THE CHALLENGE: As Wall Street firms reevaluate their core competencies, once-strategic business processes are now being outsourced. But deciding which processes to outsource and managing the provider relationship remain critical to success.
The outsourcing of none-core business functions has been a standard way of life at many Wall Street firms. For years, investment management firms have reduced costs by taking advantage of business process outsourcing (BPO). But lately, BPO seems to be gaining ground in more areas than ever before, as companies reevaluate what comprises their core business processes and look for additional ways to save while better serving their customers.
One of the main drivers behind the trend toward increased outsourcing has been the heightened amount of competition in the industry. Firms now are realizing that they need to focus more on their core businesses if they want to better compete with their rivals. "More and more, firms are saying, 'We must focus on what we are actually good at doing, where we really add value and differentiate ourselves from the competition, and where we have intellectual property that is unique to us,'" observes Peter Redshaw, research director at Gartner, an information technology research and analysis provider.
Another driver behind the BPO push is the need to cut costs. The competition between rivals means that margins are getting smaller, and firms need to take a hard look at ways to keep their costs under control. While outsourcing does not always lower a firm's costs significantly at the outset, it often will do so later when business hits a slow period. For example, in the case of a transaction-oriented business process, the costs of outsourcing typically vary according to the volume of business, relates Redshaw. "If I do a lot of business, I obviously will pay more," he explains. "But if I hit a sticky patch and am not doing a lot of business in that area, then my costs will come down correspondingly."
But the decision to outsource a business process is not always cut and dry. Before considering BPO, firms first must evaluate their businesses in a much more granular way. "You have to develop your own fundamental philosophy of what you want to be doing as a core capability and what it is you are doing exclusively for your clients, versus what is a generic capability for which it would make more sense, for strategic reasons, to leverage out to someone else," says Timothy Theriault, CTO at the Chicago-based investment management firm The Northern Trust Corp. Through this kind of evaluation, he continues, many firms now are finding that instead of making intense capital investment in areas that are not core to their firms, they can leverage someone else's scale.