinessRedefined

RegulationsDomestic &International

Newer Risks Convergence

Consolidation

New breed ofCustomers

e-environment

CompetitionBarriers?

Changes in the Banking IndustryChanges in the Banking Industry

Needed: New skills, knowledge management, marketing Strategies, high investments, “Glocal” approach


Technology Spending

The global financial sector spends about US$350 billion annually on The global financial sector spends about US$350 billion annually on technology. technology.

Global bank IT spend to touch US$450 billion by 2010 Global bank IT spend to touch US$450 billion by 2010 (Towergroup)(Towergroup)

Expenditure on legacy systems to decline 4.2%Expenditure on legacy systems to decline 4.2% IT expenses on differentiating investments about US$100 IT expenses on differentiating investments about US$100

millionmillion Focus likely on business process transformationFocus likely on business process transformation

Indian Financial sector likely to spend about US$5.0 billion in the Indian Financial sector likely to spend about US$5.0 billion in the year 2006-07 year 2006-07

PSBs and other banks could account for US$2.8 billion. Financial PSBs and other banks could account for US$2.8 billion. Financial sector (including the insurance) are set to spend US$2.2 billion.sector (including the insurance) are set to spend US$2.2 billion.


Centralisation

Customer Transactions

Internal Transactions

Focal Technology Areas

ManagementHR related – payroll, leave, benefits, raise Govt. relatedPension &PFTDSTax planningIntranetMail Messaging Training/learning

Delivery of products/servicesATMsInternet BankingMobile BankingTele bankingCall CentresCardsPoS

Corporate & other ServicesEFTEBPPCash ManagementTrade FinanceForex ManagementInsuranceMutual Funds


Data Centre

Disaster Recovery Site

RegulatorsGovt. Agencies

Delivery Channels

Inter-Bank Systems

(RTGS, SFMS, SWIFT etc)

Bank Offices

CBS - ArchitectureCBS - ArchitectureThe high level of complexity and relationships, IT infrastructure is causing banks to seek the outsourcing mode for CBS activities!


Outsourcing• A Swiss Core Banking Survey 2006, reveals:• 71% of banks outsource their activities• Key reasons cited for outsourcing are:

– Cost savings, economies of scale– Increased ability to concentrate on core competencies– Access to scarce skills– Improve quality of service– Turn fixed costs into variable– Learning– Keep pace with the market– Best practices– Increased productivity– Catalyst for change– Improved accountability


Outsourcing Trends Today

• Outsourced functions include mission critical and customer-facing applications

• Vendors may be new companies--less familiar with the financial services industry

• Niche providers and specialization often results in multiple vendor relationships

• Industry dynamics create new challenges for vendor oversight


Why Outsource CBS Activities?

• TowerGroup estimates banks outsource over 85% of their information technology

• Significant technical expertise and skills are required in the current environment

• The cost to license software or purchase services can be lower than the cost to develop and maintain a proprietary system

• Time to market and technology dynamics require rapid development and enhancement

• Optimise business value


Options for CBS Infrastructure Management

• Bank owned – vendor managed• Vendor owned – vendor managed• Bank owned – bank managed• Vendor owned – bank managed• Banks in India following three models:

– Outsourced Model– System Integrator Model– Bank IT Dept. Driven Model

• YES Bank opted for a completely outsourced model operating a pay-by-use basis


Core Banking Outsourcing• Core Banking implementation and maintenance is a

massive affair:– Core banking initiative replaces about 50-60 vendors– Great complexity in terms of applications, application

software, hardware and system software, interfaces

• Need for special IT and management skills• Common CBS services outsourced include:

– Back office processes– HR activities– IT related– Data Centre operation and maintenance


To Outsource or Not?• Once a bank decides to go on CBS, it has to determine

- build or buy; outsource or not, and how much?• Each bank has its own choice depending on a number

of factors:– better capital

– adequacy through minimal capital investments

– leveraging technology more as a differentiator than merely as an enabler

– risk appetite

– manpower, and capital resource allocation optimisation.


Outsourcing the Data Centre• Share DC? Or Dedicated DC?• A number of factors are taken into account before

deciding: – Bank’s stand on sharing– Security worries– Costs– Bank Size and breadth– Vendor reputation

• Data Centre outsourcing is a growing segment – Global DC outsourcing market size was US$72.3 billion in 2003 and expected to grow to US$95.0 billion by 2008 (Gartner)


DC Outsourcing Components• System operations• Tape operations• Print operations• 2nd level DC support• Production control• Backup & recovery• Technical support• Performance analysis• Capacity planning• Storage management• System security• Contingency planning• Asset procurement


Capabilities of Partner• Partners must be able to deliver infrastructure and support services required for data

center outsourcing, now and in the future• Contract /deal structure • Pricing acceptance • Metrics & measurements • Effective resourcing management• Security & disaster recovery• Clarity of services, responsibilities • Relationship management • Subcontractor management • Technical support Expertise• Strategic plan and vision• Portfolio of services and solution sets• Management acumen, Innovation & leadership • Business development, Marketing and sales responsiveness • Financial stability• Alliances and partnerships• Ability to Execute


Outsourcing Issues• Over dependence on 3rd party• Pressure on the operating margins• Lower quality of in-house service• Management dissent• HRM problems Conflict of culture• Loss of company knowledge & know-how• Losing touch with staff & customers• Loose contractual framework• Lack of management skills• Flexibility and responsiveness is required by the company, but they are

locked into a contract requiring formality• Corporate strategy changes but the company is unable to change the

outsourcing contract• Company is charged for extra services not included in the original

outsourcing contract


Outsourcing Issues• Interrupted communication and decision making channels• Multiple,diverse and/or un-integrated IT infrastructure• Lack of organisational flexibility• Determining best practice• Security costs• Competition between outsourcing service providers• Risk of upsetting suppliers /customers• Difficulties to define the correct SLA• Internal resistance• Supplier fails to provide the services as agreed• Lack of controls if supplier can not deliver as agreed• Lack of comprehensive data• Difficulty to transfer/in-source at the end of the agreement• Poor communications• Constraints on business acquisitions/disposals


People Risk

• Behaviour during the process of selecting a supplier and negotiating the deal

• Attitude during transfer to the supplier• Behaviour when working with the new

supplier• and new working practices• Attitude to being retained to manage the

deal


The People Side

• In 2003, Bank of Ireland staff went on strike over a proposed $600m (£340m) outsourcing deal with HP, leading to seven months of negotiations with unions…

• Its important to deal with employees first and take them into confidence to prevent such barriers– People must be at the heart of any outsourcing deal

– Keep lines of communication open

– Create awareness of the reason for outsourcing

– Regular training sessions

– Clarify the career path


Managing the Risks• Treat the IT service provider as a Partner, not a vendor!

Undertake due diligence• Least expensive is not always the best!Look at qualitative

aspects of the IT partner• While taking sourcing decisions, ensure parameters are

comparable• Have a practical, accountable SLA with regular reporting built

in• Close monitoring of the service offered and disruptions, if anyOf course, it’s the best if bank owns and manages all infrastructure

– but that’s not practical!In that sense CBS outsourcing is a win-win situation for banks and

vendors as well. The former will be able to concentrate on core business while the latter will have obvious benefits in terms of business!

Multi-Tasking Outsourcing Challenges – Core Banking Services Dr. V.P. Gulati.

Documents

Transcript of Multi-Tasking Outsourcing Challenges – Core Banking Services Dr. V.P. Gulati.