Outsourcing in the Next Cycle

(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.)

The Boogeyman of Outsourcing is now back in the headlines–too bad the model designed to scare the masses represents only a tiny fraction of the $200+ billion a year market where if used in layers, will allow mid-tier and community bankers to not only serve customers but provide differentiation and realize profit.

Having been considerably involved in more than two decades of offshore outsourcing for financial services institutions, I have witnessed firsthand the impacts that have resulted in pockets of global economic decay and lost domestic opportunity. However, the portrayal of it as once again as “economically evil” shows a comprehensive naivety in how its transformed its delivery architecture and implementation over the past decade–let alone the next five years.

Bottom line, outsourcing may be a great vote getter, but its contribution towards current and future prosperity cannot be legislated or worse, marginalized. For if it is, regulators and Congress will ensure that markets will be slow to respond, brittle in time of crisis and frankly dependent on government involvement for decades to come.

Naivete and Missing a Knee-of-the-Curve Juncture
Outsourcing over the next five years is an opportunity for mid-tier financial firms and community banks to take the lead against a backdrop of impersonal banking behemoths and a consumer base that doesn’t trust them. Within the emerging outsourcing models, MTCB will require deployment of compartmentalized transformative capability, flexibility and profitability (in the form of apps, APIs, innovation labs, incubation, etc.) due to the lack of capital that can be used for cybersecurity, mobility, transitional apps, big data and risk management across all relevant industry segments.

The justification for widespread outsourcing by MTCB resides with markets that are seemingly dominated by systemically important enterprises who possess larger budgets, greater scale and an ability to influence market developments. Moreover, with technology advancements creating scarce skill sets coupled with rapid cycle consumer usage behaviors, the need to innovate is shifting to progressive outsourcing firms that go beyond the “lift and shift” model cited by politicians.

For MTCB, outsourcing partnerships will include on-demand models, network ready models, orchestration models and consortium models that can include solutions from third-party vendors, internally developed or a cross-combination. In a world now dominated by mobility and software, MTCBs have little choice but to assemble their outsourcing solution tiers with multiple vendors, while forgoing traditional lead times common with large initiatives. Additionally, as outsourcing contracts dramatically shrink in duration, MTCBs will have to develop core competencies in rapid cycling and iterations of solutions, maintaining big-data and incorporating outsourcing “deals” analogous to technology appliances to be used across platforms and demographics.

The Outsourcing World Today
The challenge today for industry employees and opportunistic politicians is that the term outsourcing is an umbrella description for a host of domestic, foreign and shared products or services performed at the direction of a buyer and delivered by a supplier that is independent, yet contractually committed, to meet or exceed a measurable outcome. Where once we believed outsourcing to represent jobs shipped to foreign borders (and managed underneath quality and service levels) in a pursuit of corporate profits and efficiencies (i.e., labor arbitrage), the collection of industries today represents hundreds of billions of annual revenue for both domestic and foreign firms.

Today, there are layers of outsourcers (e.g., thousands of firms) with traditional, less nimble names partnering with highly specialized firms within domestic shorelines. Outsourcing layers are now necessary for economic realization, but more importantly, the skills and operational complexities needed to deliver on increasingly very short-term contracts, which are demand driven under a collaboration arrangement (e.g., incentives, gain-share, profit-share).

What this signals for MTCBs is an environment where IT and BP architectural competency along with big data (and robust data management) skills are what will provide consistency and profitability against their larger, utility-like competitors. MTCBs need to recognize the game-changing potential (e.g., adaptive innovation, risk compartmentalization, building block design, greater value) that today’s outsourcing models provide rather than view it simply as a cost-saving efficiency as politicians are espousing.

Confusion, Conflict and Divergence between Research Briefs
It is striking (and sometimes discouraging) to conduct a review of future directions of outsourcing. From briefs and reports with titles of “IT 2020,” “How outsourcing relationships with change towards 2020,” “IT outsourcing 2020” and “Outsourcing in 2020”, you might get the impression that they arrived at commonalities–but no. Several of these acclaimed authors were at opposite ends of the spectrum with their conclusions with vast differences in deal sizes, customer services versus costs, offshore versus virtual and even BPO versus RBPO (robotic business process outsourcing). What was striking is that each author aligned their results to their individual lobbying efforts (e.g., NOA), their business models (e.g., A.T. Kearney), and their technology strengths (e.g., ISS).

MTCBs will have to for the next 18 months carve out their own path when it comes to outsourcing. Using boundaries of risk, brand, complexity, customer base, regulatory requirements and security, enterprises need to execute on a strategy quickly and iteratively. MTCBs also need a team of experienced internal and external advisors who are well versed in the financial services industry, but also in the entire spectrum of IT and PI not only for internal operations. Additionally, and most importantly, for deployment of outsourcing layers in an efficient model that can be rapidly adopted but also pivot for adaptation.

An Emerging and Fluid set of Implementation Models
MTCBs must become project managers or conductors comprehensively integrating all aspects of multiple outsourced arrangements. A familiar analogy might be a program office operated utilizing defined architectural filters deciding how and what gets implemented, but using external operations to carry out the goals, objectives and implementations. For MTCBs they retain the most critical components of IT and BP delivery in architecture, integration, and data, while releasing the burden of development and daily-operations (which can be shared if desired).

Moreover, using emerging outsourcing models, MTCBs can satisfy consumer, regulatory and business requirements faster and with a reduced spend. How? By accepting that core competencies have shifted. By recognizing that no institution can no longer create all its point-of-entry channels. By recognizing that FinTech is a by-product of regulatory environments, and a massive, emerging shift of consumer behaviors. By allowing partners to play a leadership role in delivery. By admitting that financial services industry models are fragmenting providing a unique opportunity to change the value equation of how we spend our budgets and for what risk-reward returns.

Deployment of layered outsourcing models in a post-presidential election will be for MTCBs about being persistent and adaptive. Some, like the researcher seemingly producing materials to continue their business model, will say MTCBs don’t have the expertise or track record to take on these unfamiliar operational roles. Yet, saying it doesn’t make it so. MTCBs are operating systems, delivery channels, compliance requirements, legacy systems and large voids in skills already. The sophistication to manage effectively and efficiently layered outsourcing is no more than trying to balance IT budgets that are breaking just to stay operational.

What is the Recommendation?
MTCBs cannot continue business as usual by attempting to move forward, focusing on the rearview mirror (i.e., doing things similar to what they have done for years). MTCBs need to adopt the new layered approaches to outsourcing (e.g., orchestrated, networked) and take a centrist view of architecture, while partnering with many likely outsource providers both domestically and internationally.

Additionally, find partners (i.e., traditional outsourcers, vendors, consultants) who can provide not only a sounding board for your directions, but who are willing to provide unbiased, external “…did you think of …”–even if it is not what they offer. Finally, accept that market movements and consumer trends will not be measured in years moving forward–but in months.

Those of us who started the ITO and BPO efforts more than two decades ago are shaking our heads in wonder at those who vehemently describe the state-of-the-industry with models that were already antiquated nearly 10 years past. For those MTCB leaders who are seeking a profitable way forward, the idea of layered outsourcing should hold immense interest and potential–as it provides means to address key regulatory areas of protection, transparency, security and adaption.

(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)