Different Outsourcing Approaches for Banks
The question is not whether banks will outsource their systems but when. The back office carries no differentiating potential but puts a constant pressure on the bank to reduce IT and operations costs. Back office services such as payments, securities administration, and reference data management are well suited for automation, consistent processes, and the industrialization approach of business process outsourcing providers.
The situation for the private banking front office is quite different, however. Unlike the back office, the front office enables a bank to differentiate itself from the competition. Therefore, the front office benefits most from customization and bank-specific solutions. But front office solutions are challenging to develop because technology and client expectations have changed dramatically in recent years. More and more of the world's high net worth individuals manage their wealth digitally. Private banks and wealth management companies must place their front office on the digital map to stay competitive, but many banks struggle to do so. Except perhaps for the wealth management arms of large banks, their IT capabilities are not sufficiently equipped for an in-house development. This leaves banks with basically three options.
The first option is to hire a small, local—but very experienced and effective—"Google"-type team of senior software engineers who not only understand the private banking business but also can take the bank's requirements and transform them into a powerful and smart solution. Obviously, this is a high-quality—and high-price—option.
The second option involves contracting an offshore software developer. In comparison to the first option, the teams are larger, but the people are typically more junior. As many CIO and project managers can attest, these projects typically face many problems. Communication and interaction between the bank and the developer are often insufficient or inadequate. Also, the developer's workforce may lack the special and diversified skill set required to accomplish a complex and multifaceted assignment such as the design and development of a digital front office.
The third option is to use hybrid-sourcing. hybrid-sourcing as a concept has been around for centuries but has now largely moved to the Internet. Today, the spectrum of hybrid-sourcing ranges from simple mass-production to large, complex, and custom-built production. Banks are usually looking for the latter, asking the service provider to design bank branches, develop mobile banking apps, or submit ideas for new banking products and services. Banks can use hybrid-sourcing to connect with a widespread network of different skills and expertise, as well as tap into a global pool of ideas and knowledge. They may also benefit from involving people who are not already confined to traditional private banking methods.