Using multiple vendors is a widely-spread approach to outsourcing in which IT operations and technology infrastructure are contracted to a number of vendors, usually in combination with some internally provided elements of information technology. At the other end of the spectrum, you have fully in-house IT provisioning and sole-source outsourcing models.
There are many reasons why a company would choose to outsource to multiple vendors. Outsourcing enables an organization to augment in-house capabilities without making long-term commitments or large capital investments, or to improve service levels and reduce costs.
Working with multiple vendors allows companies to focus on their main business capabilities, ensuring superior competency, asset transfer, utilization improvement, economy of scale and business risk mitigation.
“From a qualitative perspective, benefits may include increased stakeholder satisfaction or increased proactive innovation and transformation opportunities identified by the outsourcer.”
The basics of vendor management
Vendor management allows companies to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle. This enables them to optimally develop, manage and control vendor contracts, relationships and performance for the efficient delivery of contracted products and services and help their clients meet business objectives, minimize potential business disruption, avoid deal and delivery failure, and ensure more-sustainable multisourcing, while driving the most value from their vendors (Gartner).
Vendor management can be centralized as a function within the client company or delegated to a vendor management organization, when dealing with many vendors, with vendors crossing functional areas or with few vendors with many contracts.
“As clients look for ways to address the challenges of overseeing increasingly complex multi-vendor service delivery models, vendor management will establish itself as a way to provide a high-level, enterprise-wide view while at the same time managing day-to-day operational details and multiple touch points between different providers in the service delivery chain.”
Mike Slavin, Alsbridge managing director for CIO.com
Regardless of the preferred sourcing model and the mix between in-house and outsourced management, it is important for companies to develop an effective operating model. This structure will be required to support the integration of the communications technology portfolio with the wider IT eco-system and facilitate the interaction between external vendors and internal business units.
In TJIP’s case, we handle our own vendor management, since we only work with other partner companies. Within our company, we have someone in charge of quality and cost effectiveness of our vendors’ services, to ensure that everything goes smoothly.
How the finance industry benefits from this practice
Since the 1970s, banks and other businesses have used outsourcing for functions unrelated to their core business, including clerical, record storage, accounting, data processing, security and plant maintenance. Outsourcers could often do the work at a fraction of the cost of what companies spent to maintain themselves, helping fuel the growth of the outsourcing industry.
Life insurance providers, for example, are one of the first early adopters of IT, due to the importance of data processing for their core business. Over time, most insurers developed IT environments largely based on mainframe technology, which, at the time, was efficient and dependable. However, after the initial phase of early adoption, insurers did not maintain the level of investment in newer technologies such as open systems, multi-tier architectures and data management tools. As a consequence, they found themselves with a number of admin systems that were efficient but not particularly agile or flexible in servicing their customers.
Outsourcing to multiple vendors became the solution to addressing these issues, shifting the insurer's’ responsibility to managing the quality of overall processing, managing customer escalations and managing the service provider’s performance. At TJIP, we’ve worked with a number of financial service providers to extend the product lifetime of their legacy systems by connecting them to our product modelling tool (Dialoque), using our enterprise service bus. This way the old systems can still be used by customers who are expecting a modern system.
Today, the finance industry is turning to multiple vendor outsourcing for its scale and flexibility, that enables companies to tap into the deep knowledge of tech-savvy providers and develop cost saving strategies.
According to the World Retail Banking Report, 77% of retail banks now outsource at least one part of their business. Common industry estimates show that outsourcing provides banks with a saving of 20%-40%, depending on whether processes are located locally or abroad. Moreover, banking and finance companies outsource application development at a higher-than-average rate, with 71% outsourcing some application development work, according to the 2016/2017 IT Outsourcing report.
The outsourcing marketplace growth has enabled top retail banks to outsource their mortgage application process to service partners who can process them at a lower cost, using industry-standard process flows and technology, and leading insurance providers to have their claims quickly and expertly managed, processed and settled by third-parties.
Through outsourcing, financial services institutions can address strategic objectives such as:
- Efficiency – implement shared services as a lever to release costs through economies of scale and labor arbitrage.
- Effectiveness – Simplify transactional activities, allowing a focus on value-added activities such as business partnering.
- Risk Management -- Spread operations across locations to maintain business continuity and help reduce dependency on specific economies.
- Agility – Gain access to standardized, scalable and specialized solutions to reduce time to market for new services.
- Service Quality – Gain access to specific talent and processes to establish domain specialization.
- Capital Efficiency – Release capital through efficient and effective sourcing.
Why outsourcing is a great way to drive innovation
Rather than spending resources on in-house product development or risking an R&D investment, outsourcing enables companies to partner up with third-party technology providers that excel in their niche. According to Gartner, transformation of financial services business and its supporting technology is critical to driving innovation.
It’s a new age of business and technology agility that financial services organisations can leverage to combat the continued market volatility and optimise their return-to-growth opportunities.
Working with multiple vendors is an opportunity to look at processes, technologies, architectures, cost structures and operating principles through different lenses, that enable improved operational effectiveness and competitive differentiation.
One of the biggest advantages we’ve found when working with multiple vendors is the flexibility in managing business change and the innovation capacity brought on by different people across global teams. The whole brain capacity of our own company has grown exponentially since we are not only using the expertise and ideas of our employees, but also of the teams we hire, and even those of their colleagues, who are consulted internally when it comes to delivering the best results. See also our case study in SlideShare 'Multi-Vendor Outsourcing for the financial industry'.
How it enables long term cost savings
Infrastructure costs are probably the first thing to come to mind when talking about cost savings. The admin and hardware costs for outsourcing vendors tend to be lower, as vendors typically share platforms across multiple clients. Moreover, the outsourcing vendor can support its application more efficiently, reducing application support costs.
Human resources is also a key cost saving point, in the long term. Instead of recruiting, training and developing in-house IT specialists, financial service companies can focus their focus on managing key business processes and ensuring product quality. Outsourcing partners can often ensure higher skilled talent, in low-cost locations around the world.
The overall shift in focus enables higher innovation in developing new products, exploring new markets and combating market volatility, all brought on by the outsourcing of IT services to third-party vendors.
There are, however, some risks associated with outsourcing to multiple vendors, as well as an initial investment from the part of the client company. Depending on the situation, the cost of migration to an outsourcer’s systems may be high. There are also other costs associated with integrating the outsourcer’s platform with the financial company’s internal systems such as finance, commissions, valuation and reporting. These integration costs have the potential to affect the overall business case.
The difference that outsourcing made for TJIP
Outsourcing has enabled us to provide superior software products to our clients in the financial industry, that differentiate them from other providers. We provide our customers with software that connects ‘the world’ to their front office, including a lot of external services but also internal back end systems, legacy or not. It’s because our customers are looking to outperform their competitors that they have chosen to build customized software instead of more generic, off-the-shelf applications, that we provide together with our partners.
Working with multiple vendors has enabled TJIP to deliver solutions that provide advantages for our customers whenever ‘something unique’ is required. Those solutions are needed not only within the financial market, but almost everywhere. This has enabled us to gain a considerable amount of experience in the financial market, where we developed customized software in large scale environment for high demanding customers.
If you’d like to find out more about the specific steps that we undergo when selecting vendors and what our vendor management strategy is, download our Case Study On Multi-Vendor Outsourcing For The Financial Industry.