Large application outsourcing transactions in the banking sector hit a record five-year high last year, according to a recent report by outsourcing consultancy Everest Group. There were 54 new big application outsourcing projects in the sector with a total contract value of $5.9 billion in 2015—an increase in volume of 45 percent and in value of 25 percent over the previous year.
Financial institutions tend to outsource applications around three different dimensions, says Jimit Arora, partner at Everest Group There are systems to run the business which are outsourced for cost reduction and efficiency reasons. There are systems to manage the business, which may involve issues of regulatory compliance or cybersecurity and are driven by cost or penalty avoidance. And there are systems to change the business, which are efforts to drive revenue growth by introducing new products and services more quickly.
Typically, those “run” and “manage” categories drive the outsourced IT application projects, Arora says. But digital transformation efforts are clearly driving an increase in application outsourcing. “Half of analyzed application outsourcing deals in banking in 2015 had elements of digital transformation in their scope,” says Arora. “These could be engagements that had elements of mobility, big data, cloud, social media, artificial intelligence, or block chain for example.” Banks are looking to third parties for these large transformational projects in order to more easily and quickly access the talent required to deliver them.
Outsourcing is clearly not just a simple cost cutting measure for banks. It’s “also about getting access to the right talent in the right location to enable transformation initiatives,” says Arora. “More specifically, there are clients (especially in the mid-market) who have traditionally preferred a DIY approach to run, but changing market dynamics are forcing them to partner on digital transformation initiatives. This is also shifting the nature of the marketplace from longer-term annuity based contracts to shorter, project-based engagements.”
At the same time, financial institutions are seeing increased cost savings from outsourcing systems for running the bank more efficiently, which can further fuel investment in other areas. And they’re doing it by switching IT service providers. “The nature of the game in the financial services space is that incumbency is proving to be not such a great thing,” says Arora. “Clients have option value in the market today, and there are challengers who are guaranteeing 30 to 50 percent cost reduction on the run spend through aggressive automation. This is requiring the incumbent service providers to cannibalize their own book of business or face elimination in their existing accounts. So the savings are very real.”
Simplification via digital means will help banks reduce costs
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