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The recent job cuts in The City will be of little avail if Wholesale Banks don't follow up with strategic moves to deliver long-term cost savings, warns management consultancy Bluerock Consulting in a new study. It also suggests that there is a significant 'first-mover' advantage to be gained by institutions who overcome The City's traditional reluctance to adopt outsourcing.

Chris Beer, Head of Investment Banking consulting at Bluerock, said: "The downturn this year and recent cut backs made by Wholesale Banks means that they are in an excellent position to outsource key business processes while per transaction costs are lower than in a period of market buoyancy. The flexibility afforded through outsourcing, combined with careful strategic planning, will help banks to position themselves for rapid growth when economic recovery happens.

"Continued pressure on settlement cycles and stringent regulatory requirements mean that the expense of maintaining and improving Wholesale Bank infrastructures continues to escalate. The outsourcing proposition enables City institutions to address these issues in a cost effective manner and to concentrate on what they do best: realise shareholder value through the capture and cultivation of investor relationships.

"Since very few Wholesale Bank business processes are outsourced at present, a real opportunity exists for early movers to shape the market. Outsourcing providers will tailor their services to fit the requirements of their early customers, with late arrivals either having to accept packages designed for rivals or being forced to pay a premium for bespoke services.

"There is enormous growth potential here. Our estimates show that as many as 80% of The City's banks are considering sourcing options for their back and middle office functions. Annual overheads savings of 40% have been achieved using outsourcing arrangements in other areas of the Financial Services sector."

Chris Beer continued: "To date, senior management focus on M&A activity, coupled with concerns about losing control of key business processes has delayed the adoption of outsourcing arrangements across the sector. Whilst it is understandable that banks want to hold on to their business critical functions, we feel they have often defined this too broadly."

Using the Study, Bluerock has developed '10 Rules' (see below) of outsourcing for the Wholesale Banking sector. Chris Beer added: "We took into account some of the key issues that require consideration when reviewing sourcing options and produced what we hope is a useful guide for those considering outsourcing as an operational strategy."


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Issued by Kelso Consulting on behalf of Bluerock Consulting


For further information, or to obtain a full copy of Bluerock's report, please contact:

Chris Beer
Bluerock Consulting
020 7743 6780
christopher.beer@bluerock-consulting.com

James Sheppard or Tim Prizeman
Kelso Consulting
020 7729 7595
jamess@kelsopr.com


Notes to editors:

The study was carried out by Bluerock and Continental Research during July & August 2001.


Bluerock was formed in 1999 to provide management consultancy service to the financial services industry. Since inception they have attracted some of the best talent in the industry enabling them to provide their clients with experienced, hands-on consultants who understand the markets and the key business issues and can make change happen within their organisations.


Some Definitions

Middle Office

Key control function which links the activities of the 'Front Office' (brokers / traders) and the 'Back Office' (see below). The Middle Office is primarily responsible for managing bank's risk exposure and delivering reconciled Profit & Loss figures for Front Office activities.


Back Office

Typically covers all trade processing activities including clearing, settlement, accounts payable / receivable, reconciliations and investigations, together with liquidity management.


T+1

The UK financial market currently operates a T+3 clearing and settlement convention for equities - meaning it takes 3 days from trade date for all documentation to be exchanged and payments to be settled. The US financial market is moving to a T+1 convention in 2004, with Europe and the United Kingdom set to follow sometime after - although no firm dates have been set.



The 10 Rules of Outsourcing in Wholesale Banking

1. Outsourcing is strategic. Economic gains will take time to accrue (and these will need to identified carefully). As with any change programme, there will be an up-front cost incurred to achieve later savings. A detailed analysis is therefore required for a discounted cash flow perspective and developing a benchmark cost per transaction. Furthermore, the time taken from strategic decision to full implementation of an outsourcing arrangement could well take at least 2 years for certain products or functions. “It’s not something you can do quickly. People often don’t understand that. It’s a 2-3 year process.”

2. Empower Senior line management. Only line managers will have sufficient understanding of the candidate function or process to enable a fully informed process of assessment and due diligence. The empowering of existing management will increase acceptance and buy-in from staff. Uncertainty of change is a major issue for all staff affected and needs a sympathetic approach. In today’s market this is increasingly important to the banking community.

3. Use external parties wisely during the decision making process. They can be of assistance if applied properly (for facilitation, advice and implementation). The decision to outsource a function or process however, can only be taken by managers of the business question; consultants should assist management and not “do it to them”.

4. Retain dedicated resources. Dedicated teams should be kept to interface between the buyer and service provider (to preserve anonymity where appropriate) and manage the Bank’s account with the service providers (to retain control and accountability). Professional service management function is required from day one to manage the transition and on-going relationships. The management of this function will dictate the style and success of the outsourcing contract.

5. Know your business. This requirement has two dimensions, firstly, a clear appreciation of operational strategy so the appropriateness of outsourcing as a response to key business drivers can be properly assessed. Secondly, understanding the core aspects of the functions (people, processes and technology) to be outsourced, enabling the development of an effective SLA. Only through this clarity of purpose can the proper benefits of an outsource relationship be realised.

6. Stay close to your customer. If you are outsourcing customer facing processes or those close to the customer relationships with the bank, then proceed with extreme caution. While there are numerous examples outside of Investment Banking, Bluerock’s experience of the wholesale banking market would suggest this is a step too far.

7. Accountability is fundamental. This can be achieved by a clear and mutually understood Service Level Agreement, together with a system of metrics which will objectively measure the quality of service provided. “It really comes down to having good service level agreements.” The SLA framework must be managed by a professional service management function. If this is not staffed appropriately then the service provider will not meet expectations over the longer term. Metrics need to be aligned by both parties, however the Bank must determine its current metrics (cost and volume) prior to any outsourcing agreement, so that improvement can be measured.

8. You can’t outsource responsibility. The responsibility for delivering products and services to your customers will remain yours, irrespective of who undertakes the operational aspects of your business. This is particularly true in Wholesale Banking, where most aspects of customer interaction will be retained by the bank. In this sector, the quality of service provided will be heavily impacted by quality of trade data and information delivered to the supplier.

9. ‘One size doesn’t fit all’. A single service provider may not be the correct solution for all your candidate functions and processes, whatever economies of scale might be realised. For example, it is unlikely that an outsourced service provider for treasury products will be able to deploy a similar level of operational or technical expertise to unrelated product lines such as equities.

10. Know your partner. Understanding the service provider’s business model is crucial to the prospects of developing a long term and mutually beneficial strategic relationship. It will enable the buyer to verify the compatibility of it’s objectives, assess the service provider’s ability to respond to changing business needs and enable the bank to engage in proper scenario planning (on how to react to changes in the market or regulatory environment, for example). Any due diligence enquiries should also focus on the continued economic stability and corporate independence of your candidate outsourced service providers. This is why a number of organisations have taken stakes in their outsourcing provider to ensure full disclosure of information.

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