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In the era of technological innovation, companies are increasingly outsourcing critical services to external partners.
From operations management to human resources management to application development management, the outsourcing landscape is changing.
In the financial sector alone, the global outsourcing market is expected to reach a value of $68.8 billion by 2030.
This growth is not only the result of increasing demand and changing market dynamics, but a direct consequence of the transformative impact of advanced financial technology (fintech) on the sector.
The rise of fintech has pushed financial institutions (FIs) to reassess and reform their operating models.
These institutions see the need to strengthen their competitive advantage and transform the provision and management of financial services.
“Banks are starting to realize that because they are not as agile as fintech providers, they need to leverage the latter’s expertise in innovation,” says Dr. Patrick Thng, Master of Technology. conferences in information systems at university. Singapore Management University (SMU).
However, the rapid growth and diversification of outsourcing has not come without challenges.
As financial institutions increasingly rely on outsourced services, effectively managing these relationships becomes paramount.
“Cost reduction, lack of internal capabilities and the need for rapid innovation are the main drivers of outsourcing.
Areas such as artificial intelligence (AI) and deep data science often require rare expertise beyond many financial institutions’ internal resources, forcing them to outsource.
says Dr Thng, former CIO/MD of DBS Bank, World Bank and BNP Paribas.
Dr. Thng highlights that outsourcing lifecycle management is a crucial strategy for today’s financial institutions to enable them to align their operations with evolving technologies and market demands.
The benefits of adopting a lifecycle model are multiple, including risk mitigation through early identification of issues, improved business predictability, and a unified approach in the planning and renewal phases.
As fintech introduces new dimensions of complexity and opportunity to outsourcing, two distinct challenges have emerged, prompting financial institutions to re-evaluate traditional models of outsourcing lifecycle management.
The first concerns the need for strategic management focused on innovation. Dr Thng highlights the importance of a risk management model that can take into account the unique aspects of the financial services industry and the trend towards fintech.
This is particularly relevant as financial institutions increasingly rely on external expertise to drive innovations beyond their internal capabilities.
“It’s not just about adopting new technologies; it is also a strategic realignment with external innovators such as fintech and large technology companies. Financial institutions that succeed in this area have managed to reduce innovation costs while improving the impact of their internal investments.
adds Dr Thng.
The second challenge is the emergence of fintech-related risks. Involving multiple parties in the outsourcing process often leads to unclear responsibilities, potentially creating operational issues.
This complexity is exacerbated in the fintech context, where operational, compliance and cybersecurity risks can significantly derail FIs’ outsourcing strategy.
Additionally, regulatory violations can result in significant fines and loss of reputation, a highly valued asset for any financial institution.
A risk-based strategic model for fintech outsourcing
Existing non-proprietary outsourcing lifecycle management models, such as ISO 37500, offer a generic four-phase approach with outsourcing governance at its center.
Another example is the National Outsourcing Association’s Outsourcing Lifecycle, which highlights proactive governance and the importance of aligning outsourcing activities with organizational strategy.
Although comprehensive, these models often lack the specificity and nuance needed by the financial services industry.
To address these limitations, Dr. Thng and Tristan proposed a new strategy-risk model that builds on a model from researcher Sara Cullen and her team in their paper: Managing outsourcing: the life cycle imperative.
“The standard outsourcing lifecycle methodology is quite generic. We felt it was necessary to develop a model that took into account the unique risks and aspects of the financial services industry, particularly fintech risks, as we had observed many banks that did not know how to work and develop appropriate outsourcing arrangements with fintech providers. »
said Dr Thng.
The Strategy-Risk model has a distinct 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 node “Investigation”, which is the starting point where organizations assess their outsourcing needs, define their business requirements and gather market intelligence.
The strategy loop encompasses activities such as identifying fintech outsourcing opportunities, conducting feasibility studies, and designing outsourcing agreement configurations. These actions allow
Financial institutions must strategically manage fintech outsourcing with a focus on innovation to stay ahead of rapidly evolving advancements and customer demands.
The risk loop involves activities such as building relationships with key stakeholders, conducting due diligence and monitoring risk exposure at an organizational and sector level to ensure a comprehensive mitigation approach risks.
What makes the Strategy-Risk model a robust tool is its sequential iterative approach. Each step or node can be revisited to improve outsourcing results.
Because outsourcing typically involves contractual relationships with specified end dates, clients can restart the process and consider new activities with each partnership renewal.
A cross-loop review is also possible, when an organization moves from a node in the strategy loop to a node in the risk loop.
The versatility of the model allows for continuous adaptation and improvement of outsourcing strategies and risk management practices.
The fintech revolution continues
The fintech era has long arrived, and the interaction between innovative technologies and financial services will continue to expand.
As technologies advance, incumbent banks and other financial institutions will also need to adapt their services accordingly. With the expected growth in demand for fintech services, financial institutions will increasingly view outsourcing partnerships with fintech providers as essential.
“Many new forms of fintech services are emerging, so outsourcing will be an ongoing demand. Given the need to mitigate risks and innovate, I believe our methodology will be very useful and practical for banks and other financial institutions.
said Dr Thng.
Technology and outsourcing risk management and fintech innovation are taught in the SMU Master of IT in Business (MITB) program, in which Dr. Thng is the director of its Financial Technology and Analytics track.
“We want to equip our students with the methodologies necessary to effectively manage fintech partnerships and integrate innovations while mitigating risks. This ensures that our graduates are well-positioned to manage the dynamics between banks and fintech startups in the real world.
he said.
In conclusion, the benefits of this outsourcing model extend far beyond the financial sector.
With the right tweaks, it has the potential to transform other highly regulated industries that handle sensitive data like financial services – think healthcare and medical technology.
In Dr Thng’s view, a successful outsourcing partnership, regardless of industry, presents a mutually beneficial situation in which suppliers and customers can compete profitably and increase customer satisfaction.
Dr. Thng will be one of the speakers at SMU’s upcoming MITB information session on June 29, 2024. Register and join the session to learn more about SMU’s MITB program and exclusive scholarship opportunities. here.
