Mr. Anderson as Managing Director of Trestle Group in Switzerland you have had the chance to work on some complex IT and business process outsourcing projects involving transformations of organizations and nearshore and offshore sourcing models.
With your experiences in the financial industry, could you please give us a short introduction on outsourcing of IT and business processes in this industry in the DACH countries?
ITO and BPO are at the same time very similar in how to approach them in terms of approach, control structures, setting measurable KPIs and the like, however they are very different animals in terms of content, players involved and general acceptance as to the depth of outsourcing that is accepted.
The financial services industry in the DACH region have a much longer history in sourcing larger portions of the IT value chain compared to BPO, where there has been reluctance to carve deeper into the value chain.
One trend we see with our clients is a growing willingness to move away from strict extended workbench (ITO) or body shopping (BPO) approaches and more to solutions or service oriented approaches. This is a paradigm shift for both supplier and the industry.
Having said that, given the fact that the financial services industry is relatively conservative, the majority of work is still done on a T&M basis for ITO and less aggressive, often headcount based, models for BPO – especially given the fact that many clients still feel more comfortable with a SSC model than pure outsourcing of their business processes.
What are the specifics and what are the challenges the industry is facing that makes sourcing of IT and business process services an option?
RA: To add to that I can point out that the IT organizations within banks and insurance companies in the DACH often have less mature processes than those of the suppliers. The old adage, “Don’t outsource a mess”, is a valid concern that we face all the time. With IT organizations, the challenge is to create internal processes robust enough to be able to work in an outsourced model.
On the BPO side the same challenge exists. Working instructions often do not exist or are not up to date, there are few, no or incomplete internal SLAs that clearly define responsibilities, roles and KPIs and at the staff level the thought is that their work is too complex and could never be (out)sourced.
The challenge in both ITO and BPO is to bring the industry up to a maturity level with robust processes and control mechanisms in place to enable a healthy sourcing.
Which are the most suitable processes and in IT the most suitable areas to outsource?
RA: This largely depends on the level of maturity of the organization seeking to outsource. For both ITO and BPO the most suitable areas to outsource are those that are most clearly defined with a measurable start and end. For ITO this is usually development work or testing. For BPO this can be e.g. scanning, data entry and any non-client facing process. But again, these are only the low hanging fruits and there is much more potential than most financial services institutions are willing to embrace.
How do you evaluate the readiness of German financial organizations, to use ITO and on the other side BPO?
I need to answer this question in two parts. Please excuse the generalizations as it can really vary from institution to institution, however this is what we are seeing generally.
1) The “Readiness” or support from management to sponsor and push through sourcing initiatives, both ITO and BPO, is growing rapidly in the DACH region.
2) The “Readiness” in terms of the maturity of the organization (processes, people with sourcing skills, etc.) is still lacking and is not robust enough to support the growing appetite for sourcing within many of the financial institutions.
Are there specific tendencies in outsourcing at banks and insurance companies in the DACH countries, when looking back lets say 2-3 years?
What we see is a normal evolution of their outsourcing programs. As they mature as an organization and gain experiences – both good and bad – they are tending to carve deeper in to the more “complicated” and less commoditized processes. Partnerships with service providers are on the rise, covering a myriad of different models from success-based service pricing to simply partnering with the service providers to provide human resource services to hire for their SSCs, ultimately leveraging the HR machine these service providers have in place.
You mentioned an interesting fact, specifically for Germany as location for service centers: the cost saving options. Taking into consideration the availability of workforce and the service provider landscape (at least in BPO we have in Germany the option large or small service providers, barely something in between), is this on option and can you name examples?
One of the benefits for Shared Service Centers to remain small is to stay within a size where additional union laws do not apply. Once the “medium” size is reached then the Shared Service Center has to comply with additional union laws and begins to lose their flexibility and hence one of their key advantages over their larger parent company.
What we are seeing also is that the larger Indian and Eastern European Service Providers are gobbling up small to medium sized operators in the DACH region in an attempt to reach their growth targets and penetrate the DACH region more effectively.
From our experiences Poland provides very good conditions for BPO and a number of German organizations operate service centers there already. What other trends regarding destinations do you see?
For our global clients we see a truly global model in terms of locations of their SSCs or external providers. Typical is that they source in the very same locations where they operate or already have offices. This can even mean, for example, sourcing to the South in the U.S., Eastern Europe (Czech Republic, Bulgaria, etc.) or Spain to name just a few locations. The statistics are out there which locations are “hot”, however often the locations are chosen for emotional reasons or relationships to suppliers in that region and not completely on a pure top ranking.
The sourcing models: German banks are rather very conservative and would probably prefer the captive model, while real ITO/BPO may provide better benefits and even operational advantages. What are your experiences in this regard when talking to the people on client side?
At the end of the day the discussion centers on uncertainty and that means risk. If either the advisor or the supplier can take out the key uncertainties in a sourcing model for the client, then they are usually open for a sourcing deal with an external provider.
And my last aspect are the regulations: Lately the Safe Harbor agreement fell apart, other areas are handling and giving access to customer data to external partners, data protection regulations in general. I know that a lot of especially German decision makers are concerned about this part when it comes to outsourcing. Is there an absolutely safe route to go and how can clients stay compliant with their internal, but also the regulations from legislative side?
No. The only absolutely safe route is to keep all processes in-house and even then the challenge of cost to implement regulatory changes alone and not “share” the costs with a supplier can be fatal. The key is to implement a flexible data model and robust data warehouses now, independently of the sourcing initiatives. This will serve to ease the pain and cost of future regulatory changes both in-house as well as if the service is outsourced.
Thank you for this interview!
Reid Anderson (Managing Director) – is a passionate sourcing and financial services professional. With over 15 years of combined industry and consulting experience in the financial services sector, he has a proven track record in managing complex IT and business process transformation projects. Reid provides hands-on, pragmatic and balanced leadership and project delivery based on up-to-date research and intelligence on financial services market trends and sourcing providers’ services. He moderates and blogs in the XING Group Forum he founded in 2004, „Offshore Outsourcing“, and is a regular contributor to publications on key sourcing topics. Reid earned his B.A. in Business Management from Goucher College in Baltimore, Maryland and is based in Frankfurt, Germany since 2001.