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Crunching the numbers - the value of outsourcing for banks Back  
While outsourcing is now increasingly common for corporates, with companies such as Exel Logistics outsourcing its European shared financial services center to Accenture, Stuart McLaughlin writes that due to competitive pressures, banks are now looking to outsourcing to save money.
Outsourcing has become a by-word for dread amongst employees, and a cause celebre for unions who see the oncoming threat of a new supplier entering the fray. To continue to fear the threat of outsourcing from both an employee and employer perspective demonstrates a fundamental misunderstanding of the nature of the Irish market, its predisposition to engaging third parties to deliver long-term services, and the detail of what lies behind the myth of the ‘O’ word!

Let us first destroy one of the key misunderstandings: IT Outsourcing has already been adopted in Ireland and we should not consider ourselves a total backwater when it comes to working closely with suppliers in areas of IT and shared services. Perhaps we have not adopted the concept with quite the same vigour as other markets but, as we know, Ireland is a different market.

Outsourcing related revenues already account for a significant element of Accenture’s annual turnover in Ireland, and over 400 staff are now working within Accenture in Ireland delivering outsourced services to both public and private sector clients in Ireland, the UK and further afield.

The Revenue On-line Service (www.ros.ie) was developed and is maintained by Accenture staff, providing the current leading example of e-government in the state. Exel Logistics recently made the decision to outsource their existing European shared financial services centre based in Dublin to Accenture, including the transfer of 130 staff, bringing the total number of Accenture staff in Ireland to almost 900, and Microsoft have a long-standing agreement with Accenture to support their European Operations Centre in Dublin. These are landmark relationships that demonstrate a subtle shift in the Irish marketplace.

Indeed, Accenture has demonstrated that it practices what it preaches, by focusing its own back-office activities for the European offices in a single European Service Centre in Dublin. Each office effectively outsources operations such as accounting services, time and expenses and IT helpdesk to Dublin, leading to over 350 employees in Dublin achieving significant efficiencies and improvements in service.

These examples also highlight the variations in the nature and origins of relationships. For too long outsourcing in Ireland has focused on data centre and infrastructure services. The Revenue Service relationship is geared towards providing application management, the Accenture relationship with Exel delivers Business Process Outsourcing in a shared services environment and infrastructure and application support is core to the Microsoft service. Hosting services also form part of the overall picture but an outsourcing relationship does not have to be all encompassing. It may, as in these cases, be selective.

We have already mentioned that outsourcing is a word that strikes fear into many people and generates controversy. It is true that the results are mixed, some outsourcing initiatives fail to produce the expected results, and many employees interpret the strategy as a means of downsizing, an abdication of accountability or simply a risky financial strategy.

Let us address the issue of downsizing; probably the major issue concerning Irish employees as we move on from 2002, which saw the largest increase in unemployment in the state in the last 10 years. It is true that staff transfer may be a part of an outsourcing deal (although this is not necessarily the case), but the rights of employees are legally protected in these instances and their terms and conditions remain the same. Many employees will testify to the improved opportunities that arose from being transferred to a firm who specialised in their area of expertise. Indeed it may well be the case that the long-term prospects of an employee’s future are enhanced as outsourcing aims to remove inefficiencies in their current set-up.

To summarise the picture so far, outsourcing is a proven strategy that has already been adopted in Ireland. It isn’t always totally successful in delivering what was expected, but as suppliers have gained experience, and as clients have learnt to select the right partners this success ratio has improved substantially. There are, clearly, degrees of outsourcing, and the potential opportunities for Irish organisations will vary depending on their size, scale and business issues.

Until recently, most managers thought of outsourcing chiefly as a tool to control costs or achieve efficiencies in established operations. In the late 1990s, outsourcing began to evolve from a cost saving initiative to a core strategy as corporate leaders found in it a tool to quickly redefine, reposition and transform their core business.

Many existing Irish relationships in the outsourcing arena focus on the conventional efficiency based approach but there is evidence with agreements such as that between Accenture and Exel that Irish-based organisations continue to move up the value chain in order to gain a competitive advantage. But does this groundbreaking deal in shared finance and accounting services show a model for other industries such as financial services?

Traditionally one may have thought not, but it is clear that global banks will be undertaking a process of rethinking core banking functions. In fact the terms ‘core’ and ‘non-core’ may soon be irrelevant to the discussion. What really matters, after all, is not whether a function is ‘core’, but whether it differentiates the bank.

In the UK banks are adapting to the competitive landscape by outsourcing cash management and payments processes once considered core. While these functions are core to banking, they do not represent a distinctive competitive asset. Similarly banks in North America have begun to outsource a range of services previously considered fundamental. The Bank of America’s decision to outsource human resources and accounts payable, for example, did not diminish the banks profile at all.

In a recent US survey, Accenture found that many banks are already disregarding the academic distinction between core and non-core. Nearly two-thirds of banks outsource some corporate functions, usually credit card processing, human resources and IT operations. Surprisingly though, half of banks interviewed said that they also outsource some finance and accounting functions- including general ledger, tax accounting and financial reconciliation.

The survey sampled 30 US retail and commercial banks from a population with over $3 billion in assets. Most outsource some functions including financial reconciliation consolidation, monthly or quarterly close, fixed-asset accounting, accounts payable, accounts receivable, management and legal entity reporting and budget and plan production.

A minority of banks surveyed do not outsource any corporate or financial functions, usually because their staffs are so small that it would not make economic sense, or because they fear a loss of control. Competitive pressure may soon brush these concerns aside.

Deciding which areas to outsource does, of course, present a challenge in itself and certain core areas of judgment and policy must be retained, even within the most aggressive of outsourcing programmes. The core areas where opportunity lies are in functions that can be commoditised such as reconciliation, payables, inventory accounting, general ledger, cash and fixed assets.

We can look forward in Ireland to the future growth of outsourcing and the competitive advantages it can offer Irish organisations whether that be through straight cost savings at one end of the scale, to long term risk/reward sharing relationships which can totally transform the position of Irish businesses in the local and International markets. The first steps have already been taken, and chief executives, finance directors and visionary IT directors should be engaging suppliers to establish where this strategy may enable future opportunity, and, potentially, union leaders should be looking to their employers and asking whether outsourcing is the move that might secure, rather than jeopardise their futures.

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