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Big banks, big applications, big outsourcing

Stephanie Overby | July 18, 2016
Large application outsourcing is booming at big banks, driven in large part by the need for digital transformation.

Looking ahead, IT budgets in the banking industry are expected to remain flat or inch up slightly from 2015. The spending emphasis will be on simplification, says Arora. In order to compete in a market that is becoming more crowded and disruptive, banks must simplify business operations, regulatory compliance, and user experience to reduce costs and remain successful.

“Banks are progressing in the right direction,” says Arora “On the retail deposits side, we believe banks invested in time to offer the digital-only options in the marketplace and are adequately secure from challengers. However, in the areas of payments and mortgages we believe the traditional banks are vulnerable.” A majority of digital transformation dollars to date have been invested in customer-facing systems, leaving back-office systems largely paper based.

“This disjointed approach to creating digital workflows—a function of how banks are organized—causes friction and value leakage,” Arora says. “Take, for example, a mortgage, where a client may start by using digital systems of engagement but quickly runs into a paper environment in the middle or back office where the process breaks down and [takes] weeks.” A digitally native competitor can easily win over that customer.

Another issue is that many financial institutions also lack a well-designed enterprise digital transformation strategy. “Ad-hoc adoption of digital technologies such as mobile and data analytics do not allow banks to own the entire customer experience journey,” Arora says. “The true benefit of these investments is realized at the convergence of these technologies.” The average bank is running more than 1,000 different applications, often in a siloed way, limiting their ability to generate actionable insight from those systems the way a new company might be able to.

Outsourcing could help banks overcome these issues. It depends on how the banks approach their IT application outsourcing, Arora says. “Outsourcing done the traditional way—think of the functional siloes —will continue to emphasize the challenges outlined above. The new demand profile is different, and therefore the supply model needs to evolve as well,” he says. “However, in some situations outsourcing can also act as the bridge that helps a large bank collapse functional siloes and think of vertically integrated, front-to-back solutions.” Expect more as-a-service deals that involve business process, application, and infrastructure: enrollment-as-a-service, for example, or claims-as-a-service.

“Also, service providers have matured to become business partners, with a willingness to engage in an outcome-based engagement model,” says Arora. “Most of the service providers have a dedicated strategy where they partner, build, and buy these startups and can bring to the table capabilities that an individual bank may not be able to bring on its own.”

 

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