In this era of technological innovation, companies are increasingly entrusting critical services to external partners. From handling operations to managing human resources and steering application development, the outsourcing landscape is undergoing a significant change. In the financial sector alone, the global outsourcing market is projected to reach a value of US$68.8 billion by 2030. This growth is not just a result of increasing demand and shifting market dynamics, but a direct consequence of the transformative impact of advanced financial technology (fintech) on the sector.
The rise of fintech has driven financial institutions (FIs) to re-evaluate and reform their operational models. These institutions are seeing the need to sharpen their competitive edge and transform the delivery and management of financial services. “Banks are starting to realise that because they’re not as agile as fintech providers, they need to tap into the providers’ expertise for innovation,” says Dr Patrick Thng, Principal Lecturer of Information Systems at SMU and former CIO/MD of DBS Bank, World Bank and BNP Paribas.
However, the rapid growth and diversification of outsourcing did not come without its own set of challenges. As FIs increasingly rely on outsourced services, the efficient management of these relationships becomes paramount. In the IEOM award-winning paper titled “Reimagining the Management of Outsourcing Life Cycles in the Fin Tech Era for Financial Services,” Dr Thng, together with SMU Doctor of Engineering candidate, Tristan Lim, introduced a novel outsourcing life cycle management model tailored to address the unique nuances of financial services more effectively.
Why outsourcing management matters
“Cost reduction, lack of in-house capabilities, and the need for rapid innovation are the key drivers of outsourcing,” explains Dr Thng. “Areas such as artificial intelligence (AI) and deep data science often entail scarce expertise beyond the internal resources of many FIs, compelling them to outsource.”
Dr Thng stresses that managing the outsourcing life cycle is a crucial strategy for today’s FIs to enable them to align their operations with changing technologies and market demands. The benefits of adopting a life cycle model are manifold, including mitigating risks through early problem identification, enhanced predictability in activities, and a unified approach in the planning and renewal phases.
As fintech introduces new dimensions of complexity and opportunity in outsourcing, two distinct challenges have emerged, prompting FIs to reevaluate traditional outsourcing life cycle management models. The first pertains to the need for strategic management with a focus on innovation. Dr Thng underscores the importance of a risk management model that can address the unique aspects of the financial services sector and the trend towards fintech. This is especially relevant as FIs increasingly depend on external expertise to drive innovations beyond their in-house capabilities.
“It’s not just about adopting new technologies; it’s also about a strategic realignment with external innovators such as fintech and big tech companies,” adds Dr Thng. “Successful FIs in this space have been able to reduce innovation costs while enhancing the impact of their internal investments.”
The second challenge is the emergence of risks associated with fintech. The involvement of multiple parties in the outsourcing process often leads to unclear responsibilities, potentially creating operational problems. This complexity is exacerbated in the context of fintech, where operational, compliance, and cybersecurity risks can significantly derail the outsourcing strategy of FIs. In addition, regulatory breaches can result in significant fines and loss of reputation, a highly regarded asset of any financial institution.
A two-loop advantage
Existing non-proprietary outsourcing life cycle management models, such as the ISO Standard 37500, offer a generic four-phase approach with outsourcing governance at its core. Another example is the Outsourcing Life Cycle by the National Outsourcing Association, which highlights proactive governance and the importance of aligning outsourcing activities with organisational strategy. While comprehensive, these models often lack the specificity and nuance needed for the financial services sector. To address these limitations, Dr Thng and Tristan proposed a new Strategy-Risk model that builds on a model by researcher Sara Cullen and team in their paper, Managing Outsourcing: The Life Cycle Imperative.
“The standard outsourcing life cycle methodology is quite generic. We felt it was necessary to develop a model that caters to the unique risks and aspects of the financial services sector, particularly fintech risks, as we had observed many banks that did not know how to work with and develop suitable outsourcing arrangements with fintech providers,” says Dr Thng.
The Strategy-Risk model features a distinctive two-loop design – the strategy loop and the risk loop – with each loop comprising seven nodes that represent the different stages and activities undertaken in an outsourcing process. Both loops converge at an eighth ‘Investigate’ node, which is the inception point where organisations assess their outsourcing needs, define business requirements, and gather market intelligence.
The strategy loop encompasses activities such as identifying fintech outsourcing opportunities, undertaking feasibility studies, and designing outsourcing deal configurations. These actions enable FIs to strategically manage outsourcing with an emphasis on innovation to stay ahead of rapidly evolving fintech advancements and customer demands. The risk loop involves activities such as establishing key stakeholder relationships, conducting due diligence, and controlling organisational and industry-level risk exposure to ensure a comprehensive approach to risk mitigation.
What makes the Strategy-Risk model a robust tool is its iterative sequential approach. Each stage or node can be revisited to improve outsourcing outcomes. As outsourcing usually involves contractual relationships with specified end dates, clients can restart the process and consider new activities upon each partnership renewal. A cross-loop review is also possible, where an organisation moves from one node in the strategy loop to a node in the risk loop. The versatility of the model allows for continuous adaptation and improvement in outsourcing strategies and risk management practices.
The fintech revolution continues
The fintech era has long arrived, and the interplay between innovative technology and financial services will continue to expand. As technologies advance, so will the need for incumbent banks and other FIs to adapt their services accordingly. Amid the expected growth in demand for fintech services, FIs will increasingly see outsourcing partnerships with fintech providers as essential. “Many new forms of fintech services are coming up, so outsourcing will be a continuous demand. With the need to mitigate risks and bring in innovation, I believe our methodology will be highly useful and practical to banks and other FIs,” says Dr Thng.
Technology and outsourcing risk management and fintech innovation are taught in the SMU Master of IT in Business (MITB) programme, in which Dr Thng is the Director of its Financial Technology and Analytics track. “We want to equip our students with the methodologies to effectively manage fintech partnerships and integrate innovations while mitigating risks,” he says. “This ensures that our graduates are well-positioned to handle the dynamics between banks and fintech startups in the real world.”
In conclusion, the advantages of this outsourcing model extend far beyond the financial sector. With the right adjustments, it has the potential to transform other highly regulated sectors that manage sensitive data like financial services – think healthcare and medical technology. In Dr Thng’s opinion, a successful outsourcing partnership, regardless of the sector, presents a mutually beneficial situation where both vendors and clients can compete profitably and increase customer satisfaction.
