Trends in Outsourcing & Offshoring in the Financial Services Industry 2008-2012: Elix-IRR Annual Report

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Financial Services companies continue to face headwinds in the global marketplace. Whilst outsourcing activity has not returned to the levels it enjoyed pre-Credit Crunch we are starting to see signs of strengthening demand across North America, EMEA and Asia-Pacific. The third edition of Elix-IRR’s report on Trends in Outsourcing and Offshoring in the Financial Services Industry examines developments in the market since 2011 and the key deal activity which has taken place. We once again assess the health of outsourcing in Financial Services by geography and by domain as well as applying particular scrutiny to the ever-increasing pressure of global regulation and the role of service management in ensuring that outsourcing contributes to the achievement of strategic goals. And because of our longstanding commitment to Africa we return to the continent with fresh insights to the health of the market there, particularly supplier activity in the region.

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Trends in Outsourcing & Offshoring in the Financial Services Industry 2008-2012: Elix-IRR Annual Report

  1. 1. 12012 © Elix-IRR Partners LLP
  2. 2. INDEX Chapter Page 1. INTRODUCTION 4 • Highlights of the 2012 Report 5 2. EXECUTIVE SUMMARY 7-10 3. WHY • Outsourcing Drivers are Changing 12 • Regulatory Environments 13 • Global Strengthening of Regulatory Regimes 14 • Regulation Breadth under RRP – Opportunities for the Industry 15 • Focal Points for RRP 16 4. WHAT • Global Trends in Outsourcing & Offshoring 18 • Global Outsourcing Activity in FS 2008-11 19 • Regional Trends in Deal Activity 21 • FS Back Office Outsourcing Candidates 23 • BPO Trends in the Outsourcing Market 25-31 • ITO Trends in the Outsourcing Market 34-37 • KPO Trends in the Outsourcing Market 39-42 5. HOW • FS Sourcing Strategies 44 • Achieving Strategic Goals 45 • Service Management Frameworks 46-52 • Market Analysis: Lessons Learned 53 6. WHERE • Global Trends 55 • Focus on Africa 56-59 • Near shore out sourcing 60-61 7. WHO • Top 15 Global FS Deals by Value 63 • Regional Analysis of Global Top 10 FS Deals 58-68 • Top 10 FS Outsourcing Deals in North America 66-68 • Top 10 FS Outsourcing Deals in EMEA 70-73 • Top 10 FS Outsourcing Deals in Asia Pacific 75-77 • Regional Summary of Key Trends 78 8. ELIX-IRR’S FINANCIAL SERVICES TRANSFORMATION CAPABILITIES IN SUPPORTING OUR CLIENTS 79 9. CONTACT US 80 10. Annex A 81 2 2012 © Elix-IRR Partners LLP
  3. 3. 1. Introduction 3 2012 © Elix-IRR Partners LLP
  4. 4. 1. IntroductionThis is the third year Elix-IRR has produced Trends in Outsourcing & Offshoring in theFinancial Services Industry. This study is widely read by senior executives in financialinstitutions and the service providers and consultancies within the sector.The insights have been broadly recognised as valuable contributions to the considerationsof Financial Services (FS) institutions furthering their regional and global sourcing strategiesin the wake of the global financial crisis.As with previous years this research will provide an overview of the trends in outsourcingand offshoring by major financial institutions in the last 4 years, focussing in detail onperformance in 2011 and making predictions as to the conclusion of 2012. We will cover: • The pre-eminence of regulatory focus in shaping the Why overall FS landscape continuing in 2012 • Functions and trends seen in the outsourcing deals What in 2011 outsourced/offshored • Sourcing best practice as outsourcing arrangements How mature • The popular and emerging locations for delivery of Where outsourcing activity • A summary of major outsourcing transactions by Who key FS players and service providersThe study also provides supporting data for the current outsourcing landscape for the FSindustry. A glossary of terms has been provided in Annex A for reference. 4 2012 © Elix-IRR Partners LLP
  5. 5. Highlights of the 2012 Report The following are key sections and insights to this 2012 report, bringing new perspectives and industry insights from Elix-IRR.New Regulation  This section describes how the regulatory environment surrounding the FS industry in 2012 ischanges the way FS increasingly coming to shape relationships with service providersinstitutions work with  We analyse in detail Recovery and Resolution Plans, as a culmination of many of the regulatoryService Providers objectives of the past year, and where opportunity might arise for the industryAnnual Review of  We take our annual look at market activity from 2011, both new deals and renewals, and assessDeal Activity the latest trends from BPO, ITO, KPO and geographical perspectives  Understanding some of the key levers to executing a best practice sourcing strategy is keyThe role of Service  We assess how effective management of service providers lies at the heart of a successfulManagement outsourcing relationshipGlobal Trends in the  We cast our eye across the globe to find out where major industry activity has occurredMarket - MajorActivity Locations  Following on from our last report, our experts update the situation in Africa, an emerging location for outsourcing activity  This section presents the top ten FS outsourcing deals for each of these regions: North America,Top 10 Global FS EMEA and Asia PacificOutsourcing Deals byRegion  Information on deal ranking, company name, service provider, total contract value, outsourcing domain and key descriptions of activities 5 2012 © Elix-IRR Partners LLP
  6. 6. 2. Executive Summary:FS Outsourcing Trends from 2011 and 2012 So Far 6 2012 © Elix-IRR Partners LLP
  7. 7. Executive Summary1. Reasons for Outsourcing and OffshoringRegulatory and market challenges ensure continued focus on cost models The global economy continues to show signs of recovery and  Ever-increasing capital requirements on banks from global most global banks have shown improved profitability up to Q3 regulatory change are driving changes in business models 2012 causing a greater focus on cost efficiency Global regulators continue to impose tightening regulations in  Enhancing systems and platforms will help deliver full regulatory order to affect behavioural change through policy and legislative compliance but changes to support models will be needed to means help deliver substantial cost reductionsTactical sourcing strategies evolve to meet the strategic change challenges Tactical sourcing strategies have achieved cost reductions and  Companies continue to look towards suppliers to help productivity gains in the last 2-3 years commercialise their assets, but the development of internal commercial skills in the sourcing function is becoming more Increasing desire in 2012 to move to transformational outsourcing prevalent to realise enterprise-wide productivity gains, global synergies and increased margins  Internal sourcing departments are becoming better equipped to view the business and find economies of scale to optimise vendor relationships as a wholeA growing need to look across the change portfolio Systems integrators will increasingly find opportunities to support  By taking a strategic view of the entire change portfolio in 2012, technical change across global technology platforms companies are starting to achieve greater synergies and will be able to inter-lock the strategic change agenda with the service Suppliers and vendors have continued to develop benefits from management framework for a sustainable Total Cost of process and technology innovation to improve the ‘speed to Ownership market’ of new products and services because innovation comes at a cost 7 2012 © Elix-IRR Partners LLP
  8. 8. Executive Summary2. Trends in Functions Outsourced / OffshoredFinancial Services outsourcing returns to growth overall FS Outsourcing market trends are showing signs of continued  In 2012 we have seen a rise in BPO and ITO deals, with some recovery also landing in 2013, as well as a number of renewals pending In 2011 companies were prudent and looked to ‘traditional’ cost  As macro-economic instability continues however with further reduction opportunities in the outsourcing market. In 2012 this is state-aid investments made to boost growth, many large banks continuing with a rise in ITO and BPO deals have initiated the design activity for innovative large scale outsourcing or further transformation of their existing support New entrants to outsourcing were ‘mid-tier’ banking and models insurance institutions3. Operating Models for Outsourcing and OffshoringOperating models are maturing and companies new to outsourcing have a shorter learning curve Legacy outsourcing approaches are now being challenged to  The front line business areas are increasingly engaging internal leverage global synergies and economies of scale without falling sourcing resources in the forward planning for change to ‘achieve foul of cross border restrictions and cross border data restrictions more with less’ FS companies are building upon their existing, internal sourcing  Tightening margins are generating increased demand for skills by increasing commercial skills, negotiation techniques and transformational solutions with a rapid pay back challenging suppliers to be more innovative  This puts renewed pressure on suppliers to deliver current solutions quicker than they would have previously 8 2012 © Elix-IRR Partners LLP
  9. 9. Executive Summary4. Popular and Emerging Destinations for DeliveryTraditional offshore locations of choice are under pressure  India remains the dominant location, particularly for ITO services  Increasingly the middle office processing requirements however in the last two years salaries have risen circa 10-15% and KPO are being considered for outsourcing to (in $ terms), despite the slow economic recovery achieve further savings on labour arbitrage for perceived specialist skills although near shore solutions are seen as  Increasing pressures to near-shore in USA and EMEA brings preferential opportunities for markets in Asia, South America, Africa and Eastern Europe. Drivers for these opportunities include  Africa emerging as a BPO location generating significant timezone benefits, higher quality and greater customer market interest satisfaction  Providers are coming away from traditional markets faced with political pressure in advanced economies to ‘bring jobs home’5. Major Outsourcing Deals and Key Service ProvidersService provider acquisitions in 2012 Leading service providers continue to achieve increases in  We begin to see early acquisitions in the African region, with revenue, operating margin and headcount through acquisitions in contact centres, customer care and business continuity niche, analytical software, specialist processing services and services targeted cloud–based technologies 9 2012 © Elix-IRR Partners LLP
  10. 10. Executive Summary5. Major Outsourcing Deals and Key Service Providers (cont)Indian providers invest in emerging markets Large Indian players are adding to their capabilities in both ‒ Governmental incentives onshore and nearshore locations and growing their presence  When factored in these incentives have the potential to reduce outside India. Benefits include: costs to a comparable level with India ‒ High-quality, medium-cost back office and call centre capabilities  A recent example of an Indian provider investing in emerging markets includes WNS’ recent acquisition of South African ‒ Availability of skills to service offshore clients is high BPO provider Fusion Outsourcing Services ‒ Industry knowledge and experienceIBM displaced in 2011 for largest new deal won (despite renewing the largest deal with BNP Paribas) Looking back on 2011, IBM lost its prime position in terms of  However IBM extended a significant joint venture deal with BNP high-value contracts in North America and Asia Pacific Paribas for data centre outsourcing ‒ In North America, T-System Services were awarded a  Near-shoring strategies by companies have had an impact upon US$1.7bn ITO contract by Capital One global service providers who offer ‘best shoring’ on the basis of ‒ In Asia Pacific, the outsourcing downturn was evident with the leveraging sales based on cost reduction through labour largest outsourcing deal at US$307m, awarded by HDFC arbitrage Bank to Reliance ‒ In EMEA, IBM retained the top new deal with US$1.3bn with la Caixa and a total regional value of $1.5bn Sources: Elix-IRR analysis, IAOP, BPeSA, IDC, press releases 10 2012 © Elix-IRR Partners LLP
  11. 11. 3. Why:Why the Regulatory Environment is continuing to drive the shape ofFinancial Services Outsourcing in 2012 11 2012 © Elix-IRR Partners LLP
  12. 12. Outsourcing drivers are changing, becoming more variedand global in their reachIn our last report we focussed on outsourcing deals with innovation triggers resulting in product & process outputs.In this report we note that the drivers for outsourcing continue to be affected by market headwinds and having tocomply with increasingly stringent regulation. As a consequence banks are looking for innovative sourcingsolutions that change the support cost paradigm while enabling focus on regulatory compliance.We will be assessing regulatory drivers and how they provide new opportunities for the outsourcing industry.COMMENTARY Our report will be focussing on the regulatory environment and its effect on the outsourcing market We see increasing scrutiny from regulators contributing to decreasing RoE requiring banks to emphasise cost cutting In turn this leads to a reduction in investment appetite, even for the regulatory and compliance solutions The cyclical nature of these prevailing conditions is amplified as they constrict and tighten on banking operations further. The over-riding risk therefore is loss of competitive advantage and market share 12 2012 © Elix-IRR Partners LLP
  13. 13. A greater variety of factors are now driving theregulatory environments surrounding Financial Services  Regulating to ensure financial institutions can support themselves in times of stress and not depend on public money Political  Damaged reputations caused by on-going and highly publicised Three conclusions for the FS incidents Outsourcing Industry present themselves:  Increased capital requirements levied by regulators  Direct/indirect cost-cutting in response to bottom line pressure 1. Coupled with downward Economic  Lack of investment appetite driven by regional market instability pressure on margins, and the cost of capital pressures regulatory pressures are driving reviews of operating  Regulators prioritising protection of socio-economic stability costs, headcount and  Head count reduction necessitates fewer people doing more business rationalisation and Social  Key personnel have more personal regulatory responsibility transformation and less time available to focus on strategic direction 2. The investment budget for  Reduction in investment programmes, priority given to change and innovation will be regulatory compliance focused on regulatory,Technological  Complex highly integrated infrastructure leads to high indirect compliance, cross-border data costs of change programmes protection initiatives and cost reduction  Regulatory pressure globally  Emphasis on risk mitigation (financial and reputational) 3. Focussing on core banking Legal  Volcker Rule, FATCA, Dodd Frank, Basel II & III, RRP competencies will provide an  Client Money Segregation, Transaction Reporting, KYC opportunity to evolve new and existing shared services and outsourcing arrangements;  Head count reduction and off-shoring driving financial institutions toEnvironmental  Focus on building footprint in faster growing markets ‘do more with less’  Ongoing buy side out-sourcing of processes and services Given global regulatory  Regulators supporting customer freedom to switch between pressure these opportunities banks are universal… Customer  Sustained loyalty less assured as customers are better informed to buy financial products and services 13 2012 © Elix-IRR Partners LLP
  14. 14. Greater variety of regulatory drivers are matched by aglobal strengthening of regulatory regimes EU Regulation COMMENTARY • EMIR – aims to increase stability within OTC derivative  Globally, regulators have markets • PRIPs – aims to achieve consistent and effective standards introduced greater levels of for investor protection stringency to banking US Regulation • MiFID – aims to enhance investor protection, improve cross- border market access and promote competition in the financial operations in order to• Dodd Frank• Volcker Rule markets across the EU safeguard consumers and• • AIFMD – to impact how AIFMs distribute funds and operate Financial Stability Oversight Council business public funds• Securitization Reform• Derivatives Regulation – increased  In addition, a perfect storm is transparency The concept of being created by natural• Consumer Protection Reform regional regulation Basel III• Credit Rating Agency Reform Aims to strengthen regulation, supervision, downward pressure on margins is almost a moot• Capital Requirements point for global risk management and transparency by as the result of lower growth• Living Wills regulatory standards on: players with • Capital adequacy occurring at the same time entities & clients spread across the • Stress testing  The challenge for Financial world • Liquidity Stability Services firms becomes how to increase shareholder value Bank LeviesFirst proposed by IMF in 2010 Recovery & Resolution Plans (RRPs) whilst satisfying regulators• UK Banks will be required to produce RRPs to give regulators a  This presents significant• France crisis management plan setting out necessary steps and• Germany powers to ensure bank failures are managed in a way to avoid opportunities for the• Austria financial instability and to minimise public costs outsourcing industry as banks• South Korea • Regulated under the Dodd-Frank in the US• Proposed – Netherlands ~2013 • June 2012 - European Commission adopted a legislative look to how they can rationalise• Possible EU Financial Transaction Tax proposal for bank recovery and resolution and consolidate their activitiesTHE SOURCING OPPORTUNITY Smart players in the outsourcing industry will increasingly be seen tying outsourcing offerings to compliance requirements and bottom line growth Robust sourcing strategies and outsourcing firms’ capabilities offer a breadth of support that will be well placed to support Financial Services clients meet their regulatory and financial challenges The following section will focus on the rise of Recovery and Resolution Plans (RRPs). Perhaps one of the most relevant developments in regulation for service providers in the last 12 months. RRPs are also one of the most wholesale from a compliance point of view, bringing together many of the components of other regulatory initiatives (e.g. capital adequacy, robust liquidity positions, balance sheet stability) with the practical measures to achieve either Recovery or Resolution. RRPs provide a stern challenge from the point of view of both compliance and ongoing execution of business strategy 14 2012 © Elix-IRR Partners LLP
  15. 15. The breadth of regulation under Recovery andResolution Plans creates opportunity for the IndustryGlobal regulators are moving to safeguard the wider global economy from the fallout of another financial crisis inthe future. Analysis of the rise of RRPs reveals that alternative sourcing models can play a major role.  Globally financial authorities are taking a legislative, policy driven approach to transforming regulatory regimes to ensure that banks “Too Big to Fail” can do so in an orderly manner thereby minimising risk to consumers, the CONTEXT taxpayers and deposit holders  This is being compounded by a general shift in emphasis from Bail “Out” to Bail “In” where large banks faced with potential failure are being urged by Central Banks and regulators to recapitalise using private capital, not public money. This results in significant restructuring of balance sheets and risk management portfolios  RRPs are being mandated in order to recover a bank from severe threats to its survival (Recovery) or wind the bank up in an orderly manner protecting consumers and the public purse (Resolution)  Systemically Important Financial Institutions (SIFIs) are the banks which will invite most scrutiny, particularly SIFIs with global reach (G-SIFIs), due to the disproportionate consequences of disorderly failure from a the FOCUS political, economic or socio-economic perspective  The complexity of achieving compliance is magnified when set against a backdrop of existing and unprecedented regulatory change driven by major legislative or policy events such as Dodd-Frank, Basel III, the Vickers Report (UK) and tightening margins  All areas of banks will require both strategic and detailed analysis to understand which entities do what business, how they are funded and how they might be allowed to fail the COMPLEXITY  IS & IT strategies will form a core component to winding entities up as infrastructure, applications and users will need to be segregated  Significant consideration will also need to be given to how can staff be safeguarded against the failure of a particular entity so that they can continue to support surviving business  Changes to Operating Models, the need to segregate entities and the risk sharing potential of executing the right sourcing strategies can lie at the heart of future compliance efforts the CONCLUSION  Systems integrators and major outsourcing firms have both the industry expertise and the technical insight to play a major role in the diagnostics, planning and execution of RRP strategies 15 2012 © Elix-IRR Partners LLP
  16. 16. The focal points for RRPs are opportunity areas wheresourcing and outsourcing specialists can play a roleElix-IRR’s work with major global banking institutions reveals recurring themes which come under scrutiny indeveloping RRPs. Our analysis asserts that a number of these hold opportunities for the major outsourcing players. RRP FOCUS AREAS KEY SOURCING CONCLUSIONS Group Risk Assessment Future commercial models will need to provide evidence of compliance to regulators, compounded by ongoing scrutiny on cross-border data protection. However we envisage suppliers being able toAnalysing the bank by entity to define the leverage this as an opportunity to innovate.most critical parts and any retail impact Liquidity Recovery The importance of liquidity utilisation and it’s many drivers and usages is an area where banks are struggling to provide the necessary data. Innovative vendors will be able to create utility solutionsEnsuring a robust liquidity position exists in to this emerging issue.times of stress Capital Recovery Banks will be keen to remove assets from their balance sheets in order to aid their capital ratiosEnsuring capital adequacy during times of leading to broader opportunities for vendors to take over human capital & IT assets.stressSupport & Business Contingency Robust sourcing strategies can help alleviate the pressure on CIOs to understand how to configure their future IT landscape. In light of 20+ years of technology and group integration efforts carefulAbility to be able to segregate IT effectively consideration will need to be given to how technology assets can be unwound in the event ofin failure without harming BAU elsewhere failure of a specific entity or group of entities. GovernanceEstablishing management structures to The complexity of corporate structures and organisational design drives a level of complexityoperate during times of severe stress which will be very challenging to unwind. Outsourcing players already engaged in BPO / HRO for multiple parties should position themselves as solution providers able to support the wind-down of entities whilst safeguarding staff from the failure of any particular entity and continuing to support People & Organisation the remaining business.Reviewing entity employmentarrangements and safeguarding the future 16 2012 © Elix-IRR Partners LLP
  17. 17. 4. What: Global and Regional TrendsSourcing Market Analysis (BPO, ITO and KPO) 17 2012 © Elix-IRR Partners LLP
  18. 18. Global Trends in the Overall Outsourcing & OffshoringMarket Overall growth of the outsourcing industry is picking up despite global economic pressures. Growth in Outsourcing Market, 2008-2011  The outsourcing market grew by a nominal 8% fromUS$bn CAGR +8% 2010 to 2011, an indication that the industry has picked up pace after a fall in size from 2008 to 2009500 +4% 422  EMEA and Americas still account for the majority of 378 389400 371 the outsourcing market – though the Americas’ market share is decreasing with a 5% growth rate from 2010300 to 2011 compared to 12% in EMEA and 8% in Asia Pacific. This reflects larger transaction values and the200 trend towards expansion of contracts at renewal100  Financial Services is the largest vertical for outsourcing services accounting for some 20% by value 0 2008 2009 2010 2011  The US is the largest outsourcing consumer by country and this will be the case for the foreseeable future 2011: Outsourcing Market breakdown by • Cost is still the main driver for outsourcing; however,US$bn type, region and vertical there are an increasing number of other factors that500 play a role in the outsourcing decision process, e.g. 422 422 422 achieving speed, agility, flexibility and innovation as400 Asia Pacific FS well as access to technical and/or industry specific BPO 78 (19%) 83 (20%) 153 (36%) expertise and skills300 Americas • We believe outsourcing advisory firms increasingly 201 (48%) influence the decision-making of buyers of outsourcing200 ITO Non-FS 339 (80%) services 258 (61%)100 EMEA • ITO and BPO outsourcing activity continue to generate 143 (34%) KPO the largest proportion of revenue in the outsourcing 0 11 (3%) market 2011 2011 2011 Source: Evalueserve, 2011, IDC, 2012 & Elix-IRR analysis, 2012 18 2012 © Elix-IRR Partners LLP Note: Vertical-specific BPO not included
  19. 19. Global ITO and BPO Outsourcing Deal Activity in FS BPO deals continue to show growth while ITO deals are declining from a high in 2010. Market activity in 2011, as in 2010, was driven by renewals and extensions and not by new outsourcing deals. New Deals: TCV of Global ITO vs. BPO ITO New Deals: Avg Contract Value of Global ITO vs. ITO BPO BPO BPO BPO CAGR 20 19.1 19.1 17.9 -10% 16.5 ITO CAGR 15 +8% 9.4 ACV ($m)TCV ($ Bn) 14.3 13.3 150 10 12.7 107.0 114.7 90.9 92.6 100 74.3 66.8 5 39.5 44.3 8.5 50 3.8 4.7 5.7 0 0 2008 2009 2010 2011 2008 2009 2010 2011  In addition to the increase in Total Contract Value of BPO deals and decrease of  While the Total Contract Value of deals remained the same between 2010 & TCV of ITO deals, we see a similar trend in the average contract value between 2011, we have seen an increase in the proportion made up of BPO deals 2010 - 2011  ITO activity fell for the first time in 2011 when, despite growth in North America  Where nervous markets saw BPO average contract values decrease 40% from and EMEA, the value of ITO deals in Asia Pacific fell by over 70% 2008 to 2010, we see a trend towards recovery with BPO average contract values  BPO continues to trend towards previous 2008 highs, buoyed mainly by robust up almost 50% in the last year growth in North America, particularly in the insurance sector  North America is the only region to have recorded a fall in average ITO contract value, having a marked effect on the global average ITO new deals BPO new deals Global ITO Deals New vs. Renewed Global BPO Deals New vs. Renewed ITO renewed deals BPO renewed deals 100 100% of TCV % of TCV 34% 44 % 29% 66 % 68 % 51 % 59 % 71 % 50 50 66% 56 % 71% 34 % 32 % 49 % 41 % 29 % 0 0 2008 2009 2010 2011 2008 2009 2010 2011  The trend towards a greater proportion of value coming from renewed deals  The strong trend towards increased renewed deal proportions has continued, with continues, with roughly two thirds of ITO TCV in 2011 being renewals a full 71% of BPO TCV coming from renewed deals in 2011  This is likely indicative of a maturing of the marketplace, with most companies  The North American BPO market was biased towards new deals from 2008-2010, already having some level of outsourcing in place before a sizable shift in 2011 to 80% of value being derived from renewals  The majority of contracts in the Asia Pacific region are new, possibly indicative  A similar shift occurred in EMEA in 2010 and was sustained in 2011, possibly of the emergent market for outsourcing there indicative of market maturity 19 Source: IDC 2012 © Elix-IRR Partners LLP Note: The data above excludes South America
  20. 20. What:Regional Trends 20 2012 © Elix-IRR Partners LLP
  21. 21. Regional Trends in New Deal & Renewal Activity 2008-11The North American outsourcing market has shown a strong return to growth between 2010-11 as it recovers to 2008levels. However, growth in EMEA has slowed down substantially, whilst no mega-deals over $500m have taken place inAsia Pacific. Of the $19.1bn of new deals in 2011 $6.1bn were in North America, $12.2bn in EMEA and only $0.8n in Asia-Pacific Asia Pacific North America -74% TCV CAGR TCV CAGR Total Contract Value ($ Bn) +56% Total Contract Value ($ Bn) +4% -12% 10 106 150 35 35 3 40 No. of Deals No. of Deals 91 85 26 25 30 100 2 5 62 $ 8.8 $ 3.0 20 50 $ 2.5 $ 6.1 1 $ 4.4 $ 3.9 10 $ 0.7 $ 0.8 0 0 0 0 2008 2009 2010 2011 2008 2009 2010 2011 EMEA  Whilst outsourcing activity has still not  Whilst over the period there has still been 0% returned to 2008 levels, the Total Contract TCV CAGR growth in Asia Pacific, we have seen a Total Contract Value ($ Bn) Value (TCV) increased by over 50% +14% very substantial decline of almost three between 2010-11 143 quarters of TCV over the past year 15 150  This positive trend is visible in both ITO 112  The most substantial fall was in BPO and BPO activity, with BPO showing very 88 89 activity, losing over 98% of total contract No. of Deals 10 100 substantial increases value due to new contracts halving $ 12.2 $ 12.2 compared to 2010 5 $ 8.4 $ 9.5 50 0 0 Colour Key: 2008 2009 2010 2011 Growth in Outsourcing is highest (hot)  The previously strong upward trend has flattened in Outsourcing activity is high and still growing (warm) the past year, with a slight fall in Total Contract Value Outsourcing activity is decreasing (cooling)  EMEA deals accounted for ~ 64% of all global deals in 2011  There has been an increase in the number of deals, but a concurrent fall in their average value 21 2012 © Elix-IRR Partners LLP Source: IDC BuyerPulse Contracts Database, August 2012
  22. 22. What:Sourcing opportunity for FS Sourcing Type Analysis (BPO, ITO and KPO) 22 2012 © Elix-IRR Partners LLP
  23. 23. FS Back Office outsourcing candidatesIn Elix-IRR’s experience, processes that are repeatable, high-volume and administrative in nature are potentialcandidates for efficiency gains arising from outsourcing. In the following section we analyse the overall outsourcingmarket in 2011 and then focus on the application of the following three sourcing types: BPO, ITO and KPO OPERATIONS Investment Banking Wealth Management Retail Banking SUPPORT FUNCTIONS HR Finance Procurement FM & Real Estate CONTROL RESEARCH AND ANALYTICS Research & Governance and Assurance Legal & Compliance Analytics IT Management Application Infrastructure Helpdesk Key 23 BPO ITO KPO 2012 © Elix-IRR Partners LLP
  24. 24. What:BPO Analysis 24 2012 © Elix-IRR Partners LLP
  25. 25. BPO Trends in the FS Outsourcing MarketFinancial Services has been a critical driver in the growth on BPO volumes and values in the past. Elix-IRR believe thereis still significant value to be obtained by extending the scope of BPO to a broader set of functions across the backoffice. Below we describe a selection of major processes which are typically retained, possible outsourcing candidates orprocesses that are often outsourced OPERATIONS* Investment Banking Wealth Management Retail Banking • Business Development • Account • Sales Generation • Operations • On boarding AML/KYC • Confirmations Services • Strategy Control Management • Settlements • Business • Cash and Liquidity • Customer • Origination /account • Data opening Management • Customer Queries Development Management billing • Investor Custody • Account servicing • Clearing and • Reconciliations • Service • Payments Services • Cash and Liquidity Settlements Management Processing • Statements • Collateral Management Management • Payments Processing • Card Manufacture SUPPORT FUNCTIONS* HR Finance Procurement FM & Real Estate • HR Strategy • Budgeting Process • Category • Leasing • Buildings • Business Partners • Regulatory Reports Management • Network and Space Maintenance • Collateral • Tax Filing Management • Cleaning • Spend • Reception Management Units • Treasury Management • Recruitment • Payments • Landlord Services • Procure to Pay • Case Management • Accounts Payable • Communications • Reporting • Account Receivable • Transport Services Key: *Selected processes are intended to be indicative of the business areas under discussion. We do not purport to be representing the totality of capabilities undertaken in the course of daily banking = Typically retained business = Possible candidate for Shared Service/Outsourcing 25 = Suitable for Shared Service/Outsourcing 2012 © Elix-IRR Partners LLP
  26. 26. Overall BPO Trends in the Outsourcing Market Banking and Financial Institutions along with central and federal government clients, were critical in driving the demand in the BPO market. Total BPO Spend Globally  BPO outsourcing has seen a moderate 3% growth over the past few years, though this has picked up in 2011 CAGR +8%  There has been a noticeable increase in the number of +3% BPO deals over the last 12 months in both North 160 153 America and EMEATotal Value of Outsourcing Spend ($ Billions) 140 142 140 138  Asia Pacific experienced a downturn in 2011 as the global recession impacted the region 120  South Africa have introduced incentive schemes for job creation and India service providers are increasingly 100 interested in the region for alternate delivery models  BPO demand in Financial Services is driven by demand 80 for credit card processing, insurance services, investment bank processing and payment processing 60  Buyers are increasingly looking at bundled ITO/BPO options, which reflects increasingly integrated sourcing 40 strategies 20  BPO vendors focus on strengthening operational excellence capabilities, platform BPO assets, and business analytical services as levers for the expansion 0 of existing deals, new deals and renewals 2008 2009 2010 2011  Latin America will continue to increase in attractiveness Note: Vertical BPO figures are not available within total global BPO spend figures. as a near-shore destination for the US However, the following pages show the break out of vertical BPO versus other outsourcing domains for new deals. With the rise and increasing importance of vertical BPO deals in FS over the past decade, we estimate that, for the FS market, vertical BPO is at least as large as traditional BPO domains 26 Source: Evalueserve, 2011, IDC, 2012 & Elix-IRR analysis, 2012 2012 © Elix-IRR Partners LLP
  27. 27. FS BPO Activity by Outsourcing DomainThere has been a substantial rise in the value of Vertical BPO activity in North America. The same domain has shownsubstantial falls in value in EMEA and Asia Pacific, respectively – it is, however, still the dominant BPO activity in allregions. Key: HR = Human Resources F&A = Finance & Accounting BPO Sub-Domain Outsourcing Activity – based on 2011 TCV ($m) Vertical BPO = BPO specific to FS Industry North America EMEA Asia Pacific Total: $3.3bn Total: $2.5bn Total: $4m  There has been a substantial ($2.2bn) rise in the value of Vertical BPO activity in North America, and consequently, its share of all BPO contract value has risen from 36% in 2010 to 82.8% in 2011. There were significant extensions to existing, large scale deals for periods of 5 – 7 years, indicating a deepening of established relationships  Customer care contracts increased from a low base to $297m in EMEA, with a small number of deals in North America and none in Asia Pacific. Globally, this has more than accounted for the fall in this domain in North America, showing an increase of 2% of global BPO activity  HR Outsourcing fell by almost $400m in North America, having accounted for 46% of deals in 2010 to only 7.1% in 2011. This reflects that the early advantages of HR outsourcing have been achieved and our experience is that new entrants to outsourcing will come to the market with a multi-sourcing transformational strategy rather than labour arbitrage  F&A Outsourcing fell in Asia Pacific from 56% of all BPO deals in 2010. The trend for all support functions is to create organisation- wide synergies with sourcing strategies 27Source: IDC, 2012, Elix-IRR analysis, 2012 2012 © Elix-IRR Partners LLP
  28. 28. Regional Analysis of FS Industry BPO Activity Overall activity in FS-specific BPO (banking and insurance operations processes*) has dipped below 2008 levels with the majority of new deals being in EMEA. North America $ CAGR -16% Total Contract Value 55 54  While the number of deals happening each year has been No. of Deals 6,000 55 60 41 relatively constant over the period, the TCV has varied ($m) 4,000 40 substantially 5,539 2,000 3,282 20  There has been a substantial increase between 2010-11, although 1,180 1,423 TCV is still at around 20% below 2008 levels 0 0 2008 2009 2010 2011 EMEA $ CAGR No. of Deals -4%  The TCV of BPO has seen relatively little change over 2008-2011, Total Contract Value 3,000 60 with a slight overall decline 40 42 2,000 31 30 40  It will be interesting to see whether 2012 and 2013 analysis will ($m) 2,803 2,963 1,000 2,453 2,460 20 show whether patterns of growth followed by decline persist 0 0 2008 2009 2010 2011 Asia Pacific $ CAGR -67%  BPO activity has stalled in Asia Pacific, with TCV falling by 98% Total Contract Value No. of Deals 400.0 13 15 from its high of 2010 11 300.0 7 10  Only three BPO deals occurred in the region in the last 12 months ($m) 200.0 359 compared to 13 BPO deals in 2010, highlighting the effect of the 3 5 100.0 157 economic crisis which has now hit the region (particularly Australia 109 0.0 4 0 and Japan) 2008 2009 2010 2011*NOTE: Banking and Insurance operations processes include but are not limited to– trade processing, loan administration, billing services, payments services, 28document and data management, account processing and reconciliation etc. 2012 © Elix-IRR Partners LLP Source: IDC BuyerPulse Contracts Database, August 2012
  29. 29. FS BPO Average Contract Analysis by Region Average Contract Value for BPO deals is far lower than ITO – particularly for renewals. The upturn in KEY Asia Pacific in 2010 has come to a halt – there were only three new deals in 2011. New Deals Renewals North America Average Contract Value 200 190 159 150  BPO activity showed a substantial decline 2008-2009, which was sustained into ($ million) +20% 2010 100 83 -72% 50  Renewed contracts rose by 20% from 2008 to 2011, although new BPO contracts 31 26 28 23 17 have fallen further still and are now at 72% below 2008 level 0 2008 2009 2010 2011 EMEA Average Contract Value 200 174  New deal figures in 2011 have still not returned to their 2008 highs, but have 150 +132% picked up in the last year ($ million) 117 102 94 100 76 -65%  Data on renewals shows more fluctuation than that of new contracts, but despite a 50 50 26 35 fall from the spike of 2010, Average Contract Values remain well up over the period. This is a reflection of the number of contracts expanded on renewal. 0 2008 2009 2010 2011 Asia Pacific Average Contract Value 60 50 40 34 • After a promising 2010, figures for both new and renewed contracts in 2011 have ($ million) 30 crashed. In total there were three new deals in 2011, with an average value of just 19 +37% 20 17 12 13 17 over $1m, and no renewed contracts. 10 -100% 1 0 0 2008 2009 2010 2011 29Source: IDC Research, 2012, Elix-IRR analysis. 2012 © Elix-IRR Partners LLP
  30. 30. Examples of BPO Outsourcing Activity Wing Lung Bank outsources ING sign new deal with BACS payment debit HCL Technologies set operation management to Cognizant to provide an and credit processing up back-end processes Accenture (deposits, loans, insurance and finance services are for loans, financial payments and customer business process centre of outsourced by LBG products and customer servicing) excellence to Parseq (2011- service at Citi (July 2014) 2012) MidSouth Bank outsources payroll and Zurich used Procurian and Genpact to ISS manages and delivers facilities management services HR services to Inova Payroll restructure and manage procurement to Barclays operations in the UK, Europe, the Americas, infrastructure Asia Pacific and the Middle East (July 2012) 30 2012 © Elix-IRR Partners LLP
  31. 31. Future Trends in BPO in Financial Services BPO - Generic• There will be a major focus on customer data sovereignty and the rapidly changing legislation on physical location of data and its use. This has the potential to impact some BPO deals until specific countries / regulatory bodies clarify their stance• Service Management professionalisation – organisations will realise the value of a skilled, retained organisation to lead on the refinement of supplier relationships and the longer term outsourcing benefits• Emerging geographies in Asia Pacific, Africa and Latin America will contribute further in the next 12 months BPO - FS Specific• Ongoing regulatory pressures and reducing margins have resulted in wholesale banks looking for opportunities across their environment• Banks are looking beyond labour arbitrage and seeking broad ranging productivity gains to: • inter-lock the business strategy with sourcing approaches • Obtain significant, step change savings over time Snapshot: Trends in BPO Payments Processing • An increasing move to outsource payments processing in the• Outsourcing will be more focused at achieving productivity gains sector (and financial savings) across the enterprise • Considerations must be made in regards to data protection and regulatory issues, as well as customer’s perceptions of• KYC and Single Customer View strategies will develop further off-shore data access and require elements of business process re-engineering prior to • Larger U.S. banks often have their own payment ‘factories’ • Further outsourcing and offshoring is being considered by outsourcing banks and credit card operators to reduce cost and improve margins• Increasingly a move to outsource payments processing in the • New banks and innovative mobile payments operators have sector more flexibility and have the potential to establish lower cost payments operations by optimising locations world-wide 31 2012 © Elix-IRR Partners LLP
  32. 32. What:ITO Analysis 32 2012 © Elix-IRR Partners LLP
  33. 33. ITO Outsourcing: In Summary As with BPO, Financial Institutions combined with central and federal government clients drove the demand in the ITO market in 2011. IT* Management Application Infrastructure Helpdesk • Service Management • Change • Business • Development • Data Centre • Tier 1 call centre • Strategy & Management Requirements • Testing • Network Management • Incident Architecture • Solutions • Maintenance • VOIP Management • Disaster Recovery *Selected processes are intended to be indicative of the business areas under discussion. We do not purport to be representing the totality of capabilities undertaken in the course of daily banking business Key: Total Information = Typically retained Technology Outsourcing CAGR +8% = Possible candidate for Shared Service/Outsourcing Spend Globally = Suitable for Shared Service/Outsourcing +4% 258Total Value of Outsourcing Spend ($ Billions) 260  There has been moderate growth in the total ITO spend 238 over the 2008-2010 period, with growth picking up 240 232 226 substantially to 8% in 2011 220 200  The key market drivers for ITO are cloud computing and Remote Infrastructure Management Outsourcing (RIMO) 180 as well as consumerisation of data storage and social 160 media solutions 140  Industry-specific offerings will continue to increase, and 120 vendors must improve their knowledge of their clients business and industry 100 80  Competition is fierce and margin pressures grow higher, even as the market begins to improve 60  Striking the right balance between offshore, near-shore 40 and onshore offerings will be key to vendor success 20  ITO customers are still “testing” to find the right balance 0 between captive centres and outsourcing 2008 2009 2010 2011 33 2012 © Elix-IRR Partners LLP
  34. 34. FS ITO Outsourcing Domain Activity Infrastructure services continue to dominate ITO activity in all regions followed by Applications Maintenance in North America and Network & Desktop Outsourcing in EMEA and Asia Pacific. KEY: ISO = Infrastructure Services Outsourcing HAM = Hosted Application Maintenance ITO Sub-Domain Outsourcing Activity – based on 2011 TCV ($m) AM = Applications Maintenance NDOS = Network & Desktop Outsourcing HIS = Hosted Infrastructure Services North America EMEA Asia Pacific Total: $2.8bn Total: $9.7bn Total: $755m  Infrastructure services, as in previous years, continue to be by far the most common form of IT outsourcing. ISO now accounts for over 80% of all ITO market activity, having risen by $550m in North America and $1200m in EMEA since 2010  In North America ISO dominates with 92.6% of market activity share  In EMEA and Asia Pacific, whilst still dominant, NDOS and AM activity also represent non-trivial proportions of activity  Other Sub-Domains do not contribute significantly  Market uncertainty and the pressure to improve bottom line returns from infrastructure estates is likely to be fuelling the dominance of ISO. From a rationalisation perspective focussing on hardware procurement is an attractive option for quick savings, fuelling outsourcing activitySource: IDC, 2012, Elix-IRR analysis, 2012 34 2012 © Elix-IRR Partners LLP

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