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Outsourcing Deal Analytics Second Quarter (Q2), 2013


Executive Summary

The global financial services industry has been undergoing significant transformational changes during the past few years. Rapidly evolving technology and regulatory changes have forced financial firms to change their business models in order to create new opportunities. In response to these trends, major banks, capital markets and insurance firms are continuously expanding their strategic alliances with third-party service providers in order to navigate the journey ahead more smoothly.

Based on extensive data gathering and analysis on outsourcing deals, FSOkx presents the key transformation and outsourcing industry trends during the second quarter (Q2) of 2013.

 

Key Findings

  • For the third quarter in a row, total outsourcing deals have declined. In Q2, the number of deals declined by 13 percent.
  • In banking, retail banks have significantly increased outsourcing in Q2 while commercial banks have pulled back from outsourcing with the number of outsourcing deals decreasing for the third quarter in a row.
  • In capital markets, outsourcing among broker dealer firms decreased by a massive 72 percent while asset management firms increased their outsourcing to third party vendors.
  • Application support/operations and middle office outsourcing are the top functions outsourced this quarter by financial services firms.
  • North America and Europe still dominate the financial services outsourcing market with the majority of clients and service providers originating from these regions.

 

Outsourcing within Financial Services Firms on Downward Trajectory in Q2 2013

As the clouds of global economic uncertainly disappear, the financial services industry is slowly and gradually on the path to recovery. Financial services firms are looking hard at their profit margins, performance, and re-aligning their business strategies to address the effects of regulatory reforms, technological advances, competitive dynamics, and market movements.

 Although the industry witnessed a decline of 13 percent in the total number of outsourcing deals this quarter which can be attributed to the decline in capital market outsourcing deals. The overall deals are nearly the same (249 compared to 255) when compared with Q2, 2012. Due to the competitive pressure faced by firms in Information Technology Outsourcing (ITO) space in recent years, many service providers have invested heavily in building additional functional capabilities across buy-side and sell-side. This in turn has lead to vendor rationalization programs and hence a lot of deals that are signed these days are deals signed for multiple years and across multiple areas.

 As the financial industry continues its surge towards profitability and growth we could anticipate the outsourcing deals increase in terms of value rather than just numbers.

 

Deal Signing Continues to Outpace Deal Implementation

In Q2, 58 percent of the totals outsourcing deals were new deal signings. Deal signings have outpaced deal implementation and deal extension for the past two quarters as financial services firms tackle various regulatory and operational challenges posed by the current market environment.

 

Increase in Retail Banking Outsourcing within Banking Industry

The banking industry across the globe is facing challenges such as customer loyalty, better risk management, and the need to enhance cost efficiencies. In order to combat the current industry environment, banks are restructuring their operating models. Leading retail and commercial banks are increasingly collaborating with technology solutions providers who can help them harness the power of new technologies such as big data, cloud services, mobile banking, online banking, and payments processing.

 This quarter we saw retail banks increasingly looking for vendor expertise to help them achieve customer satisfaction, increase market share, and improve process efficiencies. While outsourcing for both commercial banks and credit unions decreased this quarter, FSOkx anticipates this trend to reverse as banks of all types will look to work with third-party providers to enhance their products and services for better market positioning.

 

Outsourcing Deals by Investment Banks Highest within Capital Markets Industry

Increasing regulatory scrutiny, difficult market conditions, and the need for improved trade efficiencies are the primary drivers for capital market participants to outsource various business functions. As a result of regulations such as the Dodd-Frank Act, MiFID, EMIR, and other trading rules, both buy and sell side firms need to streamline their middle and back office processes to help achieve much needed operational efficiency.

In Q2, investment banks and asset managers increased outsourcing of trade support, post-trade processes, and risk management/compliance functions to third parties. Although there was a significant decline in the number of outsourcing deals from broker-dealers, FSOkx expects broker-dealers to revisit outsourcing in the near term to seek to offer better client services and reporting and provide support for multi-asset strategies.

 

ITO Leads the Way, Dominates BPO Once Again

Information Technology Outsourcing (ITO) deals comprised 87 percent of total outsourcing deals within the financial services industry, thus overtaking Business Process Outsourcing (BPO) once again by huge margin. Financial firms, in the search of enhanced operational efficiencies and reduced cost, continue to use technology as a strategic tool to transform legacy systems to stay ahead of their peers. Regulators in North America and Europe have demanded increased use of technology to streamline data management, client, and regulatory reporting across market participants.

 

Application Support and Operations Dominate within ITO deals by Function

With nearly three-fourth (73 percent) of the total ITO deals this quarter, application support/operations again dominated ITO. In order to achieve high performance while being responsive and agile to changing market dynamics, the majority of financial services firms continued to invest in applications such as payment processing, trade execution, risk management, reporting, and compliance.

 

Middle Office Outsourcing Emerged as the Top Domain within BPO

For the financial services industry, improving business processes and achieving operational excellence has been the prime objective for the past few years. For capital market participants, the events of the last twelve to eighteen months and turbulent market conditions have brought renewed focus on improving middle office functions such as risk management, trade support, performance, reporting, and compliance. For banks and insurance companies, the focus is on improving enterprise-wide automation and enhancing processes related to payments, core banking, data management, insurance application, and claims processes.

 

North America the Leading Outsourcing Destination

North America and Europe still remains the hottest destinations for outsourcing within the financial services industry. This is partly due to regulators increased scrutiny on financial service firms in this region. This quarter 39 percent of clients and 62 percent of service providers were from North America compared to 44 percent and 63 percent in Q1, 2013. Europe holds the second position with 31 percent of clients and 32 percent of service providers.

 

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.