Soft Economy Drives BPO Activity

MBA (6/23/2008 ) Palaparty, Vijay
The soft economy may spur further business process outsourcing in the financial services sector, according to research from EquaTerra, Houston. It expects demand to grow 7-8 percent annually over the next five to seven years, responding to market challenges and opportunities.
The report, Perspective: What’s Next for Service Delivery in Financial Services?, said financial services organizations remain focused on cutting costs and realigning resources to match current demand levels, also looking at process reengineering and sourcing options that aim to maintain operating efficiency as revenue growth returns.

“[We're] not seeing a decrease in outsourcing demand in the financial services industry outside of select areas, such as mortgage services, but rather a delay in the demand to market,” said Stan Lepeak, EquaTerra’s managing director of research and co-author of the report.

In EquaTerra's first quarter Pulse Survey that was part of the report, 38 percent of service providers said current economic conditions are drive outsourcing demands. Twenty-nine percent said demand has slowed while buyers rethink plans. Thirty-three percent of providers said the economy has had little to no impact.

“In the short term, financial services outsourcing buyers have become more focused on cost avoidance and are looking at outsourcing as a means to defer or amortize investments in new IT capabilities,” Lepeak said. “Longer term, however, outsourcing is still viewed as a strategic reengineering tool, enabling business process improvement and market innovation.”

Fifty-five percent of service providers said buyers placed strategic emphasis on process improvement, innovation and transformation over pure cost reduction in their outsourcing efforts. Only 14 percent said cost reduction or cost avoidance drove buyer decisions and 32 percent reported no change in strategy driving adoption.

“Management and delivery of middle and back-office business processes is a prime target for innovation,” said John Boyle, financial services sector lead for EquaTerra and co-author of the report. “Financial services organizations could significantly benefit from alternative service delivery models like offshore captives or outsourcing to more efficiently and effectively deliver services. Sourcing strategies are effective tools for boom cycles, but they’re even more valuable in bad times. They can ensure hard-won efficiency gains are permanent and evolve to deliver greater value.”

Despite demand in response to a weak economy, the report said service providers have been negatively impacted.

“The severity of the impact is naturally directly correlated to the size of exposure to the harder hit areas like mortgage services,” Lepeak said. “Some smaller or specialized Indian service providers have suffered more from the slowdown in this market sub-segment.

The report said services providers focused on providing contract labor, short-term projects and more discretionary work like consulting, IT systems integration and some areas of application development have also been harder hit. “Larger Indian and multinational service providers have for the most part not been materially affected by market conditions. Indeed, several Indian service providers cited a stronger year-over-year financial services pipeline, especially for larger outsourcing deals (total contract value of $25 million).”

Companies such as First Houston Mortgage, Houston, which has a captive offshore facility in Mangalore, India, where it handles non-customer facing business, see outsourcing and offshoring abroad as the “future” of the industry as a means for efficiencies—for lenders and ultimately consumers.

“There are going to be pieces of the mortgage process that go to South Asia,” said David Zugheri, president of First Houston. “I wish I could have the economies of scale where everything is onshore. The consumer has a choice in doing business with a company that offshores for a lesser price, or a company that has only onshore presence at a higher price. Most likely the consumer will go for the lesser price. At this point, the savings are passed through to the consumer 100 percent—the Indian operation doesn’t really earn a profit.”

To protect their business, the report said service providers are shifting the mix of work to more strategic projects or those with shorter term return on investment, delaying or scaling back but not cancelling projects or re-scoping efforts based on revised client needs. Longer-term outsourcing arrangements are more immune to these types of changes, the report said.

The report also said that service providers are moving in direction of offering platform-based services, including widely known software-as-a-service or platform-as-a-service models, in an effort to standardize and to offer complete, "total" products and services.

“Leveraged solutions are those developed and assembled from common components, pieces of which service providers can deploy across multiple clients,” the report said. “These offerings ideally combine IT solutions with new and innovative business process models and couple them with ongoing outsourced support services. Leveraged offerings are typically more profitable for service providers. Greater standardization can improve profitability, but more importantly to buyers, it can create more consistent and higher quality deliverables.”