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Outsourcing exposed

24 November 2004  |  10503 views  |  0 Source: European Central Bank

A March-April survey by the European Central Bank of 82 individual banks from nineteen EU countries found outsourcing to be prevalent at all but two of the sample institutions.

Although outsourcing is becoming more important, there is still uncertainty surrounding the various aspects and concepts of outsourcing, as well as the implications for banks.

The ECB believes banks sometimes lack a clear picture of the achievements and experiences of industry peers, the degree to which outsourcing has been adopted in the banking industry, and how the outsourcing market is shaping up to meet their demands.

The prime motive for outsourcing is cost reduction, cited by almost 90% of respondent banks. Yet only a quarter of the sample are considering future outsourcing to offshore locations, which in general have a reputation of being more cost efficient but less regulated. Around 60% of the banks surveyed said they definitely would not outsource activities to offshore locations.

Most activities outsourced are support activities, such as IT or back office admin, while outsourcing of core activities such as treasury, risk management or asset management is very limited or non-existent at 80% of the banks.

Almost 75% of the banks involved in the survey see a potential risk arising from the loss of control over the activities or services being outsourced or from an undesirable dependency on the service provider. About 40% see operational risks, such as a breakdown in accessibility, a loss of data, etc. Around one third of the banks fear that they might lose certain institutional skills or lose the flexibility to react to changes in customer behaviour or to changes in the economic environment, which can be seen as strategic risks.

Furthermore, 20% to 25% of the respondent banks see outsourcing risks stemming from high costs or cost intransparency and a potential decline in the quality level of service combined with a reduction of its competitive advantage (entailing a loss of customers). Cultural and social problems and technical constraints are also quoted as relevant by several banks.

Despite the risks, most EU banks seem to be satisfied with their experiences thus far. The current survey shows that outsourcing arrangements achieved the expected results in around 75% of the banks. The remaining 25% indicated it was too early to tell whether outsourcing had created the expected value.

Some banks nevertheless pointed out some negative experiences, mainly involving a deterioration in the quality of the service (15% of the banks surveyed, 12 banks, in eight countries) and high costs or market power of the provider (12% of the banks surveyed, 10 banks, in seven countries).

While outsourcing currently involves mainly IT services and card and payment processing, the question arises whether other parts of banking may also be moved offsite. Bearing in mind the motives cited by the banks, especially the need to enhance efficiency and reduce costs, the answer to that question will probably be positive.

In particular in the current macroeconomic environment, with a continued focus on cost efficiency and performance, the ECB believes many banks may want to consider (or reconsider) outsourcing to offshore locations. Other activities that seem potentially suitable for outsourcing involve higher-end functions such as asset management, financial analysis, accounting, legal services or human resources.

Also standardised custodian services may be increasingly subject to outsourcing, states the ECB, given that modern technology enables real-time access to major exchanges and to information networks, independent of the location where transactions are initiated or executed. This may cause some further pressures on the EU banking sector in terms of employment and consolidation.

The full report, including charts, is available in Chapter four of the hosted ECB PDF on EU banking structure.» Download the document now 912.7 kb (Adobe Acrobat Document)

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