Outsourcing is a phenomenon that has been popular in the financial services industry over the last decade as a way to reduce costs. But outsourcing operational functions to another player can have a boomerang effect.
– In the long run, there are consequences that many policy makers and regulators risk underestimating and that can be very costly and difficult to address,” says Michael Weitman of Clara Financial Consulting.
Outsourcing administrative functions in securities trading and asset management may seem like a logical way to restructure operations to cut costs. Outsourcing has often been done, directly or indirectly, to low-wage countries such as Poland, India and the Baltics, where staff costs are on average significantly lower than in Sweden.
The idea of outsourcing what is identified as “non-core business” sounds understandable. Like other industries, the financial services industry wants to focus on the “core business”, generating profits and where it believes it can compete. But outsourcing core operational functions in finance may be a bad solution in the long run for several reasons.
– Finance is vital to society. It provides functions that enable businesses and people to save and reallocate risk. This places high demands on both reliability and availability,” says Michael Weitman, who has been working in the financial services industry for over 25 years.
– Decisions about outsourcing in the financial services industry need to take into account long-term strategic aspects and not be made on the basis of short-term static analysis, says Michael. High staff costs combined with manpower-intensive manual operations are a challenge, but outsourcing risks losing the critical mass of skills needed to manage risk and grow the business in the long run. This is something we are already seeing signs of. In the long run, it is not sustainable and can lead to a loss of capability and competitiveness,” says Michael.
Automation and standardisation is the solution
It is important that industry players safeguard the availability of qualified skills. Industry collaboration, maintaining operations in the local area and access to a cluster of local and regional specialists are needed to maintain control and the ability to future-proof their business.
The way forward is a higher degree of standardisation and automation to streamline operations and to strengthen the capacity for change. Smarter use of systems and human resources will achieve a better return on the operational platform that already exists and is required to run the business.
– Keeping your Tesla in the garage and driving a taxi is not good business. Efficiency measures and skills development are better than outsourcing in the long run. A retail business that lacks expertise in warehousing and logistics risks being quickly lost to competition.
– Sweden is at the forefront internationally in many areas of financial services development and IT. With this in mind, it is strange that decision-makers think that their business processes can be produced better in other countries. The individual organisation and Sweden risk losing ground, foregoing development potential. That is why we need to bring the industry together in Sweden. To counteract the damage that outsourcing risks bringing to the industry, we need a joint effort and a strategic agenda focused on Sweden becoming a world-leading centre of excellence in the financial sector,” he concludes.
[1] The Swedish Financial Supervisory Authority defines the terms Outsourcing, Outsourced Activities and Outsourcing as “when a firm enters into an agreement with a supplier to perform (in whole or in part) a process, service or other activity that the firm would otherwise perform itself.” (Outsourced Activities | Finansinspektionen)
