Multi-Tasking Outsourcing Challenges – Core Banking Services

1. Multi-Tasking Outsourcing Challenges – Core Banking Services Dr. V.P. Gulati

2. Agenda • Economy and Financial System • CBS Architecture • Outsourcing • Why Outsourcing • Core Banking Outsourcing • To Outsource or not • Data Centre Outsourcing • Components of DC Outsourcing • Outsourcing Issues • The People Issue • Managing Risks

3. RETAIL WHOLESALE(Corporate) FOREIGN EXCHANGE MARKET COMMODITIES MARKET CAPITAL MARKET MONEY MARKET TRADING DEAL MAKING BUYER SELLER DELIVERY DEAL DECISION PAYMENT BANKS MARKET-RELATED TRADE-REPORTING SYSTEM(S) Clearing & Settlement INFRASTRUTURE DELIVERY SYSTEM(S)- OWNERSHIP TRANSFER PAYMENT SYSTEM (S) ‘E’-conomy and Financial Systems

4. Changes in the Banking Industry Technology Infrastructure Newer Risks Convergence Consolidation Banks Regulations Domestic & International e-environment Business Redefined New breed of Customers Competition Barriers? Needed: New skills, knowledge management, marketing Strategies, high investments, “Glocal” approach

5. Technology Spending • The global financial sector spends about US$350 billion annually on technology. • Global bank IT spend to touch US$450 billion by 2010 (Towergroup) • Expenditure on legacy systems to decline 4.2% • IT expenses on differentiating investments about US$100 million • Focus likely on business process transformation • Indian Financial sector likely to spend about US$5.0 billion in the year 2006-07 • PSBs and other banks could account for US$2.8 billion. Financial sector (including the insurance) are set to spend US$2.2 billion.

6. Focal Technology Areas Centralisation Delivery of products/services ATMs Internet Banking Mobile Banking Tele banking Call Centres Cards PoS Management HR related – payroll, leave, benefits, raise Govt. related Pension &PF TDS Tax planning Intranet Mail Messaging Training/learning Customer Transactions Internal Transactions Corporate & other Services EFT EBPP Cash Management Trade Finance Forex Management Insurance Mutual Funds

7. Delivery Channels Disaster Recovery Site Data Centre Regulators Govt. Agencies Inter-Bank Systems (RTGS, SFMS, SWIFT etc) Bank Offices CBS - Architecture The high level of complexity and relationships, IT infrastructure is causing banks to seek the outsourcing mode for CBS activities!

8. Outsourcing • A Swiss Core Banking Survey 2006, reveals: • 71% of banks outsource their activities • Key reasons cited for outsourcing are: • Cost savings, economies of scale • Increased ability to concentrate on core competencies • Access to scarce skills • Improve quality of service • Turn fixed costs into variable • Learning • Keep pace with the market • Best practices • Increased productivity • Catalyst for change • Improved accountability

9. Outsourcing Trends Today • Outsourced functions include mission critical and customer-facing applications • Vendors may be new companies--less familiar with the financial services industry • Niche providers and specialization often results in multiple vendor relationships • Industry dynamics create new challenges for vendor oversight

10. Why Outsource CBS Activities? • TowerGroup estimates banks outsource over 85% of their information technology • Significant technical expertise and skills are required in the current environment • The cost to license software or purchase services can be lower than the cost to develop and maintain a proprietary system • Time to market and technology dynamics require rapid development and enhancement • Optimise business value

11. Options for CBS Infrastructure Management • Bank owned – vendor managed • Vendor owned – vendor managed • Bank owned – bank managed • Vendor owned – bank managed • Banks in India following three models: • Outsourced Model • System Integrator Model • Bank IT Dept. Driven Model • YES Bank opted for a completely outsourced model operating a pay-by-use basis

12. Core Banking Outsourcing • Core Banking implementation and maintenance is a massive affair: • Core banking initiative replaces about 50-60 vendors • Great complexity in terms of applications, application software, hardware and system software, interfaces • Need for special IT and management skills • Common CBS services outsourced include: • Back office processes • HR activities • IT related • Data Centre operation and maintenance

13. To Outsource or Not? • Once a bank decides to go on CBS, it has to determine - build or buy; outsource or not, and how much? • Each bank has its own choice depending on a number of factors: • better capital • adequacy through minimal capital investments • leveraging technology more as a differentiator than merely as an enabler • risk appetite • manpower, and capital resource allocation optimisation.

14. Outsourcing the Data Centre • Share DC? Or Dedicated DC? • A number of factors are taken into account before deciding: • Bank’s stand on sharing • Security worries • Costs • Bank Size and breadth • Vendor reputation • Data Centre outsourcing is a growing segment – Global DC outsourcing market size was US$72.3 billion in 2003 and expected to grow to US$95.0 billion by 2008 (Gartner)

15. DC Outsourcing Components • System operations • Tape operations • Print operations • 2nd level DC support • Production control • Backup & recovery • Technical support • Performance analysis • Capacity planning • Storage management • System security • Contingency planning • Asset procurement

16. Capabilities of Partner • Partners must be able to deliver infrastructure and support services required for data center outsourcing, now and in the future • Contract /deal structure • Pricing acceptance • Metrics & measurements • Effective resourcing management • Security & disaster recovery • Clarity of services, responsibilities • Relationship management • Subcontractor management • Technical support Expertise • Strategic plan and vision • Portfolio of services and solution sets • Management acumen, Innovation & leadership • Business development, Marketing and sales responsiveness • Financial stability • Alliances and partnerships • Ability to Execute

17. Outsourcing Issues • Over dependence on 3rd party • Pressure on the operating margins • Lower quality of in-house service • Management dissent • HRM problems Conflict of culture • Loss of company knowledge & know-how • Losing touch with staff & customers • Loose contractual framework • Lack of management skills • Flexibility and responsiveness is required by the company, but they are locked into a contract requiring formality • Corporate strategy changes but the company is unable to change the outsourcing contract • Company is charged for extra services not included in the original outsourcing contract

18. Outsourcing Issues • Interrupted communication and decision making channels • Multiple,diverse and/or un-integrated IT infrastructure • Lack of organisational flexibility • Determining best practice • Security costs • Competition between outsourcing service providers • Risk of upsetting suppliers /customers • Difficulties to define the correct SLA • Internal resistance • Supplier fails to provide the services as agreed • Lack of controls if supplier can not deliver as agreed • Lack of comprehensive data • Difficulty to transfer/in-source at the end of the agreement • Poor communications • Constraints on business acquisitions/disposals

19. People Risk • Behaviour during the process of selecting a supplier and negotiating the deal • Attitude during transfer to the supplier • Behaviour when working with the new supplier • and new working practices • Attitude to being retained to manage the deal

20. The People Side • In 2003, Bank of Ireland staff went on strike over a proposed $600m (£340m) outsourcing deal with HP, leading to seven months of negotiations with unions… • Its important to deal with employees first and take them into confidence to prevent such barriers • People must be at the heart of any outsourcing deal • Keep lines of communication open • Create awareness of the reason for outsourcing • Regular training sessions • Clarify the career path

21. Managing the Risks • Treat the IT service provider as a Partner, not a vendor! Undertake due diligence • Least expensive is not always the best!Look at qualitative aspects of the IT partner • While taking sourcing decisions, ensure parameters are comparable • Have a practical, accountable SLA with regular reporting built in • Close monitoring of the service offered and disruptions, if any Of course, it’s the best if bank owns and manages all infrastructure – but that’s not practical! In that sense CBS outsourcing is a win-win situation for banks and vendors as well. The former will be able to concentrate on core business while the latter will have obvious benefits in terms of business!

22. Thank You