commentBanks worldwide have opted to outsource their non-core activities, and India is one of the most popular destinations for overseas financial companies looking to outsource their back-end administration processes.
A significant proportion of these financial institutions already outsource their business processes, banks leading the way, with many entrusting their electronic payments, bill related queries, customer service management, and so on, to Indian outsourcers.
The evolution of IT services outsourcing in the Indian banks started from the basic level of annual maintenance contracts (AMCs) around 10 to 12 years ago. This has now moved to the level of facilities management (FM), which provides for the maintenance and running of the entire infrastructure by service providers.
Banknet India conducted a study, released in May this year, on IT procurement in the financial sector. It revealed that technology-related work outsourced by banks cut across several areas including hardware and software maintenance, ATM (auto teller machine) management, contact center, document management, networking and security, management of data centers, and disaster recovery.
Hardware maintenance outsourcing was the top choice, making up 21 percent of the total number of outsourcing tenders. This was followed by ATM management, which constituted 18 percent of such tenders.
ATM outsourcing seems to be the front-runner in the IT outsourcing. This form of outsourcing has helped banks pay for the facility based on a per-transaction model, bypassing the need to fork out huge up-front investments.
The Reserve Bank of India’s relaxation of rules permitting one service provider to set up a common ATM infrastructure for multiple banks has made ATM outsourcing activities more feasible for even relatively smaller players. These banks can set up a common and shared ATM infrastructure, and hence, gain from economies of scale.
A large number of banks, including Corporation Bank, Punjab National Bank, Bank of Baroda, State Bank Group, Canara Bank, Syndicate Bank, Central Bank Of India, Dena Bank and Development Credit Bank, have recently chosen to outsource their ATM management. Apart from ATM outsourcing, card management and networking management are other areas that are increasingly being outsourced. Banks such as Andhra Bank, Bank of India, Corporation Bank and Union Bank of India, are starting to outsource the management of card processes.
Major public sector banks are now aggressively getting their branch offices networked and setting up large networks. Most prefer to engage service providers to manage all aspects of such networks.
In a landmark deal and the first of its kind in the Indian banking industry, Bank of India announced in November 2002 plans to outsource the bank’s total IT requirements. Bank of India’s US$150 million IT outsourcing contract with Hewlett-Packard (HP) is still the Indian Banking industry’s largest ever BPO (business process outsourcing) deal.
State Bank of India, in a US$110 million IT blitz, is outsourcing its key requirements to strategic partners. For example, the task of networking and maintaining more than 1,500 branches and approximately 3,000 ATMs in 49 cities has been outsourced.
Banknet India’s report on BPO in the financial sector, released in September 2003, showed that nearly all respondents from the banking industry are positive about the benefits of outsourcing. About 57 percent cited lower costs as the primary benefit of outsourcing. Other benefits included improved efficiency and the transfer of technology risk to the service provider.
In sum, Indian banks are starting to realize that outsourcing is not just about cutting costs. It is also about improving efficiencies, reducing operating and capital costs and re-emphasizing focus on strategic banking initiatives.
To remain competitive, they need to direct resources to their core banking business. With increasing competition and the need to rein in staff costs, outsourcing in the Indian banking sector is set to increase manifold in the coming days.
Anurag Khanna is CEO of Banknet India, a research firm that focuses on IT deployment in the banking industry.