01 May 2008 Comments

 

Outsourcing in trade services

Dominic Broom, Bank of New York Mellon

Outsourcing – the practice of subcontracting a process to a third-party provider – is currently a topical and pertinent issue in many areas of banking, and trade services are no exception to this. Indeed, regulatory and market developments – especially the trend away from paper-based operations and towards an electronic, technology driven offering – have made outsourcing some or all of their trade processing an attractive option for many banks wishing to remain active in the sector.

The key drivers behind outsourcing decisions have traditionally been cost-oriented and will often relate to the substantial investment required to create and maintain complex, state-of-the-art IT-driven processing infrastructures. Progress in information and communications technology have made these platforms an indispensible part of any trade bank’s offering; yet building them requires a major investment and maintaining them entails substantial ongoing fixed costs, which need to be recouped by processing sufficient volumes of transactions. By outsourcing the processing of this type of business – which is normally paid for on a per transaction basis – smaller banks are, however, able to eliminate these fixed costs and free up resources for origination and other core customer-facing activities. These banks can further benefit by white-labelling the outsourced offering for their own corporate clients, thereby enabling them to better compete with the global monoliths.

Whilst outsourcing was once seen purely as an exercise in cutting costs, several other factors now also feature in the decision making process. The transferral of certain business and operational risks to the supplier of outsourced services will certainly be attractive, but it is the additional flexibility afforded by these arrangements that will be a key benefit for many institutions. Leveraging the processing infrastructure of a major trade services player allows the business to be rapidly and cheaply up-scaled, thereby greatly lowering the costs of entry into new markets and reducing capacity restraints to organic growth. A good ‘fit’between partnering banks will also ensure an efficient division of labour between two institutions that can then play to their respective strengths.

Those banks considering outsourcing some or all of their trade processing should, however, also be wary of the potential pitfalls of such arrangements. A key danger is that an overly commoditised offering will lose something in terms of personal, local expertise – factors so often prized by clients – so this is where provider sensitivity is crucial. When arrangements of this type are unsuccessful, the root cause is often to be found in poorly researched requirements at the outset and the inability of the system or provider to cope with local market requirements. There may also be a failure – by either party – to deal with unexpected changes, such as short-term spikes in volumes.

Given these issues, and taking into account current trends and likely future developments in global trade, what should an outsourced trade services offering look like? The most important features will be local human expertise and presence, coupled with an electronic processing platform that permits the highest possible degree of process automation. It is access to a processing ‘machine’ that lies at the heart of these deals and outsourcing operations that are purely paper-based will struggle to generate the efficiencies required to make the arrangement profitable for either party. The key here is to amalgamate as many time consuming backroom functions – such as processing purchase orders and issuing documentary credits – into an electronic system that allows the relevant parties to input, view and verify relevant information as and when required.

Whilst this ability to quickly and efficiently process high volumes of transactions is at the core of any outsourced trade services provision, the service offered to clients should also tailored to their individual needs. This is where there is still a need for traditional trade finance expertise, as well as regular human contact with clients, and in this respect a true partnership approach will be crucial to a successful outsourcing arrangement. A partnership philosophy should go beyond a tailored offering with high levels of service. Addressing any potential conflicts of interest between the two institutions will also be an issue. Many smaller FIs are outsourcing back office processing to the global monoliths in order to better enable them to compete with these very same institutions. This is perhaps ironic when one considers that the global bank in question will often be seeking to sell local trade finance services in the very same markets that it is offering its processing platform.

Dominic Broom, European head of global trade services, The Bank of New York Mellon