Global Banking Symposium 2006 Outsourcing: Building Successful Strategies John Hunter June 8, 2006
What is outsourcing? Model Outsourcing Private Labeling Correspondent Relationship Definition Transfers the execution of business process to outside suppliers: Business Process Outsourcing (BPO) Operational transformation where elements of functional responsibility, process, and personnel are transferred to a vendor partner. Application Service Provider (ASP) Manage and deliver customizable business application capabilities to multiple entities from a central data center. Service Bureau Providers (SBP) Offers a number of applications and centrally hosts the data center environment. Typically, a very low level of customization is offered. A feature of outsourcing which defines how services are delivered: White Labeling End clients are unaware of the original supplier. Grey Labeling End clients know the original provider of services. Purchasing services from an external supplier, to provide services to an end client. Correspondent services are typically an input to other services delivered to the end clients. 2
Today s business environment Increasing competition from banks and non-banks Escalating client requirements Regulatory mandates Infrastructure investment requirements Globalization M&A activity Margin pressure Risk management The challenges of today s business and operating environments are leading institutions to reassess their operating model 3
Market dynamics Industry regulatory events such as Check 21, Basel II, Patriot Act, SEPA and Sarbanes-Oxley are forcing financial institutions and and non-bank financial institutions to make business investments and incur higher operational costs. Top-line revenue pressure, in certain product segments, will result in bottomline expense pressure to maintain overall profitability. A recent Boston Consulting Group (BCG) Study estimates that by 2011, payments1 will be a $390B industry globally. BCG forecasts that for the same period revenue per transaction will decline from $1.16 to $.86 for domestic payments and from $12 to $5.20 for crossborder payments. According to a recently released IDC and Financial Insights study, financial institutions are increasingly looking to third parties to manage entire payment functions, rather than the process alone. IDC estimates that U.S. spending on payments BPO services reached $3.3 billion in 2005 and will grow at a five-year compound annual growth rate (CAGR) of 4.2% to reach $4 billion by 2010. 1 Payments business includes checking accounts, debit and credit cards, transaction services and cash management. 4
Market dynamics IDC and Financial Insights highlight the following key trends in the payments BPO market in 2006: Insourcing among larger banks, as banks continue to move from large-scale contracts to more targeted initiatives Small and medium-sized banks will drive outsourcing demand as they embrace outsourcing as a way to grow and compete with larger banks International expansion and global integration as banks focus on business development and emerging growth opportunities The emerging role of offshore, which is already pervading virtually all segments of the larger business outsourcing market A desire to avoid investment requirements, as a result of market pressures, is a key driver for outsourcing services. 5
Drivers of the outsourcing wave Outsourcing has evolved from simply being a method for saving money, to being a strategic, often necessary element for sustainable competitive advantage Traditional Drivers of Outsourcing Cost savings Reduced overhead expenditures and workforce costs Technological competence Take advantage of technological resources that are not available in-house Increased flexibility Remain agile and respond rapidly to changing market demands Improved quality and efficiency As a result of streamlined operations, companies can improve service levels Current Drivers of Outsourcing Weakening financial performance Increase the efficiency and cost effectiveness of operations to improve bottom-line results Focus on core competencies Concentrate on the core activities central to the value proposition Globalization As companies move into international markets, they can rely on outsourcers for assistance Major organizational changes During internal changes, mergers and acquisitions, and privatization / deregulation outsourcing becomes a strategic option 6
Outsourcing benefits and challenges Benefits Shift/eliminate cost Broaden geographic scope Additional product capabilities and revenue opportunities Focus on core business and revenue generation Enhanced competitive capability Best-in-class technology Subject matter expertise Flexible and scalable capacity Defined service levels Productivity enhancements Challenges Loss of control Communication Service level agreements Performance measurement Competitive threat from outsourcer Human Resource issues Management philosophy and tradition 7
Outsourcing decision criteria Is it a core competency? Does it provide a competitive advantage? Does the business have the scale required to provide a cost-efficient service? Does it provide an appropriate ROI? What are the tradeoffs? Is the capital available to make the investments required? Does the business adequately address all risk management requirements? Are you committed to on-going investment in people, process, technology? Is the business able to provide the innovative products and quality service that clients are looking for? Institutions are reallocating capital and resources to address core business and growth opportunities. 8
Strategic 0ptions Reinforce Low Cost Position High Reposition High Market Share Grow organically and fill the factory while managing expenses Strategic Options Evaluate lower cost servicing alternative via outsourcing partner Low Enhance distribution and product capability via outsourcing partner Outsource Refocus Retire Market share and cost position are key drivers of the outsourcing decision 9
Options for financial institutions Institutions are not standing idly by and watching their business get marginalized, most are pursuing one of the four strategic options Grow Scale expand your business by organic growth or acquisition Correspondent select an incountry bank exit as a clearing participant and settle via a correspondent Selective Allocation distribute payments over multiple platforms such as processing treasury payments in-house while outsourcing commercial payments to a correspondent Cost Savings Correspondent Selective Allocation Hosted Service Provider Grow Scale Hosted Service Provider partner with a leading services provider to host your technology and/or business processes. Control 10
The outsourcing continuum Bank Client End User (Grey Label) BPO / Service Bureau / ASP Services Correspondent Bank Payment Networks & Counterparties Client End User (White Label) Client Back Office Client Bank The level of transparency and control over process defines the outsourcing landscape 11
Outsourcing models YOUR BANK Technology Maintain application interfaces to Lines of Businesses Maintain communications link between Your Bank and the Service Provider Processing Exception and approval processing (e.g. OFAC) Value Added activities (Treasury, Customer Service) Monitor service level performance Manage Risk Compliance Regulatory compliance activities (AML, OFAC, etc.) Risk management ASP Operating Services Processing Perform manual data entry (FAX, Phone) Repair and validation Reconciliation Process cancellations, amendments, rejects, returns Monitor risk management effectiveness Business Continuity Service Call Center/Inquiry support Investigations, Adjustments, Cancellations BPO Service Provider Technology Deploy, maintain and solution Maintain interfaces between the Bank Business Lines and the Service Provider Monitor communications link between the Bank and Service Provider Monitor external links to third parties (SWIFT, etc.) Maintain Disaster Recovery solutions Deliver Account Admin., Training, Help Desk support Processing Process and route transactions Support Regulatory Activities Manage Risk Service Manage service level performance 12 8
Process management Structure and discipline deliver success throughout the outsourcing lifecycle as governed by the service agreement Implement Terminate Defined scope / business requirements Joint planning/management Established acceptance criteria Communication/escalation Notification Rights and responsibilities Transition support / exit plan Costs Reporting Service level agreements / kpis Change control management Governance / resolution Joint product / business planning Benchmarking Continuous improvement programs Manage Improve 13
Guiding principles & action steps Define your product strategy Do not outsource a problem Do not outsource a core competency Do not outsource to a competitor Ensure capability, commitment, & experience Undertake due diligence Outline financial objectives & measure performance Manage inherent risks Outsource to a partner, not just a vendor Focus on value to clients, not only cost reduction 14
Questions? John Hunter USD Clearing Vice President Email: john.c.hunter@jpmchase.com Tel: (813)432-7687 15