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Outsourcing banking processes

Operating with effective bank vendor management

Banks are continuously facing challenges to reduce overhead costs, enhance operational efficiencies, and improve services. As a result, outsourcing business functions has become an integral part of banking operations but has also introduced new risks. Learn how your organization can more effectively manage its outsourced processes.

Outsourcing risks and challenges

While outsourcing has become a standard business practice, it has also created newer challenges for banks related to its quality of service, continuity of operations, oversight over the outsourced process, and compliance with regulatory requirements. These outsourcing risks can be broadly grouped into the following risk categories:

  • Strategic risk: Without clear articulation of outsourcing objectives, defined parameters to evaluate the quality of service, and selection of tools to monitor performance on an ongoing basis, a bank will limit outsourcing benefits as well as hinder overall strategic objectives achievement.
  • Operational risk: Without anticipation and identification of critical outsourcing risks and establishment and monitoring of risk indicators the probability of materializing operational risks can significantly increase.
  • Regulatory & compliance risk: If a service provider is unfamiliar with the legal requirements applicable to the products or services being offered, or does not make efforts to implement those requirements carefully and effectively, or exhibits weak internal controls, it can harm consumers and create potential liabilities.
  • Reputational risk: If oversight over and the establishment of appropriate protocols and metrics (goals) to effectively manage the outsourced process is not done correctly, the benefit of outsourcing can quickly translate into a reputational loss.

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Effectively manage your outsourced process

An effectively managed outsourced process is one that reduces the cost of operation, improves the quality of service, provides greater compliance with regulatory requirements, increases customer satisfaction, and contributes to the value of the bank.

Therefore, the question is no longer if a bank should outsource processes, but how to effectively manage them. An effectively managed outsourced process should include the following steps:

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Performance dashboards for effective outsourcing management

To fully achieve the benefits of outsourcing, a bank should establish a forward-looking performance measurement system to confirm that the service provider is operating within a performance zone and providing expected business value to the bank. This performance measurement system should provide the key stakeholders with indicators to assess the current performance relative to the proposed goals and objectives.

A performance dashboard acts as a system that incorporates all critical metrics to monitor process risks, performance goals, and other contractual obligations. Performance dashboards should be versatile and showcase the rates of change over the period (e.g., the metrics goals should be based on the maturity of the outsourced process).

An effective performance dashboard is one that:
  • Uses a scoring mechanism that focuses on continuous performance improvement across all measurable dimensions.
  • At a minimum, mimics the same performance standards maintained by the bank prior to outsourcing the process.
  • Incorporates an internal performance target adjustment that’s aligned with the evolutionary life cycle of the outsourced process.
The following steps should be performed to create effective metrics for performance management:
  1. Defining measurable performance indicators: Identify and select quantifiable parameters of services outsourced. This should include the metrics collected by the bank as part of its natural work processes prior to outsourcing, as well as newer metrics to monitor risks introduced to the process due to outsourcing.
  2. Baselining existing performance: Baselining current performance prior to an outsourcing action requires reviewing goals that are in place for the outsourcing process. These goals then need to be calibrated with defined objectives and industry standards. Furthermore, for each performance target, a data source, metrics acquisition mechanism, and data refresh rate should be clearly established.
  3. Continuous advancement: Metrics defined for an outsourced process should be dynamic and forward-looking. The bank should establish different maturity stages of the outsourcing process and define goals for each. Benchmarking the goals for different maturity states can help the bank review its performance realistically and make a timely course correction to obtain maximum output from the outsourced process.

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Performance scorecard strategy

The overall objective of a performance scorecard strategy is to compare the actual results with established performance metrics. Since the performance goals are specified at the time of outsourcing a process, it’s likely that a scorecard and its associated scoring method would allow targets to be met in one area but missed on other areas. Therefore, banks should perform scorecards on a periodical basis to revisit the performance goals as needed.

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A successful performance scorecard strategy not only focuses on multidimensional performance improvement it also assesses the performance measurement on a proactive basis. Scorecard strategy must be performed in the context of the outsourcing lifecycle, and scorecard goals must be tailored for different stages of the outsourcing process.

Strategic steps forward in bank vendor management

Outsourcing can be a critical decision for a bank. Various factors play an important role in this decision, such as quality, cost, and customer satisfaction.

Performance dashboards can:
  • Help manage the outsourcing process and enable key stakeholders to measure, monitor, and manage the process by assessing the progress toward stated objectives.
  • Be tailored to different user groups to incorporate scorecards, reports, and analytical tools that run off a common set of data and metrics.
  • Enable key stakeholders to identify problems on a timely basis, take appropriate remedial actions, collaborate with others, and revisit plans and goals as needed.
  • Be tools for communication, coordination, and continuous assessment.

However, performance dashboards aren’t an end to themselves. In order to realize success from outsourcing processes, banks need an effective enterprise monitoring program to navigate the various outsourcing risks that can come with the territory.

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