Banks look to managed services

The financial industry's move towards managed services, or even full outsourcing, has been gradual. Fears about loss of control over processes and uncertainty about what is, or isn't, core to individual institutions have held back a widespread move. However, a number of trends are emerging to bolster the managed services market and prompt some institutions to think again about what they can delegate to third parties.

Cost pressure on IT departments is one of the main factors underpinning any move to managed services. Driving out costs is becoming more urgent, as some financial institutions move expenditure off their balance sheets in order to meet the capital restructuring required by Basel III.

A move to managed services can help institutions to manage complexity and risk in a cost constrained environment. Most financial institutions would target cost savings of around 30% to ensure a move to managed services is worth the short-term disruption in handing over IT operations.

At the same time, the managed services market has matured and providers are offering a high degree of operational excellence and flexibility to their clients. A decade ago, outsourcing was considered to be an "all or nothing" approach, with institutions handing over an entire IT infrastructure and the associated staff to third parties. In the past 10 years, however, as experience and expertise have been built up in the managed services industry, providers have begun to develop new business models based on a mix of onshore and offshore resourcing and a more modular approach.

The evolution of the industry has broadened the number of financial institutions willing to consider whether to outsource certain functions, and triggered a more serious examination at individual banks of what is core and non-core to their operations. In the past, many financial institutions considered certain IT operations to be of utmost importance, and not for delegation to others. But now that there are more refined approaches, institutions can more effectively assess which elements of operations can be given to a third party to handle, and which need to remain in-house.

This much more nuanced approach to outsourcing enables institutions to decide the degree of responsibility they want to take for certain functionality. Managed services providers can match their clients' wishes with various levels of delegation and responsibility. For example, some institutions may want to continue to run their IT infrastructure, but may not want to directly manage all of the applications running on that infrastructure. In this instance, an institution can outsource just the management of its application stack to a third party that will then manage the stack remotely.

On the other hand, some institutions may choose to hand over all responsibility for managing and maintaining large sections of their IT infrastructure. This trend could accelerate over the next five years. While it is yet to be seen whether larger banks will opt for such an approach and how far it will go, continued cost pressure makes the proposition more compelling. Cost is not the only factor; the sophistication of managed services allows a higher level of visibility and control over operations for banks, which makes the decision to delegate responsibility much easier.

An important benefit of managed services that is often overlooked is the ability to tap into best practice standards. Any move to a managed service model will require standardisation and automation, where possible, in order to reduce the number of manual processes before operations are handed over. An institution can benefit from best practice, established by all of the other institutions that are part of the managed services provider's client base. Managed services can help banks to achieve operational excellence, which in turn will reduce costs.

A move to managed services will also remove the burden of maintaining and upgrading IT environments. This is not only a cost saving, but also reduces the operational risk inherent in any upgrade or change to the IT environment. This is an important factor given that many IT departments are now run with fewer resources. Many banks are relying on too few people to operate mission-critical environments. Managed services can ensure banks are not heavily dependent on scarce resources.

The case for managed services will vary depending on the individual institution and its objectives. Many institutions have already driven out substantial costs from their IT infrastructures and feel they can go no further in their cost cutting. For such institutions, a managed services approach will enable them to develop specific capabilities around, say, messaging, without taking up valuable in-house resources.

A decade ago, outsourcing was considered to be an "all or nothing" approach.

Banks must pay close attention to the credentials of the partners they choose to work with. Those choosing to adopt a managed services approach need to make sure they are working with the right application and services vendors which can deliver sufficient competence for the task.

The decision to outsource can be coloured by who is given the responsibility for the decision. Operations teams and management in control of processes that are candidates for managed services may be more likely to want to retain control over those processes, compared to decision-makers further up the management chain who are more removed from the processes in question and may have a more positive attitude towards managed services. Additionally, senior management has a broader outlook on the banks' operations as a whole and may therefore identify a more compelling logic for outsourcing.

In moving to managed services, banks must also standardise their processes as much as possible and drive out customisation. This can be a challenge for many institutions, but achieving a balance between customisation and standardisation will help to ensure the move to managed services is a success.

If the challenges are overcome, successful outsourcing can deliver numerous benefits to financial institutions. Managed services solutions can help financial institutions to move into a more robust, standardised operations environment. Such an environment will help them to deal with the increasing complexity of their business environment and achieve best practice in operations.