multi-tasking outsourcing challenges – core banking services
TRANSCRIPT
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
Dr. V.P. Gulati 20th January 2007
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 SystemsE’-conomy and Financial Systems
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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.
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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!
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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.
Dr. V.P. Gulati 20th January 2007
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)
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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
Dr. V.P. Gulati 20th January 2007
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!
Dr. V.P. Gulati 20th January 2007