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2012 Annual Outsourcing Deal Analytics Report

Executive Summary

2012 has been one of the most challenging years for the financial services industry. Sweeping reforms, economic turbulence in the U.S. and the EU and scandals such as Libor and money laundering by Standard Chartered Bank are making headlines for all the wrong reasons. Investor confidence is shaken and these events have severely impacted financial firms’ profits and performance post-crisis. Financial services organizations are responding by continually transforming their processes and business models to stay ahead of their peers.

Although the overall number of outsourcing deals in 2012 (1,285) decreased slightly compared to 2011 (1,348), we saw an uptick in demand for outsourcing services in Q4, largely driven by the need to comply with various regulatory guidelines going into effect in 2013.

Due to the current industry environment, FSO predicts that the financial services industry will experience a surge in outsourcing services in the coming years due to demand for process excellence and adherence to various regulatory guidelines. This demand will exert pressure on industry players to form strategic alliances with third-party vendors to bring about innovativeness in operational processes and strategies.

Key Findings

  • Although the overall number of outsourcing deals decreased in 2012, the number of outsourcing deals in both capital markets as well as insurance increased.
  • Within the banking sector, outsourcing in retail banks increased 4 percent. However, the number of outsourcing deals in commercial banks is decreasing year over year.
  • FSOkx observed a remarkable increase in outsourcing by broker-dealer firms this year.
  • Information Technology Outsourcing (ITO) continues its domination over Business Process Outsourcing (BPO).
  • Within BPO, middle office functions are the most popular outsourcing function followed by banking processes.
  • North America remains the leading outsourcing deals destination for both clients and service providers.

Outsourcing Deals in Capital Markets and Insurance Industry Reverse Downward Trend

The total number of outsourcing deals declined by 5 percent in 2012 as the industry continued to grapple with volatile markets and a challenging business environment. Although the number of outsourcing deals in the banking sectors is declining year by year, both capital markets and insurance sectors witnessed an increase in outsourcing in 2012.
In the wake of regulatory imperatives such as HIPAA (Health Insurance Portability and Accountability Act), Solvency II, and an effort to combat fraud within the industry, many insurance firms invested in state of the art technology and collaborated with vendors this year to enhance their business processes and customer relationship management.

Outsourcing by Retail Banks Intensifies in 2012

Although commercial banks still account for the largest share of outsourcing deal volume within the banking industry, those volume are decreasing year by year. This can be attributed to delays in Basel III implementation and other reforms that are still not fully finalized. Hence, many banks are still taking a ‘wait and watch’ approach.
The retail banking segment has witnessed a small percentage of growth in outsourcing in 2012 as they continue to battle for increased market share and improve customer satisfaction by enhancing their payment processing, mobile, and e-banking solutions. FSOkx also observed that many credit unions in the last two years are increasingly looking to provide a superior banking experience by utilizing that latest technology and are opting for solutions such as e-banking, video banking, and personal financial management (PFM).

Broker-Dealers Took a Huge Leap in Outsourcing

The Dodd-Frank Act and MiFID II have been game changers for many capital market firms. Hence, this year we witnessed a notable increase in broker-dealer deals as they look to improve their trade support functions in order to cope with massive trading volumes and new trading guidelines.

Investment management, which comprises asset management and wealth management firms, has witnessed a steady decline in outsourcing over the past three years. FSOkx expects this trend to reverse itself as investment management firms look to overcome market challenges by re-inventing their investment strategies and middle-office functions such as risk & compliance, performance measurement, portfolio attribution, and trade life-cycle.

Information Technology Outsourcing Holds the Lion’s Share in Total Deal Outsourcing Volume

Supporting an ongoing trend, Information Technology Outsourcing (ITO) continues its domination in all three industry sectors as the industry continuously tries to gain operational efficiency through collaborative technologies. Capital markets firms are the major contributors of IT outsourcing as current market conditions compel the industry to enhance front, middle, and back office functions. For the banking sector, in order to meet the demands of the evolving tech-savvy customer segments, firms are creating and designing quick and user-friendly applications and platforms which make their banking experience convenient and hassle-free.

Application Support/Operations is the Major Outsourced Function within ITO

Within ITO, the majority (70 percent) of deals were related to application support and operations. On the one hand, banks continued to focus on improving their payment and other core banking processes via different channels such as mobile and Internet in order to strengthen customer relationships. Capital markets firms, on the other hand, opted for trade, risk and analytics, and compliance solutions to adhere to stringent regulations and improve their business operations. Insurance firms invested in various technologies to improve their claims, underwriting, and policy services processes to reduce customer churn.

Middle Office Outsourcing is the Major Outsourced Function within BPO

The ongoing wave of economic volatility has exerted pressure on financial firms to reinvent their operating models and business processes. In response, capital market firms invested heavily in middle office functions such as trade support, risk management, and reporting solutions to increase transparency and reduce perilous trading activities.
As banks shifted their focus to improve operational efficiency and customer loyalty, many banks outsourced risk management solutions and at the same time provided customers with user friendly e-banking and mobile-banking platforms.

Geographic Segmentation: Clients and Service Providers

North American firms maintain the top position in the financial services outsourcing market with 36 percent of total clients and 60 percent of total service providers belonged to the North American region.

2012 Vendor Space- The Top 10 Service Providers


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.