Banking on IT Outsourcing: Finding the Sweet Spot
If you are a tech leader, chances are you have been asked this question: ‘what is the optimal degree of IT talent outsourcing?’ We have discovered that the answer is around 21% overall, but there are other critical levers to consider.
Banks are under mounting pressure to find their IT capability sweet spot, balancing internal and external resources in a bid to manage operational costs and maximize their competitive advantage. In collaboration with Expand, a BCG subsidiary for benchmarking in financial services, we have gathered the empirical data.
Our investigation featured 55 banks of various sizes, which we made comparable by translating absolute IT cost into IT ‘intensity’ – defined as a percentage of IT cost over operating expenditure. This ratio offers a more stable basis than IT cost over income due to revenue fluctuations.
By reading this article, you will discover how the right approach to externalization enables financial institutions to streamline IT operations while powering digital transformation.
The Make-or-Buy Tightrope
While the optimum level of IT outsourcing to balance operational and investment requirements was found to be 21%, the cost curve stayed relatively flat among those outsourcing between 8 and 34%. In cases where externalization surpassed 34%, we found increases in IT intensity – this tends to be caused by overly ambitious outsourcing and the loss of critical capabilities in the retained organization.
Of the 55 banks we examined, 23 were outsourcing more than 34% of their IT capability and incurring significantly higher IT costs as a result. According to our findings, this is the case for any bank with more than one external full-time equivalent (FTE) for every two internal FTEs.
Some banks (8 of the banks in our sample) were managing to balance their costs and performance with less than 8% of their IT capability being outsourced, but others in this category were experiencing significantly higher costs.
Execution is Everything
For banks outsourcing between 10% and 34% of their IT capability, positive cost outcomes depend far more on execution than the amount of outsourcing they do. With a strategic approach to externalization, firms can realize game-changing scalability without substantially increasing their IT spend.
Engaging with specialist external vendors equips banks with the skills and technologies to develop a competitive advantage - without heavy upfront infrastructure or software investments. By doing this in an informed way, banks can keep their IT outsourcing close to the magic 21% mark and avoid third party dependency for Run-the-Bank operations.
Third-party risk management, particularly data security and cyber-risk support, should be a top consideration for banks when optimizing their IT outsourcing. Not only will external expertise and capabilities help banks successfully comply with new regulations like the Digital Operational Resilience Act (DORA), but it will also significantly reduce the operational burden.
Fine-tuning Your Approach
Our study confirms that the degree of IT outsourcing you do matters, and that costs are at risk of rising if you exceed the ratio of about one external FTE for every two internal resources. But despite this wide lens view, our experience shows that commodity IT services can run well with higher degrees of outsourcing. When it comes to differentiating IT capabilities, higher levels of in-house resourcing will be more beneficial.
Regardless of the industry you are in, you can fine-tune your approach to IT outsourcing and select the right vendor eco system. To find out more, get in touch with our expert team.
