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Outsourcing Deal Analytics Third Quarter (Q3), 2013

Executive Summary

Financial services firms across the globe continue to be negatively impacted by economic and regulatory volatility. This uncertainty exerts significant pressure on organizations to redefine their business and IT operations for efficiencies. An increasing number of firms are shifting their focus to adding new revenue streams, improving client service, and transforming business models. Hence, many firms are seeking external expertise to take care of critical business functions and processes at a lower cost.

Based on extensive data gathering and analysis on outsourcing deals, FSOkx presents the key transformation and outsourcing industry trends during the third quarter (Q3) of 2013.

Key Findings

  • Total outsourcing deals increased by 6 percent in Q3 quarter compared with Q2. Much of the increase was driven by the banking sector, particularly retail banks.
  • The number of outsourcing deals in the capital markets industry continues to decline.
  •  In capital markets, investment banks and broker/dealers remained the top outsourcing contributors.
  • More than three-quarters of total outsourcing deals were new signings.
  • Application support/operations and middle office outsourcing are the top functions outsourced by financial services firms in Q3.
  • North American and European firms continue to hold the top spot within the financial services outsourcing market.


Total Number of Outsourcing Deals Increased by 6 Percent


Having to do more with less has become the ‘new normal.’ Unprecedented pressures from regulators, sky-high expectations for transparency from clients and investors and a need for better ROI have forced the industry to make significant operational changes. As a result, financial services firms are increasingly leveraging technology to outsource business functions that can help them to effectively manage risk, ensure regulatory compliance, and improve client services.

The industry witnessed a six percent increase in total number of outsourcing deals this quarter mainly due to the sheer number of deals that took place in the banking sector. For the banking industry, enhancing banking processes and improving the customer experience through digitalization and mobility remains the major outsourcing drivers. FSOkx anticipates this trend will continue as more banks look to enhance their service offerings to gain competitive edge.

While outsourcing increased within the banking sector, surprisingly outsourcing in the capital markets decreased by 25 percent compared to the previous quarter. Outsourcing within the insurance sector has seen no major fluctuations in the past four quarters.

Deal Signing Continues to Outpace Deal Implementation and Extension

Eighty percent of outsourcing deals were new deal signings. The current business environment and the need for more operational efficiency have forced many financial services firms to again look at their business operations and try to outsource parts of the business to help them not only to streamline their operations and achieve cost efficiency but also to upgrade their technology infrastructure.


Retail and Commercial Banking Outsourcing Deals Increase


The banking industry continues to face challenges on several fronts including risk management, cost efficiency, cutthroat competition, and increasing customer expectations. In a race to better understand customer needs and outperform their peers, banks are looking for new growth opportunities by introducing innovative products and services. As a result of the search for innovation, retail banks increased their outsourcing. Today, retail and commercial banks are surging towards improving their performance by investing heavily in areas such as risk and compliance, data analytics, self-service, social media, and mobile. Therefore, in Q3 banks outsourced payments, online, mobile, and other banking processes to increase their market share and enter new market segments.

Although outsourcing within credit unions has been decreasing the past two quarters, this trend is likely to reverse in the near future as credit unions and small community banks will look to outsource technologies that can help them deepen customer relationships by offering a wide range of product and services.


Outsourcing within Capital Markets Continues to Decline


The number of outsourcing deals within the capital markets industry continues to decline, driven by a drastic decrease in outsourcing activities by both asset management firms and investment banks. However, market participants remain in dire need of transforming their IT frameworks as well as trade processes, so it’s likely this decline will reverse and outsourcing will steadily increase as more firms in the capital markets industry look to improve their reporting, data management, portfolio, and trade processing functions.

FSOkx predicts that in the coming years, the industry will see a rise in middle and back office outsourcing in which market players look for technology providers that can help them streamline transactions and trade lifecycle processes. Post-trade is one area on which we predict much transformation will occur.


ITO Overshadows BPO Once Again


Information Technology Outsourcing (ITO) once again outperformed Business Process Outsourcing (BPO). This quarter ITO comprised 89 percent of the total outsourcing deals within the financial services industry. In order to improve client services and cost efficiency, financial firms continued to use technology as competitive edge. In addition, economic and regulatory pressures in North America and Europe have pushed financial services firms to use technology to modernize trading, regulatory reporting, and other business frameworks.

Application Support and Operations Dominate within ITO Deals 


Application support/operations again dominates ITO functions. In order to comply with regulatory changes and to improve profitability, financial firms are spending more on improving their payment processes, trade execution, risk management, regulatory reporting, and performance measurement functions.

Middle Office Outsourcing is the Most Outsourced Function Within BPO

Much transformation is taking place within the middle office with outsourcing middle office functions a growing trend within the industry. Increased trade volumes, cost of trade, and multi-asset trading have forced many capital market firms to turn to specialist middle office service providers that can help them enhance functions such as trade support, portfolio management, trade compliance, client reporting, and risk management.

Banks and insurance firms were focused mainly on improving business critical processes such as payments, core banking, underwriting, online claims, and customer service.

North America and Europe - Leading Outsourcing Destinations


North American and European financial services firms continue to hold the top spot within the financial services outsourcing market due to continuous regulatory and economy challenges faced by financial firms in this part of the world. In Q3, 42 percent of clients and 67 percent of service providers were from North America compared to 39 percent and 62 percent in Q2, 2013. Europe remains at second position with 29 percent of clients and 23 percent of 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.