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06/15/2016

Operations Outsourcing Strategies: Trends and Challenges in Asia

Outsourcing of middle and back office functions to third party providers has been on the rise in Asia and has grown to cover a wide range of activities. This article provides insights into the current trends in the region, the key challenges faced by financial institutions throughout the decision process and our approach to help them optimise their strategies.

Outsourcing Trends

Full back office outsourcing and partial middle office outsourcing are on the rise

The financial industry has already adopted a partial back office outsourcing model to reduce the need to invest in system infrastructures and facilitate business expansion. As regulatory and financial pressure intensifies, a growing number of institutions are moving one step further towards fully outsourcing their back office platform.

Middle office outsourcing has been more limited. Financial institutions are more reluctant to externalise those processes as they are more integrated with their front office activities and usually cover sensitive client facing activities. Nonetheless, appetite for partial middle office outsourcing is growing, as a result of the wider range of capabilities developed by technology and service providers.

 

Outsourcing has become a long term strategic game

Outsourcing enables two prevailing strategic goals:

  • Refocussing on core competencies to improve performance and risk management
  • Automating processes while variabilising costs to protect profitability

Financial institutions are reducing their involvement in peripheral activities, such as middle or back office operations, to cut down the time and money invested in upgrading legacy systems, hiring resources and managing staff turnover.

Outsourcing also provides benefits from a cost perspective. It offers an effective way of engaging in robotic process automation and can accelerate cost reduction during periods of lower business activity. Indeed, more and more vendors now offer cloud-based “Business Process as a Service” and pay-per-use models where customers are charged based on the number of transactions processed instead of the number of licenses or nodes utilised.

 

Banks tend to favour partnerships with independent specialist providers

Financial institutions looking at outsourcing can either turn to another financial institution that has developed a scalable solution or partner with an independent provider. We have observed to date a preference for the later.

This preference can be explained by the growth and maturation of the independent specialist outsourcing market. With falling computing costs lowering barriers to entry, financial institutions have access to a growing pool of potential partners, striving to differentiate themselves by building cost-effective innovative solutions faster than their competitors. 

Moreover, partnerships between banks can raise strategic concerns. While banks outsourcing their operations might be unwilling to give competition access to their transactional flow, outsourcing providers may hesitate to facilitate the growth of competitors.

 

Strategic Challenges

Managing regulatory constraints and requirements

 

One of the key steps of the decision process is the assessment of the feasibility of the outsourcing project from a regulatory perspective, which is often more complex in the Asia Pacific region than in Europe or the US:

  • The amount of regulations that come into play can appear to be overwhelming. A financial institution looking at establishing an outsourcing arrangement at regional level will on average have to consider more than ten distinct regulatory frameworks.
  • Further, outsourcing regulations across the region are not homogeneous. Regulatory approval requirements, for example, can differ significantly from one jurisdiction to another.

Thoroughly analysing the impact of regulatory requirements is therefore primordial. By-passing this critical step has the potential to materially affect the ROI or jeopardise the feasibility of the project. 

Selecting a partner in line with the sourcing strategy and risk appetite of the bank

 

Outsourcing critical activities such as settlement or valuation can have a significant impact on the profitability/risk profile of an institution and the servicing of its customers. It is thus essential to select a partner in line with the organisation’s outsourcing strategy and the boundaries set by its risk framework.

This is however easier said than done:

  • The proliferation of “fintech” options has made the shortlisting of candidates more time consuming.
  • Frameworks articulating the strategic objectives and boundaries within which the organisation is willing to operate are not always clearly defined.
  • The risk assessment process is becoming more complex, as regulators turn up the pressure on “outsourcing risk”.

More often than not, the selection process will involve trade-offs that need to be carefully thought through.

Sia Partners Approach

We have developed a 3-step structured approach to help our clients make the most of their outsourcing opportunities:

If you are interested in discussing how we could support your organisation on its decision making journey, please contact our teams in Asia.

Please find here the full version of the article for further reading. 

Sia Partners

 

Sources:

  • BNP Paribas, “Middle and back office outsourcing for banks and brokers – Preparing for the international stage – Asia”, Nov. 2014
  • Regulators’ websites

 

    Copyright © 2016 Sia Partners. Any use of this material without specific permission of Sia Partners is strictly prohibited.

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