Evolution of Outsourced IT
The role of information technology (IT) in the financial services industry has changed rapidly in the past five years. Since its conception, the primary goal of the IT department has been to improve efficiencies and reduce cost. The emergence of the outsourced IT function, using a low-cost workforce to run low-impact operations only enforced this view. Those days, however, are set to come to an end as cost cutting, while still vital, is no longer enough. According to a recent survey by the Economist Intelligence Unit, 83% of CEOs now believe that within three years, IT’s predominant purpose will be to enable revenue growth, and actively drive business performance.
At present, many financial service organisations still regard IT in a solely cost-cutting capacity. In order to maximise its potential, IT must be recognised as a transformational tool that, if managed effectively, can be used to maximise investment while simultaneously achieving both reduced cost and improving overall business performance.
The good news is that revenue contribution from IT can come in many forms. The most obvious method can be seen in business process efficiency, improving the client experience and developing new financial services. However, it can also be used to improve internal knowledge sharing, help distribute crucial intelligence across the enterprise and improve understanding of the customer base to help cross- and up-selling. Mobile technologies are also delivering huge benefits, enabling employees to stay in touch and react to opportunities faster than ever. In addition, collaboration with partners can be expanded far more easily so that projects are completed more efficiently, and in less time. Flexibility of the IT framework is crucial. Those firms, for example, who have taken a proactive approach in preparing their IT for MiFID compliance in November this year stand to gain an immediate competitive advantage. Failure to create an adaptable IT infrastructure can place your organisation in serious jeopardy and those who fail to appreciate the importance of IT to grow revenue are likely to be left behind.
The Economist’s research also highlights the fact that one of the challenges that organisations face is the difference between CEOs and IT managers in how they see IT’s future contribution to business goals. IT managers’ day-to-day responsibilities have traditionally focused on operations management and reacting to recurring faults in poor system and applications design. When investment is made in implementing technology, it is often to cut costs rather than supporting and enabling business transformation. This gap in perception of what IT needs to deliver is a real hindrance in the alignment of business goals and technological operations.
Companies that continue to rely on the financial function to control IT must break with tradition – the starting point is for the CEO to get actively involved in IT’s management and communicate the evolved role they see for the department. Organisational structures, too, are not designed to facilitate revenue growth, as customer-facing functions and the IT department have traditionally been very separate, making collaboration difficult. While the perceived potential of outsourced IT has only recently begun to change, landmark outsourcing deals have started to deliver genuine business value, proving how the application of a new approach to outsourcing can help IT investment fund revenue growth of the organisation.
When the concept of outsourcing first emerged, its real goal was clearly cost-cutting. Imported, low-cost labour on temporary visas was used to supplement existing staff. The second generation corrected some of the limitations of the first, with work sent offshore while regional marketing offices representing the outsourcer were established to provide a degree of local contact and support. Cost-effectiveness immediately improved – through the offshore relocation – but the model was still insufficiently equipped to perform anything beyond basic operations. In many cases, early outsourcing deals failed because work was very poorly defined before being ‘thrown over the wall’. When inadequate results were delivered, the immediate need to revise and resolve meant that any short-term cost savings disappeared.
So the model evolved once more: a stronger focus was again placed on local geographic and industry expertise, but with reducing operational costs still the primary objective. Local offices with project-management capability were set up to enable productive, day-to-day liaison and to resolve previous issues with poorly defined functional and technical specifications. With this model, outsourcing providers could be relied upon more to deliver complex projects that required significant ongoing discussions.
Today, we are seeing a fourth-generation model, which puts long-term business impact at its core. Characterised by seamless integration between provider and customer, this approach combines the cost-effectiveness of offshore production and the on-the-ground expertise needed to manage projects at the highest level, delivering the revenue generation support required by today’s CEOs.
The key to this is in the engagement process, and the ability to provide the customer with the best on-the-ground project management and industry skills available. We advocate using a ‘two in a box’ model, which pairs these industry experts with their colleagues offshore so that projects stay on course. This means that when there is a better and/or quicker way to do something, it is spotted and implemented immediately, with the on-site outsourcing team responsible for driving the offshore team as and when the client’s needs change. When all the competition in a market is heading in the same direction, a faster start can reap huge benefits in terms of ‘first mover advantage’.
To ensure the contribution of IT to business goals, financial service companies need to integrate outsourcing operations across their organisation. By tightly integrating the providers’ teams into the client’s business, the impact of the relationship is naturally bigger, and can be felt sooner. Whether it be delivering a new product faster, improving margins, reducing cost or managing compliance, the efficiency of offshore work combined with the local intimacy fostered through tight integration can rapidly accelerate the impact of IT on business performance. The difference this makes when embarking on complex implementations can be immense, with the potential to break down internal barriers between business and IT departments.
Longer term, fully integrating IT outsourcing across the enterprise yields significant economies of scale. By opening up multiple divisions of a business to a service provider, common build, manage and delivery methodologies, skills and software solutions can be shared and therefore used more effectively and consistently. Scalability – one of the major advantages of outsourcing over build and maintenance in-house – becomes easier and faster with the fourth-generation approach, so customers have far greater flexibility in reacting to internal or market changes.
Expectations of what IT should deliver to a business are changing. To realise these ambitious expectations of CEOs, IT providers who are capable of driving business transformation through industry expertise, customer intimacy and the ability to drive tighter integration at all levels are essential. The fourth generation outsourcing model can achieve this, because it can deliver more, faster at a lower cost than prior outsourcing approaches. Of course, the continued success of this model does require that these offshoring providers keep re-investing in talent ahead of the market whether it be hiring experienced experts or developing raw talent. Only in this way can the customer be assured that they will continue to receive the best advice and expertise available as their relationship develops. If the provider is able to do this, the contribution of offshored outsourcing will continue to move upstream and confidence in IT’s ability to make a real difference to the business will continue to grow.