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Financial Services Outsourcing Deals – 2011
The financial services industry has been on a rollercoaster ride since 2008 and, as a result, many financial organizations are re-thinking their outsourcing strategies. A wide-range of geopolitical events, including high unemployment and a credit rating downgrade in the U.S. and the poor fiscal health of several European countries, have caused negative business sentiments and low consumer confidence that has resulted in an outsourcing backlash. In fact, the overall number of outsourcing deals in 2011 has decreased compared to 2010. Outsourcing may be down, but it’s certainly not out as shrinking budgets, continued economic volatility, and competitive pressures will force many financial services organizations to continue to consider outsourcing as an option in 2012.
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Key Findings
- The overall number of outsourcing deals has decreased in 2011 compared to 2010 and 2009. As in prior years, the banking industry leads the number of outsourcing deals.
- While the number of outsourcing deals in credit unions increased compared to 2010, the number of deals signed by commercial banks declined.
- In capital markets, broker-dealers were reluctant to indulge in new contracts whereas investment banks posted a phenomenal year-on-year growth in outsourcing activities.
- The number of outsourcing deals for property and casualty insurance firms continues a positive trajectory.
- Information Technology Outsourcing (ITO) continues to outperform Business Process Outsourcing (BPO).
- The robust growth in smart phone sales is compelling more organizations to embark on mobile applications/support outsourcing.
- Compliance and risk management are the most outsourced functions within the middle office.
- North America and Europe continue to dominate the outsourcing market in numbers of deals.
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Financial Services Industry Outsourcing Landscape |
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The overall number of outsourcing deals has declined by 16 percent in 2011, likely due to an uncertain global economy, anti-outsourcing measures, and lingering concerns over new regulations in the U.S. and the European Union.
- Although banking continues to account for the largest number of deals among all three industries, the number of banking outsourcing deals is declining. The number of banking deals decreased 9 percent in 2011, following a 3 percent decrease between 2010 and 2009. This downward trend is mainly due to fewer outsourcing deals by commercial banks. Moreover, economic volatility has made banks reluctant to commit to multi-year outsourcing contracts.
- The capital markets industry registered a 30 percent decrease in outsourcing deals in 2011 after increasing by 21 percent in 2010. The primary reason for the reduction is a decrease in outsourcing deals by investment management and wealth management firms.
- The insurance industry depicts an inverse trend to both banks and capital markets. After a huge drop of 44 percent in 2010, the number of outsourcing deals in 2011 increased 36 percent, with property and casualty insurers the foremost contributor.
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| Banking Industry |
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| Others = Central Bank, Mortgage Services, Wholesale & Foreign Exchange Banks N=836 (2009); 809 (2010); 739 (2011)
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| Commercial banks account for 70 percent and credit unions account for 18 percent of all outsourcing deals in 2011. Over the last three years, outsourcing activities by commercial banks have declined, whereas deals by credit unions are on the rise. Changing regulations, stringent laws, and increasing customer needs have forced credit unions to adapt to new technologies, resulting in a hike in the number of credit union technology outsourcing deals. |
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| Capital Markets Industry |
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| Others = Private Banking, Hedge Funds, Clearing House/Depository services and Private Equity N=592 (2009); 721 (2010); 504 (2011)
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| Investment management firms continue to be the top outsourcing firms, signing 44 percent of the total capital markets deals in 2011. The graph reveals a roaring increase by investment banks with 12 percent share in 2011 as compared to three percent in 2010. Broker-dealers demonstrate a steady percentage of outsourcing deals. |
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| Insurance Industry |
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Others = Compensation insurance, re-insurance, Title and Investment Insurance
N= 138 (2009); 77 (2010); 105 (2011)
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| The insurance industry depicted a recovery of 36 percent from 77 deals in 2010 to 105 deals in 2011 after a drop from 138 deals in 2009. Health/life insurance and property/casualty insurance deals made up the largest chunk of insurance deals in 2011. Outsourcing deals within property and casualty insurance firms are noteworthy for the three-year period, possibly propelled by “Act of God” instances such as hurricanes in the U.S. and the Japan tsunami. The share of property/casualty insurance deals within the total insurance deals increased from 24 percent in 2009 to 26 percent in 2010 and further to 34 percent in 2011. |
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Information Technology Outsourcing v/s Business Process Outsourcing
As in previous years, the number of Information Technology Outsourcing (ITO) deals in 2011 significantly outpaced Business Process Outsourcing (BPO) deals. Banks, capital markets firms, and insurers signed 1,179 ITO deals compared to only 169 BPO deals. The skew toward ITO is typically due to the proven ability of ITO to reduce costs and augment a financial service firm’s lack of internal resources.
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Information Technology Outsourcing (ITO) Deals
To keep pace with growing customer demands for more customized services as well as to gain competitive advantage and improve performance, financial services firms in all three industries by and large outsourced application support/operations in 2011.
- Out of 627 ITO deals in banking, application support/operations account for 59 percent of those deals, trailed by application architecture (15 percent) and mobile application support (9 percent).
- Out of 456 ITO deals in capital markets, application support/operations account for 64 percent of outsourcing deals, trailed by application architecture (12 percent), application integration and network management (8 percent each).
- Out of 96 ITO deals in insurance, application support/operations account for 71 percent of outsourcing deals, trailed by application architecture (15 percent).
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| Others includes Application Development, Desktop Support, Server Hosting, Web Server Hosting, and Quality Assurance |
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Business Process Outsourcing (BPO) Deals
The number of BPO outsourcing deals remains low compared to ITO outsourcing deals
Banking
- Out of 112 BPO deals in the banking industry in 2011, the vast majority (63 percent) were for banking processes including core business activities and card issuing/processing.
- Banks are increasingly considering risk management and compliance as crucial functions for regulatory compliance and survival in the current cut-throat competitive environment. Although only five percent of the current BPO deals, FSOkx predicts risk management and compliance deals will grow at a brisk pace in 2012.
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N= 112 (BPO Deals 2011)
*Others include Custody, Consulting, Finance and Accounting, Reconciliation, Trade Finance Services, Mortgage Processing, and Sales and Management
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Capital Markets
Out of 48 BPO deals in the capital markets industry, the highest percentages were in middle office outsourcing . The types of functions outsourced within the middle office outsourcing domain is varied, ranging from clearance/settlement to outsourcing the entire middle office function, but the largest percentage of deals within middle office is trade support followed by reconciliation. |
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N=48 (BPO Deals 2011)
1Front office includes pre-trade compliance, pre-trade decision, research and analytics, trade execution, trade routing.
Middle office includes compliance, collateral management, clearance/settlement, performance, portfolio, risk management, reconciliation, risk support.
Back office includes custody, fund accounting, fund administration, transfer agency.
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| Insurance |
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N= 9 (BPO Deals 2011)
Out of only 9 BPO deals in the Insurance Industry, insurance processes accounted for more than half of the deals (56 percent).
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Key Functions Outsourced within the Banking, Capital Markets and Insurance Industries – Total Outsourcing Deals
Banking Industry
Of the total deals (BPO and ITO) in the banking industry, within the banking processing, the most outsourced function is core business activities (34 percent) followed by card issuing/processing activities (18 percent) and payment processing (14 percent).
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| N=334 BPO and ITO Deals for Banking Processes domain out of total 739 outsourcing deals in Banking |
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Capital Markets Industry
Of the total deals (BPO and ITO) in the capital markets industry, within middle office processing, 38 percent are trade support and 15 percent are compliance deals.
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| N= 228 BPO and ITO Deals for Middle office domain out of total 504 outsourcing deals in Capital Markets |
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Insurance Industry
Of the total deals (BPO and ITO) in the insurance industry, within insurance processing, 26 percent are core business activities, followed by life and annuity policy services (11 percent) and underwriting functions (10 percent).
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| N=57 BPO and ITO Deals for Insurance Processes domain out of total 105 outsourcing deals in Insurance |
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Emerging Outsourcing Functions: Compliance and Risk Management |
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With regulatory pressures mounting, risk management and compliance functions have become particularly critical for banks, capital markets, and insurance firms. Indeed, in the middle office, the majority of outsourcing deals were for risk management and compliance.
More than half of compliance (51 percent) and risk management (61 percent) related outsourcing deals are attributed to banks. The top vendor is FRS Global with four compliance deals. The top risk management vendor is SunGard with eight deals.
Unlike banks, capital markets firms tend to outsource compliance (42 percent) more than risk management (33 percent). The top vendor for compliance and risk management deals in capital markets is SunGard with 11 deals.
Insurance firms have the smallest share of compliance (7 percent) and risk management (6 percent) outsourcing deals. Algorithmics is the only vendor common in both compliance and risk management deals, with one deal in each function.
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Top 10 Vendors in 2011
The table below represents the top 10 vendors in 2011 ranked by number of outsourcing deals. Most of these vendors are headquartered in the U.S. SunGard, with 81 deals, had the most outsourcing deals in 2011 followed by Fiserv with 65 deals. The domains with the highest number of outsourced deals by these top ten vendors were banking processes, network management, front office, middle office and back office functions.
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| Vendors |
Number of deals |
Head-quarters |
Major Services/Solutions |
Major Areas Covered |
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| SunGard |
81 |
U.S. |
Ambit, Asset Arena, Valdi, Adaptiv, Investran |
Front Office, Middle Office and Back Office Functions |
| Fiserv |
65 |
U.S. |
Mobile Solution Capture, Acumen Account Processing Solution |
Banking Processes & Payment Solutions, |
| IBM |
30 |
U.S. |
z Mainframe Server |
Network Management |
| Fifth Third Processing Solutions |
22 |
U.S. |
Card Issuing/Processing |
Banking Processes |
| Geezeo |
21 |
U.S. |
White Label PFM solution, Unique Engagement Banking Platform, Integrated Marketing Platform |
Banking Processes |
| FIS |
20 |
U.S. |
Integrated Banking Services(IBS)-Core Banking Solution, TouchPoint Teller Solution |
Banking Processes |
| Fidessa |
20 |
U.K. |
OMS, Market Data Access |
Front Office, Middle Office, Back Office Functions |
| VSoft Corporation |
18 |
U.S. |
Distributed Capture |
Check Processing |
| Wincor Nixdorf |
14 |
Germany |
ATM Management |
Banking Processes |
| Oracle |
14 |
U.S. |
Oracle FLEXCUBE Universal Banking Solution, Oracle FLEXCUBE Direct Banking, Oracle Exadata Database Machine |
Banking Processes & Data Management |
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Geographic Segmentation: Clients & Service Providers
North American firms continue to dominate the outsourcing market
In 2011, 41 percent of total clients and 58 percent of total service providers belonged to the North American region. Europe stands second, with a 33 percent share of total clients and 34 percent of total service providers.
Out of the North American deals, 93 percent of the deals were by the U.S. firms. However, with the U.S. government’s stance on outsourcing, it will be interesting to see if the number of deals originating in North America will decrease in 2012.
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| Among the overall service providers around the globe, service providers from North America continue to gain the top position, indicating a preference for domestic outsourcing among clients. U.S. firms within the North American region and U.K. firms within the European region lead the service providers market with 97 percent and 46 percent of outsourcing deals respectively. |
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Methodology
Deal Analytics is prepared from FSOkx Deal Tracker which tracks the value and volume of outsourcing deals for the banking, capital markets, and insurance industries within functional domains including information technology, back office outsourcing, call centers, consulting, data management, document and records management, facility management, front office outsourcing, infrastructure outsourcing services, middle office outsourcing, and advisory services.
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