In an age of technological innovation, companies are increasingly outsourcing critical services to external partners.
From business processes to talent management to navigating application development, the outsourcing landscape is undergoing major changes.
In the financial sector alone, the global outsourcing market is predicted to reach US$68.8 billion by 2030.
This growth is not only due to increasing demand and changing market trends, but is also a direct result of the transformative impact that advanced financial technology (fintech) has had on the sector.
The rise of FinTech is forcing financial institutions (FIs) to reevaluate and reinvent their operating models.
These financial institutions feel the need to become more competitive and transform how they deliver and manage financial services.
“Banks are realising that they are not as agile as fintech providers and therefore need to tap into the providers’ expertise to innovate,” said Dr Patrick Singh, principal lecturer in information systems. Singapore Management University (SMU).
However, the rapid growth and diversification of outsourcing has not come without its own challenges.
As financial institutions become increasingly reliant on outsourced services, efficiently managing these relationships becomes paramount.
The IEOM Award-winning paper “ “Rethinking Outsourcing Lifecycle Management in the Financial Services Era of Fintech” Dr Thng, together with Tristan Lim, a PhD candidate in engineering at SMU, introduced a new outsourcing lifecycle management model tailored to more effectively address the unique nuances of financial services.
Why is outsourcing management important?
“Cost reduction, lack of in-house capabilities and the need for rapid innovation are the main drivers of outsourcing.
“In areas such as artificial intelligence (AI) and deep data science, many financial institutions often lack expertise beyond their internal resources, forcing them to outsource.”
Dr Thng, former CIO/MD of DBS Bank, World Bank and BNP Paribas, explains:
Dr Thng emphasises that managing the outsourcing lifecycle is a key strategy for today’s financial institutions to align their operations with changing technology and market demands.
The benefits of adopting a lifecycle model are many: reduced risk through early problem identification, more predictable activities, and a unified approach during the planning and update phases.
As fintech brings new dimensions to outsourcing complexities and opportunities, two distinct challenges are emerging, forcing financial institutions to reevaluate traditional outsourcing lifecycle management models.
The first relates to the need for strategic management with a focus on innovation, with Dr Thng highlighting 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 important as financial institutions become increasingly reliant on external expertise to drive innovation beyond their in-house capabilities.
“It’s not just about adopting new technology; it’s also about strategic realignment with external innovators, such as fintechs and large technology companies. Financial institutions that are successful in this area are able to increase the impact of their in-house investments while reducing the cost of innovation.”
Dr Thng adds:
The second challenge is the emergence of risks related to fintech: when multiple parties are involved in the outsourcing process, responsibilities are often unclear and operational issues can arise.
This complexity is exacerbated in the fintech space, where operational, compliance and cybersecurity risks can seriously derail a financial institution’s outsourcing strategy.
Moreover, regulatory violations can lead to large fines and damage to reputation, a highly valued asset for any financial institution.
A Strategic Risk-Based Model for Fintech Outsourcing
Existing non-proprietary outsourcing lifecycle management models, such as ISO standard 37500, offer a generic four-stage approach with outsourcing governance at its core.
Another example is the National Outsourcing Association’s Outsourcing Life Cycle, which emphasizes the importance of active governance and aligning outsourcing activities with organizational strategy.
While these models are comprehensive, they often lack the specificity and nuance required for the financial services sector.
To address these limitations, Dr. Thng and Tristan proposed a new strategic risk model based on a model in a paper by researcher Sara Cullen and team. Managing Outsourcing: Life Cycle Matters.
“Standard outsourcing lifecycle methodologies are very common. As many banks did not know how to work with fintech providers and enter into appropriate outsourcing agreements, we felt it was necessary to develop a model that addressed the risks and aspects specific to the financial services sector, and fintech risks in particular.”
Dr Thng says:
The strategic risk model features a unique two-loop design: a strategy loop and a risk loop, with each loop consisting of seven nodes representing the different stages and activities performed in the outsourcing process.
Both loops converge at the eighth node, “Research,” which is the starting point for an organization to assess its outsourcing needs, define business requirements, and gather market intelligence.
The strategy loop includes activities such as identifying fintech outsourcing opportunities, conducting feasibility studies, and designing outsourcing deal structures. These actions will:
Financial institutions will strategically manage their fintech outsourcing with a focus on innovation to stay ahead of rapidly evolving advancements and customer demands.
The risk loop includes activities such as establishing relationships with key stakeholders, conducting due diligence, and controlling organizational and industry-level risk exposure to ensure a comprehensive approach to risk mitigation.
The strategic risk model is a robust tool because it takes an iterative, sequential approach: by revisiting each stage or node, you can improve your outsourcing outcomes.
Outsourcing typically involves a contractual relationship with a specified end date, so that clients can restart the process and consider new activities with each renewal of the partnership.
Cross-loop reviews are also possible, where an organization moves from one node in the strategy loop to a node in the risk loop.
The versatility of this model allows for continuous adaptation and improvement of your outsourcing strategy and risk management practices.
The fintech revolution continues
Fintech has been around for a while now, and the interplay between innovative technologies and financial services will continue to grow.
As technology advances, incumbent banks and other financial institutions will need to adapt their services accordingly. With demand for fintech services expected to increase, financial institutions will place increasing importance on outsourcing partnerships with fintech providers.
“With many new forms of fintech services emerging, outsourcing will be a continuing demand. We believe our methodology will be extremely useful and practical for banks and other financial institutions due to the need to mitigate risk and bring in innovation.”
Dr Thng says:
Technology and outsourcing risk management, and fintech innovation are taught in SMU’s Master of Information Technology in Business (MITB) programme, where Dr Thng is the Financial Technology and Analytics course director.
“We want to equip students with the methodologies to effectively manage fintech partnerships and integrate innovation while mitigating risk. This will enable our graduates to successfully navigate the dynamics between banks and fintech startups in the real world.”
He says.
In conclusion, the benefits of this outsourcing model go far beyond the financial sector.
With the right tweaks, it has the potential to transform other highly regulated sectors that manage sensitive data, such as financial services, including healthcare and medical technology.
In Dr Thng’s opinion, regardless of industry, a successful outsourcing partnership creates a mutually beneficial situation where both vendor and client can compete profitably and increase customer satisfaction.
Dr. Thng will be one of the speakers at SMU’s MITB information session on June 29, 2024. Register to attend the session and learn more about SMU’s MITB program and exclusive scholarship opportunities. here.