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Capital Markets Outlook 2013: Business Sourcing Gains Traction

The economic environment following the financial crisis has forced financial firms to scrutinize all aspects of the business to determine which business processes can be managed and run by partners.

Why It's Important: Facing declining revenues and drastic budget cuts, many banks are redefining what they consider a core competency that must remain in-house and what can be handled by a third-party business process outsourcing (BPO) provider. By moving more noncore processes to business partners, financial organizations hope to reduce costs and streamline operations, letting them spend more time focused on core business functions, such as trading, portfolio management and brokerage services.

Where the Industry Is Now: During the past few years, financial firms have deemed more processes to be noncore competencies. While many of these business processes--including email management and fund accounting--are extremely important to the business, they often don't provide a competitive advantage. When it's determined that there's no competitive advantage to maintaining and running the processes in-house, these processes are often targeted for BPO, also known as business sourcing.

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Many firms have moved some of these business processes that were once considered core competencies to third-party providers. For instance, while fund accounting is important to the business, it often doesn't provide a competitive advantage. Brown Brothers Harriman is reporting an increase in the number of clients that it provides with middle- and back-office services, including fund accounting and administration. BBH completed the transition, or "lift out," of OppenheimerFunds middle- and back-office accounting and fund administration processes this year (the deal was announced in 2010), says Christian Bolanos, senior VP and head of the outsourcing discipline at Brown Brothers Harriman.

Focus In 2013: More financial services organizations will continue to move business processes to third-party providers. The U.S. financial services BPO sector is an $18 billion market, according to the consulting and research firm Everest Group, but it could grow to a $250 billion market in the next few years. Global sourcing BPO in the capital markets accounts for the highest growth, Everest says, as firms face business and revenue pressures, and a new regulatory environment.

In addition to business processes such as accounting, payroll, fund accounting, human resources and accounts payable, companies are considering moving purely technology-focused processes to third-party providers. These processes include email management, which is a significant cost for large firms, but one that doesn't provide a competitive advantage. "Should we be focused on running technology to the business, or should the IT team be spending time and money just making sure our email servers are working?" asks a CIO at a large Northeast-based broker-dealer evaluating the use of a third-party cloud for email management.

Technology Providers: There are a lot of BPO providers. Some offer very specialized services (including investment accounting, brokerage workstations and corporate actions) and others offer more general capabilities (such as data management, help desk and client on-boarding). Many well-known financial institutions, such as BBH, BNY Mellon, Citi, Fidelity's National Financial and J.P. Morgan, offer BPO capabilities including accounting, custody, reporting, pre- and post-trade capabilities, client accounting, fund administration and settlement services.

Other BPO providers include Broadridge, Genpact, HCL Technologies, IBM, Mphasis and Wipro. SunGard, a large provider of services to banks, provides a number of white label BPO capabilities, including order-to-cash management, treasury and risk management, payments processing, managed IT services and middle office capabilities.

Price Tag: Financial institutions need to carefully analyze the potential costs with any BPO deal. Cost savings estimates might be tempting at first glance, but organizations should work through the potential impact of any business sourcing deal on employees, business processes and customers. Many firms have shifted to BPO relationships just to achieve cost neutrality and cost guarantees (no increases for a certain number of years). Other firms have been able to realize cost savings from the beginning, freeing up precious funding for new development.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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