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Offshoring the Back Office

Offshoring, or offshore outsourcing, is best utilized for back-office functions rather than customer-facing activities, two speakers said Wednesday at the BAI TransPay Conference & Expo in Las Vegas.

“If a bank has 20,000 people and assets of around $30 billion to $70 billion, about 10% of its total staff should be suitable for outsourcing,” said Robert Olson, president of Dallas-based Carretek LLC. “But among the employees that do not interface with customers, about 25% to 30% should be suitable.”

Olson said some of the operations that banks might consider offshoring are “the day-two processing functions,” such as those associated with capturing data and handling checks, loan documents and new account openings. Other prime options include human resources, finance and accounting, he said.

The proposal could dramatically reduce the number of expensive substitute checks that banks have to print.



“Three to four years ago, banks mostly outsourced their call center operations or they used foreign operations to augment their IT staff,” Olson said. “But there are a lot more internal operations that banks may want to consider when looking at outsourcing.”

Olson added that a bank with assets of between $50 billion and $70 billion could save tens of millions of dollars annually, while a bank of $150 billion or more should save hundreds of millions of dollar annually. “A lot of banks that previously have said they couldn’t even consider outsourcing to a foreign country are now finding the practice is so mainstream, they don’t have much of a choice not to,” Olson said.

Another change is that banks formerly used captive operations, or wholly-owned foreign subsidiaries, for their offshoring operations, Olson said. Today, there are a lot more options to form partnership alliances or hire foreign-owned third-party companies.

The advantage of the latter is that banks don’t have to deal with the cultural and unique legal issues associated with running a business in a foreign country, Olson said. Additionally, the partnership option is more practical for small and mid-sized banks, he said.

“The rule of thumb is that you need to have a minimum of 2,000 to 3,000 employees located at a foreign site in order to own your own operation,” Olson said. “Beyond the top 10 banks in the U.S., that is not a viable option.”

Olson was joined in the presentation entitled “Better, Cheaper, Faster—Achieving ROI in Business Process Outsourcing” by Madhavi Mantha, senior analyst for Boston-based Celent LLC.

Mantha said that most bank outsourcing in the past was of technology-based operations involving the IT staff and the CIO made most of the decisions. She said offshoring decisions today require a different type of analysis requiring more people in the organization providing input in choosing an outsource partner and implementing the transfer.

Additionally, she noted that not all outsourcing today is horizontal—i.e. outsourcing the entire payroll, human resources or accounting operations. Instead, banks are also looking at vertical outsourcing. This involves outsourcing the same operations that are performed by multiple departments, such as handling documents for the DDA, credit, mortgage and small business departments, Mantha said.

Mantha advised banks to approach outsourcing decisions gradually. “You might try out just outsourcing certain functions related to just one product and then expand it to other products if it works out well,” she said.

(For more on offshore outsourcing by financial institutions, see “Offshoring’s Allure” in the January/February 2004 issue of BAI Banking Strategies.)

 

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» SURVEY RESULTS: ATTENDEES EXPECT NON-BANKS TO BE TOUGHEST PAYMENTS COMPETITOR
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» WE'RE BRINGING IT ALL TOGETHER
Check, image, remote deposit capture, debit, ATMs, fraud, prepaid—BAI TransPay Conference & Expo 2006 is where it's all coming together this week. Follow the action with BAI Banking Strategies' coverage, including our daily e-mail newsletter, results of attendee polls, podcasts with newsmaking exhibitors and others, and exhibitor announcements.


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