The total package doesn't exist
Richard Surrency, of Bank of New York Mellon in Singapore, highlights the need to focus on core needs in achieving your objectives when outsourcing.
Only a few years ago ‘outsourcing’ was the buzzword in the management suites of US and European institutions, the goal being to realign organizations around core competencies and hand off any and all non-core functions to legions of cost effective and quality conscious service providers in low cost markets around the world. Asian institutions, including Asian based institutions representing many of the world’s leading financial services organizations, were rarely, if ever, included on the roster of potential candidates for outsourcing initiatives. And why should they be? Home to 4 billion people (60% of the world’s population) Asia was the end destination for institutions looking to outsource anything - an educated population in rapidly growing economies and, thanks to modern technology, highly accessible.
When the demand for financial services outsourcing solutions in Asia is discussed with the executive officers of Asia’s leading institutions there is unanimous agreement - Asian institutions are in desperate need of outsourcing solutions, but for reasons that are diametrically opposed to their US and European counterparts. Where many US and European institutions consider cost savings, capacity management, and the transfer of commoditized processes as primary drivers for outsourcing, Asian financial institutions consider access to operational expertise, qualified staff, market coverage and risk management as primary drivers. To understand these drivers as they relate to Asian institutions we must begin with an overview of Asian markets in recent years.
It should come as no surprise to readers that Asian economies have experienced unparalleled growth in the past five years across all industry segments, and in particular the financial services sector, as wage increases have allowed millions of families to invest in their future by participating in the financial markets. As Asia became the world’s manufacturing hub, Asian stock markets boomed and Hong Kong, Seoul, and Tokyo took their places as three of the top six most expensive cities in the world to live according to a Mercer Worldwide Cost of Living Survey conducted in 2008. While cost reduction remains a significant management metric for all financial services C-suite operatives in Asia, it is overshadowed by Asia’s most desirable, important and limited resource metric: professional talent.
The legendary battle between Hong Kong and Singapore for top tier financial services talent has become a regional battle across all markets for any and all talent. Fund accountants and operational specialists, once plentiful in Asia, now take months to locate and hire. Staff retention policies, historically overlooked in Asia as a uniquely ‘western’ concern, are now one of the most important weapons in corporate arsenals to combat Asia’s traditionally high staff turnover rates. Even today, with global markets under strain and possibly hundreds of thousands of financial professionals being made redundant in the US and Europe, the battle for talent in Asia continues unabated.
Surely the severe limitations of qualified staff would be a catalyst for an outsourcing value proposition to Asian financial institutions? Unfortunately, no. Compounding the complexities of financial services outsourcing in Asia is the recognition that it is unlikely that a comprehensive outsourcing solution can be offered across all primary markets in Asia - institutions often find that they are forced to reconsider the scope and coverage of back and middle office outsourcing decisions as disparate market regulations limit their ability to conduct business through a third party. Outsourcing’s value proposition quickly fades when financial institutions realise that they may be required to retain significant portions of the functionality they wish to outsource, and in many instances the implementation of such a hybrid model defeats the purpose of the outsource initiative.
Time and time again in Asia we have seen industry consultants emerge with grand visions of a multi-market outsourcing solution for back and middle office functions only to become overwhelmed by the complexities of local market restrictions on third party processing. Economic reality also foils many an outsourcing initiative in Asia when the outsourcing proposition collides with distribution agreements in local markets - in many instances the outsourcing provider lacks a suitable distribution channel in all key markets that the financial services firm is reliant on as a revenue source. Distributors in Asia are fully aware of their bargaining power in markets where they maintain high levels of product distribution coverage and are often reluctant to lose control of a value chain that will be handed over to an external provider. To select an outsourcing solution from a single provider in Asia can result in severe cuts in market distribution, requiring the financial institution to align their distribution against smaller local market channels.
Given these constraints, is outsourcing within Asia dead? In recent years there have been no major contracts signed by Asian financial institutions for back and middle office outsourcing, but this does not mean that a need does not exist and most likely we will begin to see institutional demand for outsourcing increase significantly in the next few years as Asia’s growth trajectory continues. Successful outsourcing propositions will focus on the true requirements of Asian financial institutions: access to operational expertise, qualified staff, market coverage (processing and distribution), and risk management. Institutions seeking cost reduction or simple labor arbitrage will likely find it challenging to replicate existing processes through a third party provider unless the scope of service is severely limited.
Regulators in all Asian markets must also be supportive of regional outsourcing initiatives involving high value services within the financial services sector and must rid themselves of legacy regulations that demand localized processing in exchange for market access or tax benefits. This regulatory model served Asian markets well when access to highly qualified labour was readily available but the dynamics have changed dramatically in recent years and regulators in all markets must adjust regulations accordingly.