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OUTSOURCING
IT
Bryan O'Connell
specialises in providing strategic and marketing consultancy services to
banks and financial service providers. |
The recent announcement
by Westpac that it is considering outsourcing a major part of its information
technology operations and telecommunications is a timely reminder that
outsourcing remains a major tool in banks' business strategies in the new
decade.
Westpac's move
was highly significant to the IT outsourcing market as it represented only
the second major IT outsourcing by a bank since the Commonwealth Bank of
Australia more than two years ago made its historic leap to outsource.
It also provided
a significant illustration of how banks are continuing to search for the
optimum results in running their internal operations by using using third
party services and expertise.
Formulating
the Decision
How do banks
decide whether or not outsourcing is a viale strategy for them? What is
their formla?
Firstly, with
the exception of IT, banks in Australia have stuck to a principle of excluding
core/ strategic functions from outsourcing. For instance, while banks are
continuing to use more automated credit scoring systems, it is unlikely
that they can or want to allow outsoucing of credit and lending decisions.
This is notwithstanding
some pressure that has been exerted on banks by their non-bank distributors,
such as mortgage originators and managers, who want to snare banks' retail
and commercial mortgage business. Perhaps some of the boundaries have not
been fully tested as yet.
The more traditional
areas of outsourcing in relation to non-core areas continue, such as property
management, human resources, expatriate administration and aspects of funds
management.
The most recent
development comes from the ANZ Bank, which recently outsourced its procurement
services in Australia and New Zealand.
This is a significant
development as the total value of the services outsourced is more than
$1 billion. ANZ claims the venture has resulted in big cost savings within
the first six months although these were not quantified to the writer.
The banks also
says its moved has led to better strategic procurement advice, better pricing
and service delivery. ANZ has also moved to improve its technology and
build an online service for suppliers. One advantage of an online service
is that the bank can better track expenditures, hasten decision-making,
and eliminate paper costs. This outsourcing process is a most interesting
development and is likely to be at least considered by other banks in the
future.
Banks contend
that while cost reduction goals drive outsourcing, much can be gained by
having a third party providing a better quality product and more efficient
service. In many cases, third parties provide a much more focused strategic
approach. This is no better highlighted than when considering outsourcing
IT, where in the past the lowering of costs was seen to the prime driver.
Costs are still
important, but the emphasis has moved to one of strategic choice. According
to research house IDC, Australia and New Zealand is a major market by world
standards when it comes to outsourcing IT. IDC estimates that the Australian
IT outsourcing market grew 17 per cent in 1999 to encompass about $2.5
billion of revenues to suppliers. Of that, the banking and finance industry
represents approximately 18 per cent.
IDC expects
outsourcing spending to increase as economic factors such as globalisation,
privatisation, deregulation and technological innovations force companies
to increase their competitive positions, and seek third party vendors as
outsourcers for help in transforming their organisations.
Certainly the
trend in Australia in the banking industry is a very good reflection of
this and it can be expected that if the Westpac IT outsourcing announcement
proceeds, IDC expects that the banking and finance industry will represent
a more significant percentage of the total IT outsourcing market in Australia
in the future.
Outsourcing
IT
With the centre
stage that IT has at the strategic CEO level of banking in Australia, it
is little wonder that banks are focusing on how to get the most efficient
and most strategic advantage from their IT operations. As well, the growing
complexity of software services and applications, the acceleration in online
services to replace traditional distribution channels, plus new technologies
and the prospect of electronic commerce benefits, all means that banks
are under much more pressure these days to consider the benefits of outsourcing
their IT.
Benefits
What are some
of the "potential" benefits of outsourcing IT to a major global supplier
of those services. IBM cites a list that includes:
-
material cost savings
-
more services delivered
more innovatively
-
freeing up a bank
to focus on its core competencies
-
a more efficient
and effective application of technology to meet business targets
-
IT employees can
benefit from challenging and rewarding careers within a major global IT
service provider
-
fosters a continuing
artnership with the IT provider, who may have more global experience, intellectual
capital, quality assurance, asset management expertise, service delivery,
consulting, systems integration and development applications; and
-
more flexibility
to exploit new technologies.
These are some
of the benefits that are open for banks to consider and IT suppliers to
deliver. As an example, the Commonwealth Bank indicated that its outsourcing
led to savings of 20-25 per cent on what would otherwise have been spent
on IT, improved service levels, increased satisfaction with technology,
fewer severe failures of ATM networks and EFTPOS, and increased innovation.
It seems the
momentum to consider outsourcing has also affected ANZ. It has made clear
that it will outsource any IT-related resource if management someone else
can do it better. Not every bank has the same view and there is a notable
exception - NAB still says its IT remains off limits to outsourcing.
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