Outsourcing Consultation for IT Infrastructures for Two Newly Merged Banks

Scenario:

You are an outsourcing consultant hired by a UK-based Bank. Three months ago, the bank has merged with another, smaller bank that is specializing in online banking services and since the merger has been struggling to integrate IT systems and services between the two banks. Different IT infrastructures, software applications, and inconsistencies in services that the two banks have been offering to their customers created the needs to standardize the IT infrastructure and centralize provision of IT-enabled services (support functions and online banking services) as a matter of strategic priority. Since the Bank does not have enough in-house expertise to devise such transformation, outsourcing is considered the way forward.  The Bank has limited experience with outsourcing; therefore, it was decided to hire an experienced outsourcing consultant (You).

As a consultant you received the following brief describing background and key characteristics of the two banks that have merged:

	Bank A	Bank B
Business model	Old, traditional bank, with physical offices in large cities in the UK (costs associated with running these offices are high)	Relatively new bank (“born in the cloud”); is only providing online banking services, no physical offices for the customers to visit. Employees are based in one facility in a brain-park outside Birmingham. Extensively use marketing to attract customers
Outsourcing experience	Limited outsourcing experience. The tendency has always been to do in-house whatever possible. Lately started experimenting with outsourcing some of support functions: last 2 years have been outsourcing accounting and HR management functions. Occasionally have been using external marketing agency to advertise new banking products	Have extensive outsourcing experience, as some of the functions such as IT helpdesk for the bank’s employees, data centre, IT infrastructure and maintenance of online banking services have always been outsourced.
In-house functions	Data centre, IT helpdesk, banking-product development, application development and maintenance (still have some legacy applications to support)	Call center, advisory, marketing, banking-product development, mortgage portfolio, investment portfolio and risk management
Personnel for in-house functions	300 employees Average age 44 years	50 employees Average age 27
Operating margins for in-house functions	5%	12%

You need to provide detailed report with your recommendations regarding how should the Bank approach the challenge of standardizing the IT infrastructure and centralizing provision of IT-enabled services.

Solution

Case Scenario:

The case scenario is based on the challenges of standardisation and centralisation faced after the merger of two banks; Bank A and Bank B. The acquiring bank is facing the challenge in the integration of IT systems and services among the two banks. The difference in the IT applications, services, and infrastructure between the two banks is causing inconsistencies and confusion for the employees and customers. The IT enabled services including the online banking services, and the support services are needed to be standardised for the merged companies. For this purpose, the company has considered outsourcing. This report analyses and provides recommendations for the outsourcing process.

Bank A:

Bank A is an old traditional bank with large physical offices situated in cities. High costs are needed to operate these offices. The company has very little outsourcing experience and has been doing jobs in-house whenever possible. The company has outsourced HR, marketing, and accounting functions in the past. The in-house functions of the bank include IT Helpdesk, Datacenter, application development, and support, banking product development. The company has 300 personnel with an average age of 44 years. The operating margin earned from in-house functions is 5%.

Bank B:

Bank B is a relatively new bank, which is providing online banking services. The company does not have any physical office and use extensive marketing for customer attraction and retention. The company has extensive outsourcing experience in IT helpdesk, data centre Infrastructure, and online banking services. The in-house functions include call centre, marketing, banking-product development, investment portfolio, risk management, and advisory. The company has 50 employees with average age 27. The in-house functions operating margin is 12%.

Aim:

Providing Recommendations for outsourcing of the Standardizing of the IT Infrastructure and Centralization of the IT-enabled services

Part 1: Decision Making:

For the outsourcing of the IT Infrastructure and IT-enabled services, the Bank A does not have extensive experience. However, Bank B has extensive experience of outsourcing of the Data Centre, IT infrastructure, and online banking services maintenance. The outsourcing process can be handled by the Bank B if needed. In the outsourcing process, the first step is to analyse which sourcing models are appropriate for the Banks.

Sourcing Models

There are various types of sourcing models present for the banks. The appropriateness of the sourcing model for the bank depends on the; i) function to be performed by the subsidiary or supplier ii) premises of sourcing is on-site or off-site. The In-sourcing model would not be appropriate as it needs in talent development. Impact sourcing and captive sourcing is also not appropriate for the bank. Offshore sourcing can be advantageous, however, as the acquiring firm is more traditionally based firm with giving importance to physical presence and locations, it can provide challenges for communication

Firstly, we need to analyse the suitability of resources, processes, and activities for sourcing before making the sourcing decision. The bank has already identified the need to outsource. For the decision of the sourcing model we can use the following model which has been taken from (Aron & Singh, (2006).

Operational Risk	High	Near-shore	Captive Centre-Near/Onshore IT infrastructure (IT support functions) (IT-enabled services)	In-house and onshore
	Moderate	Offshore	Outsource-extended organisation offshore	Captive Centre Offshore
	Low	Offshore	Outsource-extended organisation offshore	Outsource-extended organisation offshore
		Low	Moderate	High
Structural Risk

Looking at the model, we can now decide on the sourcing model. For all the three functions; IT support functions, IT-enabled services, and IT infrastructure, the best sourcing model is Captive Centers Nearby or Onshore Outsourcing (Oshri et al., 2013). As the company wants to outsource and cannot build captive centres, onshore outsourcing is selected. Any company needs to assess and evaluate all aspects of the function or project before deciding on the sourcing model. The example of this can be of the Sheen-USA. The founder of the company Xin did not conduct any research or investigation and used his own experience and intuition for the decision on the sourcing model. There were many steps which were neglected by Xin during the evaluation of the sourcing models (Oshri et al., 2015, p.96).

Potential Benefits

The main benefit with onshore domestic sourcing would be that a contract with the third party within the same country will be made. The domestic outsourcing makes it easier for the suppliers and the client organisation to communicate and visit each other. As the client organisation here is a traditional firm, the physical availability of access to the suppliers will make it more comforting.

Potential Risks:

The potential risk of ignoring better suppliers at lower cost in other offshore and nearby countries is present. There can also be the risk of having not the best supplier for the job. It can also be more costly as compared to other offshore alternatives.

Supplier Configuration

After selection of the sourcing model, the next step is to consider supplier configuration. It is important to choose the right supplier with the specialisation in the service needed. Moreover, it is also needed that the right configuration of the outsourcing arrangement is devised. The configuration options include best-of-breed model, the panel method, prime-contractor model, and sole-supplier model. Each model has its pros and cons. In the sole supplier model, the bank would be dependent on one supplier. The benefit of this model is that one supplier is solely accountable for all the outsourced functions and thus governance is easier. However, there is the risk of compromising quality in this model. The best-of-breed configuration can also be used if there are some supplies available in the market (Cullen, 2005). Multi-sourcing is considered as the right approach for outsourcing of interdependent IT and IT-enabled services from internal and external suppliers. This model has been used by competitor banks for the outsourcing of IT support service, IT-enabled services, and IT Infrastructure. ABN AMRO’s contract with IBM, Tata, Accenture, Infosys, and Patni Computer systems is the example. The Bank will benefit from this approach by increasing competition among suppliers and lowering operational, strategic risk and dependency. The disadvantage is the low possibility of investment to be made by the supplier for development of client-specific capabilities.

Supplier Selection Process

The outsourcing model depends on the success of the client-supplier relationship. It consequently depends on the selection of the right supplier for the company. For the right selection of the supplier, the configuration, and the market in which firm wants to operate is to be considered wisely. For the onshore outsourcing, the best way for selecting the configuration is to use multi-sourcing like Best-of-breed and operate it directly or through the Prime Contractor. For the Bank A, the most suitable option selected is that of Onshore Multi-sourcing (McIvor, 2005). It is beneficial and appropriate for the Bank as each of the suppliers would specialise in its service function. Moreover, the competition will create low risk for the bank. For the selection Process, the following steps should be followed;

Assembling of the selection team:

For this, the team which is to be selected should be cross-functional having expertise in both auxiliary and core functions. The team should have the roles which are going to be most affected by the outsourcing. A representative of the IT of both banks, Finance of both banks, human resource of both banks, and quality functions of both banks. The prior knowledge of supplier selection process will aid as most advantageous (Su et al., 2015).

Defining the process

The selection process should be standardised and documented. Transparency and documentation of each step of the selection process promote the unbiased selection process.

Assessment Process:

After receiving the responses from the suppliers, the bank needs to assess the pool of potential supplier and conduct shortlisting. The first step is to eliminate all the requests which do not meet the requirement of the RFP. Any offshore, or near sharing suppliers should be erased next.

Evaluation:

After shortlisting of the supplier’s request to a manageable shortlist, this step needs the selection team to assess the capabilities of the supplier in depth. The next criteria are to look for the;

–Relationship Competency – Organizational design, planning and contracting, governance, customer development, leadership, program management

–Transformation Competency – Process Reengineering, Technology Exploitation

–Delivery Competency – Business Management, Domain Expertise

The bank can use the weighted scorecard for assessment of the suppliers as following scorecard has been taken form (Baldwin et al., 2017).

Attribute	Indicator	Score	Weight	Weighted Score
Functional Capabilities	Project experience, relationship practices, resources available, staff expertise		0.2
Reputation	Past contracts, Ratings by past customers		0.1
Flexibility	Ability to keep up with deadlines, Change management practices		0.2
Technical Capabilities	Product development ability, vertical industry experience, quality metrics		0.2
Overall Expertise	Industry experience, similar project scope		0.1
Stability	Staffing Practice, Financials, the attrition rate		0.1
Trust	Past and current litigation, complaints of ex-clients, security, protocols		0.1
Total			1.0

Using this weighted score matrix, the suppliers can be scored and evaluated.

Proposal Evaluation:

This step includes assessment of the price quoted and the quality of the proposal presented by the respondents.

Due Diligence and Visit of Site:

It is an important step as it confirms or raises questions about the validity of the proposals. A visit to the potential supplier facilities is also encouraged to analyse the working environment better.

Assessing Vulnerabilities of Supplier:

This step needs to look for vulnerabilities or weaknesses of the suppliers. The weaknesses of the supplier will become the weakest of the client. Thus, this step should not be ignored.

Types of Contracts

The alternative types of contracts to be considered by the bank should be;

Time and material contracts

It relies on daily or fixed hourly fee and the costs of the supplies needed by the suppliers. As per this contract, the suppliers provide the service needed by the client and deliver it in-house. It is a less risky model of the contract for the client and is used for ERP implementation (Willcocks et al., 2017).

Fixed Price Contracts:

In these contracts, a fixed price for the large sum of work packages is agreed, and a deadline for the achievement of the targets is given. It is suitable for one-off implementation as well as the integration of the projects. This type of contract does not benefit both parties on a fair basis (Kehal & Harbhajan, 2006).

Fee-for-Service Contracts:

This type of contract has fixed fees designated to the small actual volume of work known as tickets. Such contracts are based on the fee per tickets, which is different for a different volume of work packages. It is based on a win-win situation for both client and supplier, in which supplier is motivated by incentives to provide an improvement to reduce the ticket volume (Kern & Willcocks, 2001).

Joint Venture Contracts:

It is one of the popular contract types in which the contribution of resources from both supplier and client is defined along with the sharing of the profits. It is best for offshore strategy as it aids in reducing risks, providing initial physical assets, funding, and intellectual capabilities.

The best contract type for the Bank would be Time and material contracts. It will benefit the Bank to agree on an hourly rate, and thus the service provided will be rated as per the time is given to it (Wolf, 2011).

Knowledge, Skills to be Retained or Developed

It is known that the client organisations often make mistakes during knowledge retaining capabilities which sabotage the whole outsourcing process. The bank needs to identify its core knowledge and skills area which is crucial for the customer (Claver et al., 2002). The few knowledge-based core competencies which should be retained by the Bank include;

• • Banking product development
  • Application development
  • Marketing
  • Portfolio and Risk Management
  • Call Centre and advisory
  • Mortgage Portfolio

Part 2: Transition and ongoing management of the outsourcing relationship

The poor management and governance of the outsourcing transition process and relationship are one of the main reasons which led to failed outsourcing contracts. The more planning in this phase will yield better results.

Designing of Transition of IT systems from Bank to the supplier

The transition stage of the outsourcing process is challenging because of the fact of the intense changes which occur during this phase. The setting up of the governance structure of the client-supplier relationship and the transition of the service from the client to supplier occur during this phase. The transition phase starts after the effective date of the contract and ends after the signing of the transition acceptance form. The outsourcing life cycle can also aid in helping to manage the process (Cullen et al., 2005). However, the actual transition process starts too early and ends too late (Gong et al., 2007). For transition of the IT systems from bank to suppliers, the following should already be in place;

1. 1. Transition Plan
   2. Disruption minimisation strategy
   3. Communication Strategy
   4. Staffing Arrangements
   5. Management functions
   6. Mobilised Resources

The major tasks needed to be reformed for setting up of the ongoing process are;

1. 1. Transfer of assets, contracts, information, people, and projects of which the supplier is going to be responsible in the future.
   2. Staff transition: The staff linked to the IT infrastructure, Datacenters, and support functions, which are not transferred to the suppliers, should be reallocated within the bank.
   3. Considering the Emotional impact of transition on employees: The transition phase has an impact on all employees; those who are transferred, those who remain in the bank, and those who are laid off. These change targets are needed to be focused on care and needed to be managed on time(Sople, 2016).

For managing of the transition project, the major areas to focus are:

Role and responsibilities defined: For this, the suppliers usually have their transition methodologies. The case study of ABN AMRO and TCS is an example in which ABN AMRO used the TCS transition methodology. For a definition of the roles for the transition project the Bank can use the table shown below and has been taken from (Vagadia, 2011).

Role	Description
Steering Committee	For guidance and strategic input in the implementation process, helping in decision making, monitoring, communicating progress, and milestone achievement
Transition Programme Leader	For management of the transition activities (IT infrastructure, IT-enabled services, support functions) in all divisions Report to Steering Committee
Transition Project Team Leaders	Each function would have an individual team leader- IT infrastructure, IT-enabled services, support functions
HR Representative	Assist in operating the retained organisation
IT Infrastructure Representative	Providing of technical advice, coordinating the IT infrastructure transition process, liaison with the supplier technical staff, testing and approving of the technical migration, operation functioning, and configuration
Communication Representative	Managing of the change leadership, development of the communication process, liaison with supplier communication staff, manage the feedback
Administration Representative	Provide logistic support, manage, control files

Intellectual Property and security: The transition process should be careful to not provide any unneeded access to the intellectual property and information. A monitoring protocol has to be set up for more security (Baldia, 2007).

Risk Assessment and Contingency Plans: The Bank should identify and document risks and respective contingency plans for Project risks, communication risks, operational risks, assets risks, employee risks, and retained organisation risks.

Knowledge Transfer and Training: The bank should ensure knowledge transfer regarding practices, systems, standards, and various protocols, with the supplier for uninterrupted service delivery by the supplier.

Communications: The bank should enable, develop, and maintain an effective communication plan within the banks, and between the supplier and the bank.

Close Out and acceptance: Provide feedback and approval for the transition process to the supplier.

Governance Mechanisms-for delivery of Outsourced services

Governance aims to ensure that the processes and structures developed are in the alignment of strategic objectives of the parties involved, for the governance of the relationship between the supplier and bank (Carmel & Tjia, 2005).

Service Level Agreement:

SLA will be ideal for using to govern the supplier bank relationship. It will detail the delivery of the services, and the quality expected of the service, the channels used for delivery of the service, and methods that should be used. It will also explain the conditions under which the services can be disrupted (Schütze, 2017).

Governing structure:

The interdependence of the outsourcing process of the Bank is very crucial as multi-suppliers are involved in it. The strategic importance of the outsourcing is also very crucial for the Bank. The complexity of the process is also high. It leads to the Transformational BPO governance model (Gervais, 2006). In this model, the contract puts emphasis on joint ownership. The relationship management is marked by coordination, and higher information exchange, the technological capabilities needed are also high (Parlour, 2016).

Relationship with Supplier

The more efficient the relationship with the supplier of the bank, the highest possibility of success is expected.

Using of collaborative technologies like;

• • Teleconferencing
  • Virtual whiteboards
  • Video conferencing
  • Group calendars
  • Electronic meeting systems
  • Discussion lists
  • Online Chat
  • Intranet and internet usage
  • Voice over Internet Protocol
  • Face to Face Meetings

Cultural aspects of communication should be considered while communicating and planning meetings (Beulen et al., 2010). This is very crucial like in the case study of the Russian Sauna with the Dutch Manager, the Dutch and Russian are seen to have different perceptions of time, Dutch planned, while the Russians were more spontaneous in meeting and working hours (Oshri et al., 2015, p.275).

Formal

The formal information flow structure should be developed by the following flow structure:

• • Creation of continuous interaction mechanisms, with the inclusion of weekly meeting in real-time
  • Iterations for continuous synchronisation
  • Frequent deliverables provided across distances
  • Standardization of the communication protocols
  • Development of awareness infrastructure
  • Development of the protocols for urgent activities and acknowledgements (Kirk, 2009)

Informal

The informal information flow structure should be developed by the following flow structure:

• Development of the cohesive team for encouraging the relationship between the distance
• Real-time interaction should be encouraged
• Do not send cold emails; put warmth in it by taking out the time to develop an e-touch.

Part 3: Future Outlook

Future Innovation Areas

For future innovation areas, the Bank should look into the following types of innovation channels;

1. 1. Building innovation on the market
   2. Investing in the innovators
   3. Co-Sourcing
   4. Community sourcing
   5. Resourcing (Gomes & Kruglianskas, 2006)

The innovation ladder is another tool which can best be utilised for future innovation areas.

1. 1. Strategic innovation
   2. Designing of the measurement instrument
   3. Assessing of supplier innovation ability
   4. Including innovation incentive in the contract
   5. Facilitating the relationship building between the supplier and bank
   6. Measuring and disseminating the innovative outcomes (Oshri & Kotlarsky, 2011)

The case study of the KPN where it challenges its suppliers bring innovation is a classic example. They used their network of suppliers for innovation power and only act themselves as facilitators. The strategy was to build the long-term relationship with quality-focused partners (Oshri et al., 2015, p.321).

Future Challenging Areas

The challenging areas in future would be to maintain the same level of authority, protocol following, and innovation with the suppliers. The bank also needs to look to continuously build a better relationship with the suppliers who are quality focused. The bank should focus on facilitating the suppliers for continuous innovation and provide incentives for it. The bank should keep its supplier qualifying protocols intact and keep checking the current suppliers for any misleading information.

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