Nearshore Americas

Building Next-Gen BPO Engagement at Banks

Just a couple of decades back, the banking industry pioneered the launch and growth of successful BPO delivery models to achieve cost efficiencies through operational consolidation and low cost delivery locations. Several of the bigger banks set up captive offshore operations for large scale BPO initiatives, while others chose third party service providers to develop BPO capabilities. In both cases, the strategy and execution models that drove the initial wave of BPO initiatives were based on cost, flexibility, quality and risk considerations that have now changed significantly.

Externally, industry regulation and oversight has increased dramatically, and banks have had to define stricter controls on how BPO relationships are formed and managed. Customer preferences and buying behaviors have changed, and social and mobile technologies have drastically altered the banking business landscape.

On the other hand, operational teams at banks now have years of experience managing outsourced business processes that can be leveraged to re-define how BPO services are contracted.

These internal and external forces present a unique mix of threats and opportunities for the banking industry, which should be considered as banks prepare to define and implement the next generation of BPO engagements. Some of the most relevant ones include:

  • Consolidation within the BPO industry: The BPO industry has undergone a wave of recent consolidations, with Convergys acquiring Stream, Concentrix buying out IBM Global Process Services, and more recently, the iGate acquisition by Capgemini in the IT/BPO space. Consolidations are expected to continue, and in general, offer BPO buyers improved value in the long term, as providers bring innovation and enhanced capabilities to the market. However, integration challenges and shifts in strategic focus by providers can be troublesome for banks, and therefore, should be considered in developing go-forward BPO strategies.
  • Lack of transformative value from incumbent BPO relationships: In many instances, BPO agreements have not resulted in the transformative value that banks were hoping for. This may have occurred for a few reasons. For example, it is not uncommon for banks to find that their outsourcing footprint includes multiple providers that provide siloed services to them, thereby inhibiting the realization of transformative improvements that span across the operational value chain.

Also, many banks continue to operate BPO relationships as staff augmentation services, with per head or hourly pricing models and SLAs focused on providers’ staffing effectiveness. These models were appropriate when BPO initiatives were green field projects for banks, as well as for their providers. However, the service delivery models have now matured, and continued usage of “bodies and seats” approach to BPO engagements prevents banks from unlocking value associated with making providers accountable for business outcomes.

Additionally in many cases, BPO providers have had limited success with strengthening their industry and domain capabilities over the years. Such providers typically get overwhelmed with the complexity of banking operations, causing banks to receive limited value from the relationship. In such cases, selecting a new provider or insourcing the work could be viable options.

  • Disruptive innovation through technology: The technology marketplace has outpaced the BPO industry in terms of innovation and now offers disruptive transformation solutions that are quicker and cost effective to implement. Considering process automation as an example, upcoming innovations such as robotics and machine learning can be leveraged to optimize and automate first generation banking processes that have seen limited transformation success so far. In such situations, banks can face resistance from incumbent BPO providers as their revenues are mainly based on the volume of manual effort delivered. Disruptive technologies can drive drastic reductions in requirements for manual BPO services, leaving the providers at odds with the bank’s innovation plans.
  • Global political and socioeconomic shifts: Banks with a global BPO presence have experienced constantly changing political, business and economic climates in global locations considered to be popular BPO delivery locations. Mature BPO locations such as India and the Philippines are saturating, with reducing cost advantages and increasing concentration risks. Some of the emerging destinations, such as Egypt, are embroiled in political or social revolutions. At the same time, countries such as Mexico, Ireland and Bulgaria are increasingly seen as growth destinations for outsourced services. On the other hand, repatriation of services back to US is on the roadmap of several banks, if not already underway. These shifts within the global BPO landscape are a critical issue for banks as they need to continuously re-evaluate location portfolios to manage risk and costs, while maintaining consistent customer experience and service quality.

Keeping these underlying threats and opportunities in mind, banks should consider redesigning their BPO programs for improved flexibility and efficacy. Following are some of the key areas to examine:

Protect against change of control at the BPO provider

The current and impending M&A activity in the BPO industry can be a significant change for banks as clients. A low cost provider being acquired by a Tier 1 player can erode the pricing advantages, immediately or in the near future, as contracts are re-negotiated. Banks that have specialized BPO contracts with providers in niche service areas may find a mismatch with the acquirer’s strategic priorities, making the partnership unviable in the long term. A robust contract framework becomes of utmost importance to provide banks the flexibility and options to react to such changes. Some key clauses that can be useful in such situations include:

  • Termination rights as well as transition out clauses with incumbent providers to support moving work to a new provider, if required.
  • Options to transfer incumbent provider’s staff to a new provider to mitigate risk and delays associated with setting up new provider relationships.
  • On similar lines, rights to use IP and tools deployed by incumbent providers, when the work is moved to a new one, even if on a temporary basis. This could help sustain continuity of services for banks during the transition period.
  • In case the banks choose to retain the incumbent provider, price fixation (against inflation and currency fluctuations) and contract extension clauses can help maintain optimal cost structures over the longer term, reducing the risk of being forced into a costly renegotiation.

Change contracts to increase provider accountability for business outcomes

Banks currently using “staff augmentation” BPO contracts should consider shifting to outcomes based service management with BPO providers. Selecting the right service provider with the requisite experience and domain knowledge is a foundational step. And with several years of operational experience in BPO engagements, banks’ operational teams can leverage the existing history of performance data to re-define pricing and SLAs with providers. Pricing constructs can be moved from a “pay by heads” model towards transaction or outcomes based pricing, shifting risk and accountability to providers. By relinquishing control and responsibility of process execution to providers, banks can unlock additional value and cost savings, as providers are incentivized to innovate and deliver service improvements. As an example, an increasing number of BPO providers now offer easily deployable technology solutions to re-engineer processes and reduce duplicative manual workload driven by legacy banking systems and processes. Similarly, providers can leverage analytics to bolster banks’ customer engagement through social media, mobile web, IVR and call center channels – an illustration of how BPO services can evolve with changing business requirements.

Design BPO contracts to support “Disruptive Innovation” trends

Disruptive innovation can be a golden opportunity for banks to transform, but it can also be a threat to their BPO providers, with diminished business impact and revenue loss being the inevitable consequences of disrupting the status quo in BPO relationships. It may, therefore, be helpful for banks to consider ways to align BPO providers with their priorities, as a collaborative BPO partnership can be crucial for successful transformation.

As an example, banks should consider negotiating flexible financial models that allow reductions in scale with providers in line with reduced requirements for manual BPO services as the efficiencies related to innovations kick in. Attaining such flexibility can be especially difficult with fixed price contracts, or in situations where providers offer volume discounts based on scale of services. Unless properly negotiated, banks can see price escalations and reduced savings that impede their ability to execute disruptive innovation ideas. Inclusion of “gain share” clauses within contracts can enable banks and providers to equitably share transformation benefits, thereby aligning providers to be supportive partners in the banks’ efforts to innovate.

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Banks can also ensure that contracts incorporate clauses for providers to support transformative changes while mitigating risk of service disruption. For example, an important aspect to consider would be business continuity – a resilient recovery plan for unexpected service disruptions can become critical when transformational changes are underway and a bank’s internal teams have limited resources to focus on service recovery. Stringent recovery requirements should be stressed upon within BPO contracts, along with regular audit and testing mandates for providers to maintain service resiliency. Also, there may be value in putting reasonable restrictions on provider personnel changes when transformation initiatives are underway – such changes, when timed incorrectly, can prove costly.

Review the location footprint

Banks that have a significant global operational presence need to constantly re-evaluate their BPO location portfolio based on changing geo-political risk and economics of delivery locations around the world. This may necessitate either changing the outsourcing mix or adding/removing certain locations from the portfolio. Provider contracts should offer the flexibility of moving work between locations, with minimal financial or operational impact to banks due to such transitions. “Transition-out” clauses with incumbent providers can also provide some additional protection for banks, as providers are obligated to collaborate and support transition of services to a new provider, if and when required.

In summary, banks need to reassess how they negotiate and manage BPO services to support their changing business needs. A thoughtful approach to defining BPO engagement models can provide them the flexibility to redefine cost, quality and risk considerations as customers, technology, competition and regulatory forces evolve over time.

Siddhartha Sharad

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