How financial institutions can gain efficiencies through outsourcing
Financial institutions are currently experiencing a war for talent, as skilled resources are becoming difficult to hire and retain. These staffing issues can have a ripple effect throughout the organization, limiting agility when responding to emerging trends and consumer demands, and potentially creating compliance and risk vulnerabilities. However, outsourcing is a key strategy to help institutions supplement internal resources, address skill gaps and strengthen core business processes.
More specifically, financial institutions are increasingly leveraging outsourcing strategies in three key areas: information technology (IT), internal audit and financial investigations.
Managed IT outsourcing
People generally think of IT outsourcing as offshoring technology applications and maintenance to another country, but that is not always the case. For example, many financial institutions are utilizing outsourcing to embrace cloud technologies, take advantage of experienced help desk services and develop advanced mobile applications. Some use outsourcing for more strategic functions, implementing chief information officer (CIO) advisory services to help develop strategy or utilizing third-party disaster recovery solutions.
When considering outsourcing strategies, institutions can choose between outsourcing their stuff, staff or both. With staff, an institution completely outsources a task or project, or augments internal talent with external resources. However, outsourcing an institution’s stuff is where the cloud often becomes involved. The cloud enables a wide spectrum of outsourced services, with differing levels of how an institution manages and maintains technology.
For example, a bank may have talented IT staff, and wants them to focus on strategic initiatives rather than setting up and maintaining servers. This represents a good candidate to outsource stuff (servers) to an infrastructure as a service (IaaS) provider, transitioning internal resources toward processes important to customers and staff. However, at some point, that talent may leave and the institution can also outsource the staff. Outsourcing is not a one-size-fits-all solution and should scale with the institution’s needs.
Several characteristics further demonstrate the importance of outsourcing strategies for financial institutions. As technology becomes easier for users, the more difficult and complex it becomes on the back end. The days of a single network administrator are gone, as one person rarely has the level of knowledge necessary to maintain every technology investment. In addition, persistent and evolving security threats require more attention, and increasing demand by customers and staff demand 100 percent upside and network availability.
As these demands increase, many financial institutions leverage outsourcing to help accomplish their goals that are not possible internally. Many banks initially utilize outsourcing to drive down costs, but as the proportion of the IT budget committed to outsourcing increases, cost reduction often ceases to be the top priority. Instead, significant value is seen in accessing deeper skills, providing more focus for internal IT staff, improving overall service delivery and reducing risk.
Internal audit outsourcing
As with IT, the market for talented internal auditors is challenging, with high demand and fierce competition. Rapid expansion opportunities, changing market conditions, and intricate business processes and systems increase pressure in internal audit, but consistency is necessary across locations. In addition, the regulatory environment and risk exposures have become more complex; stakeholders, including boards, shareholders and lenders, expect internal audit to help mitigate those risks.
Considering these and other complexities, attracting and keeping highly skilled internal audit resources becomes a continuous concern for senior executives and boards. However, many successful companies are counteracting labor challenges by leveraging outsourcing strategies to gain efficiencies, increase the depth of internal audit resources and better manage costs. Outsourcing can increase scalability and coverage, with necessary resources on-demand that leverage standardized processes and technology.
For companies that currently have an internal audit function, several specific issues are motivating institutions to implement outsourcing strategies. In addition to workforce challenges, inconsistency can result in internal audit missing deadlines or improperly executing its annual plan. Furthermore, expansion could lead to excessive costs for proper internal audit coverage or a lack of language or culture skills for overseas interests. In other cases, institutions may not yet have enough internal audit needs to warrant a full-time hire.
Conversely, institutions that do not currently have an internal audit department often grow to the point where leadership cannot effectively monitor activities as closely as they would like. Perhaps a stakeholder has strongly suggested that an internal audit function would help to mitigate risk. In other situations, an institution comes under scrutiny from a regulator and realizes it is struggling to monitor compliance effectively.
An effective outsourcing framework can provide several direct benefits to internal audit, including improving the controls environment and business processes. Outsourcing can go beyond traditional compliance auditing and accounting controls to eliminate redundancies, while identifying performance gaps, eliminating internal silos and implementing best practices to support growth. In addition, an effective solution can provide greater efficiency, freeing up internal resources for more strategic activities and achieving client and regulatory expectations.
Outsourcing financial investigations
Financial institutions may face a variety of complex incidents including fraud, corruption and asset misappropriation. If these incidents occur, institutions must quickly gain control of the situation to mitigate the results of these actions. Following incidents of this nature and subsequent regulatory inquiries, institutions must conduct investigations and leverage external legal counsel. However, leveraging external investigative support can provide significant benefits during investigations, even when not required by regulators.
For example, outsourcing can provide counsel, external or in-house, with access to specialized resources that are not typically available to internal bank personnel. In addition, internal investigative resources may have a lack of experience with specific types of cases or may simply be overworked and need support. In some cases, especially in smaller organizations, the person conducting the investigations may have a relationship with the subject of the investigation. A third party can help to ensure confidentiality and assure objectivity.
Outsourcing, for instance, has become important when investigating insurance claims. Outside investigators can analyze incidents from internal fidelity claims to external theft involving a customer or vendor. Delivering an objective third-party report to an insurance provider is typically a very effective use of insurance funds, and claims can include fees for hiring external resources.
Outsourced investigative services are also becoming even more important from a compliance perspective. Regulatory demands keep growing, and having an external resource that can decipher new guidelines, ensure the institution remains compliant with those regulations and provide defense when issues arise is very important.
With the experience and knowledge that outsourced investigative services can provide, the scope of work can be more efficient and precise. In addition, an outsourcing provider’s objectivity can generate improvements to an institution, potentially taking a fresh look at processes and roles of individuals within the organization.
Outsourcing has benefits
While outsourcing is often a cost savings opportunity, the real value is an increase in the talent level of several key areas of the institution. It can provide the right people at the right time, improving efficiency and enabling a stronger focus on the institution’s goals, while eliminating unnecessary processes. Ultimately, outsourcing can allow the institution to be more proactive in its thinking and planning, which is critical as technology, regulations and risks quickly emerge and evolve.