Banks create roadmap for IT outsourcing

Stability is returning after the recent economic meltdown and banks are leading the way with a new approach to IT outsourcing which could become a roadmap for other sectors to follow.

The large banks, which usually play a pioneering role when it comes to buying and using IT services, were blamed for the severity of the economic slump the world is only just emerging from. But the banks could drive the wider economy into a new way of structuring outsourcing relationships that could benefit businesses and their suppliers in the entire outsourcing sector.

According to Infosys's head of Europe, BG Srinivas, banks are not only leading the way in investing in IT outsourcing but are changing how they work with outsourcers. Infosys boasts some of the world's biggest banks as customers.

These new models for outsourcing relationships, which are seeing supplier portfolios consolidated and strategy sharing between businesses and their IT service providers, are already filtering into other sectors as the banks pioneer them.

Srinivas says Infosys is sharing strategic plans with banks and in conjunction with this the banks are reducing the number of partners they work with.

The sharing of strategic plans will help the supplier to prepare for the long term and respond quicker to customer demands while the reduction of suppliers will reduce procurement costs and reduce the risks.

"Banks are always the pioneers in outsourcing but companies in other sectors are also doing it," says Srinivas.

Jean Louis Bravard, director at sourcing broker Burnt-Oak Partners, was previously head of the global financial services business of EDS. He agrees with Srinivas that banks are revisiting their outsourcing relationships after a turbulent few years. He says as a percentage of revenue banks are the biggest spenders on IT outsourcing and he believes other sectors will follow their example because their requirements are not unique.

"Before the economic downturn the banks were just focused on revenue generation. Then after 2008 they were just focused on survival and keeping water off the ship. In the middle of last year they started to try and be efficient."

"A lot of banks are trying to reduce the number of suppliers they work with and are trying to build relationships that are not one-sided, where suppliers share the pain and the gain."

Mark Lewis partner and head of outsourcing at law firm Berwin Leighton Paisner, says banks are currently taking a hard look at their outsourcing strategies with plans for changing them. "Barclays for example is open about this and is currently revisiting its longer term contracts. Part of this includes looking at having longer term relationships." But he says this trend is only being seen at more "settled" banks because other banks have other major challenges as the recovery approaches.

He says openness is very good for outsourcing relationships but there must be parameters. "What is the sense in not sharing information with suppliers and not being open?" He says regulated information cannot be shared but that there is no reason why information about the business direction shouldn't be shared.

John Worthy, technology partner at law firm Field Fisher Waterhouse, says outsourcing supplier consolidation is happening across sectors. "The benefit of that is it means the customer can better manage the relationship and put the right effort into it." He adds that the suppliers will also be able to see that they have a strong and valuable relationship to commit to.

But reducing supplier numbers will reduce choice and options if one partner has problems. Back-up plans are important as the near collapse of Indian supplier Satyam after a massive fraud proves.

Bravard says banks can overcome this by having a small set of suppliers working in particular technology areas. For example for network and desktop services it might just have a couple each. This means the bank can dip into other resources that it has a relationship with.

Srinivas says some banks have different groups for different business units. For example the investment arm of the bank might have three and the retail operation three others. If required each operation could use the suppliers in another's portfolio without having to start the relationship from scratch.

Outsourcing seems to increase during good and bad times. It has its uses as a cost saver and then as a business changer if required. Banks are big spenders on IT outsourcing and their activities can influence trends. Could the consolidation of supplier portfolios and the development of closer business/supplier relationships be a legacy of the financial services slowdown?