Is Outsourcing Out?

Talking with financial services clients about operating model efficiency over the last couple of years has often led to the topic of near-/offshoring and outsourcing. More recently, these discussions are shifting towards the promises of digitization, such as robotic process automation (RPA), natural language processing (NLP), chat bots or artificial intelligence (AI). These potential solutions have the glamor of the “new” and to some extent the attractive ideal of a “magic machine”, which replaces manual work at the fraction of the cost of human labor.

However, if we take a closer look at our clients’ real world business cases, today, shoring/outsourcing often still proves to be 3-4 times more cost efficient than digital solutions.

Employment growth in Eastern European shared service centers (SSC) over the last years supports this observation. It is estimated that approx. 600,000 people are working in Central Eastern Europe’s shared service facilities across all industries. If we take a closer look to a sample of 29 leading Western banks and insurances, with one exception all 29 companies increased their staff in the region. The average increase is 47% between 2016 and 2018 (for the previous analysis click here). From our discussions with outsourcing providers in that region and from observations at our clients, we expect this trend to continue in general – despite some outlier cases where individual companies decide to take their CEE operations at least partially back on-shore.

From outsourcing to new ecosystems

We are just at the beginning of the digital revolution. More and more technologies will advance and become available at lower costs to improve efficiency of operating models in financial services. However, the implementation, operations and ongoing further development of digital solutions require highly specific capabilities.

The key question to ask yourself is: Does my company possess differentiating capabilities in digital innovation and transformation? Or, in other words: Are my clients willing to pay a premium that we build up own superior capabilities in this field?

The answer is not straightforward and will often differ between a particular bank, asset manager or insurance company, but it will always focus on the differentiating capabilities. It might lead to diverging perspectives for client interfaces versus back office operational platforms, which compete with external shared service providers operating with a much larger scale and investment budget. In fact, a recent PwC survey among German banks confirms that while cost efficiency is still the # 1 motivator for outsourcing, access to specialized resources and focus on differentiating capabilities are the second and third most important motivation. Leading companies established vibrant ecosystems that provide access to these kind of human and technical resources.

Implications for your right to win

Despite some loud prophecies of doom, we see little evidence that shoring and outsourcing have become “out” within the financial services industry as digital technologies emerge. Rather – and in addition to “traditional” outsourcing providers – more and more Fintechs target existing financial institutions as partners. They offer access to latest technologies such as blockchain and innovative ways of working and talent. On the other hand, more and more traditional banks and insurers challenge their existing value chains and begin to consider themselves as part of a larger ecosystem. This is confirmed in the above mentioned PwC survey among German banks in which 63% aim to cooperate with Fintechs within the next two years.

In this sense, the old question of make or buy is very much up to date, with a new angle though of differentiating digital capabilities in a larger ecosystem. At Strategy&, we support clients in identifying their differentiating capabilities, a suitable organizational and operational setup as well as forward thinking strategies for automation and digital delivery – in short: on your journey to defend and further develop your right-to-win in the market.

Authors: Dr. Utz Helmuth, Dr. Bernhard Skritek. The authors acknowledge the contribution of Martin Debusmann and Adrian Harder