According to a new report by outsourcing consultancy Everest Group; “Large application outsourcing transactions in the banking sector hit a record five-year high last year.” The report continues “There were 54 new big application outsourcing projects in the sector with a total contract value of $5.9 billion in 2015—an increase in volume of 45 percent and in value of 25 percent over the previous year.”
There are three areas that benefit from large application outsourcing projects:
- Systems that manage the business (which involve issues of regulatory compliance or cybersecurity and are driven by cost and penalty avoidance)
- The Systems that run the business with the primary focus on cost reduction and efficiency reasons.
- The Systems to change the business, which have the primary focus of driving revenue growth by introducing new products and services more quickly.
Who are the Drivers of Outsourcing IT?
Typically, those “run” and “manage” categories drive the outsourced IT application projects, Jim Arora, partner at Everest Group says. But digital transformation efforts are clearly driving an increase in application outsourcing. “Half of analyzed application outsourcing deals in banking in 2015 had elements of digital transformation in their scope,” says Arora. “These could be engagements that had elements of mobility, big data, cloud, social media, artificial intelligence, or block chain for example.” Banks are looking to third parties for these large transformational projects in order to more easily and quickly access the talent required to deliver them.
Financial organizations are not only seeking methods to cut costs, they are now seeing the benefits of having access to the right talent in the right location to enable transformation initiatives. Having the right partner to expand your product features and services is prudent, and market dynamics are forcing these organizations who traditionally preferred the DIY approach to software services to seek out and partner with outsourcing software development and services, this is especially more evident with the need for more digital transformation.
At the same time, financial institutions who are benefiting from increased cost savings from outsourcing systems for running their financial organizations more efficiently, which can further fuel investment in other areas. And they’re doing it by expanding their search of the available IT service providers,, and not just the super large companies. According to Arora “The nature of the game in the financial services space is that incumbency is proving to be not such a great thing.” “Clients have option value in the market today, and there are challengers who are guaranteeing 30 to 50 percent cost reduction on the run spend through aggressive automation. This is requiring the incumbent service providers to cannibalize their own book of business or face elimination in their existing accounts. So the savings are very real.”
“Other” Big Benefits from Outsourcing
Outsourcing doesn’t just help the bottom line, Organizations are seeing consultative benefits from their outsourcing partners. Financial institutions find themselves lacking a well-designed enterprise digital transformation strategy. They continue to employ ad-hoc digital technologies and data analytics which do not allow for a seamless customer experience journey. The true benefits of investments in these areas will only come from tying all the technologies together, the average financial institution is running more than 1,000 different applications and often they silo the data, limiting the true ability to understand the data and making positive actionable changes.
Vendors are not vendors anymore, they are true business partners invested in your organization’s goal to succeed. Most of the service providers have a dedicated strategy where they partner, build, and can bring to the table capabilities that an individual financial organization may not be able to bring on its own.