A catalyst for transformation in banking
As part of their ongoing efforts to innovate and grow, some banks are leveraging managed services to help bridge gaps in internal capabilities and adopt a more holistic, value-based approach to outsourcing. Learn what’s behind this trend, when it works well, and why.
- Banking system profitability
- The need for vast resources
- Bridging gaps
- Who should care about managed services?
- Key questions to evaluate
'Managed services are strategic, experience-driven, outcome-based relationships with high levels of operational integration and scalability that leverage the specialized skills, processes, and technology of an external service provider.'
Banking system profitability
It may be tempting to imagine that the structural transformation banks have undertaken for nearly a decade is giving way to a period of stability. But the future will possibly show otherwise. While there has been more stability in recent years, the industry’s core operating profitability has been far from impressive (see figure 1) and needs a boost through innovative cost management as well as alternate revenue streams. Spurred by new technologies and an evolving competitive landscape, banks should continue their ongoing transformation.
This transformation may be especially needed in risk management and regulatory compliance. According to Deloitte Touche Tohmatsu Limited’s (DTTL) most recent global risk management survey (10th edition), risk managers from financial services firms believed “cyber risk” and “regulatory or compliance risk” would grow the most in importance over the next two years. As regulatory paradigms evolve, many firms will likely continue to prioritize sharpening institutional expertise in risk management, compliance, internal controls, technology integrity, and data management.
The need for vast resources
Managing these business-critical processes requires vast resources, both internal and external. Take regulatory compliance, for instance. It now costs the banking industry nearly $270 billion annually, or 10 percent of operating cost, to meet the demands of regulatory compliance. Much of this spend is because many of the biggest global banks have doubled the size of compliance and regulatory teams. This expansion in internal compliance resources occurred even as institutions increased reliance on third-party firms in myriad areas: Banks around the world have spent nearly $200 billion on consulting services in the years following the financial crisis.
Amid this period of heavy investment in risk management and regulatory compliance, some firms are choosing to bridge gaps in internal capabilities and adopt a more holistic and value-based approach to outsourcing relationships by using managed services. Managed services are strategic, experience-driven, outcome-based relationships with high levels of operational integration and scalability that leverage the specialized skills, processes, and technology of an external service provider.
Who should care about managed services?
Risk and operations decision makers across banking and capital markets firms should closely observe the evolution and integration of managed services within the industry’s operating models. Managed services are strategic, long-term relationships by definition, demanding the attention of senior leadership spanning the banking organization. And with growing complexity and operational integration in relationships between banks and their providers, monitoring the adoption of managed services could also be an important consideration for bank regulators.
Some key questions to evaluate
Organizations should seek to understand several critical issues about the application of managed services in the context of their overall strategy, culture, and structure. Through this paper, we attempt to answer the following questions to help banks make these assessments:
- How are managed services different from traditional outsourcing?
- How can organizations create a framework to determine which activities can benefit from managed services? In particular, how could managed services benefit the risk, compliance, and governance functions within banks?
- What are the qualities to look for in a managed services provider? How can managed services help balance different stakeholders’ demands?
- What are the key considerations in implementing managed services? What risks should be evaluated before entering a managed services relationship, and how can these be managed?
The Future of Banking
In the upcoming months we will share a range of articles with you on the future of banking, based on ‘seven wicked problems’ we have identified. Our research skills and day-to-day experience in working with banks have allowed us to dive into these challenges more deeply. By sharing our insights, we strive to help you with the choices you face in your day-to-day work and with aligning your leadership, culture and organizational structure to a fully digital mindset, optimizing the use of proprietary and external data.