When Metro Bank founder Vernon Hill addressed a group at the 2008 BAI Retail Delivery conference about his plans to set up in the UK, he was asked about the technology that the new operation would use.

There were just two criteria: a single client view screen for all accounts and customers, and the whole thing would be outsourced to someone with state-of-the-art software. "Why would anyone opening a new bank do it any other way?" he asked.

The new bank opens in London this summer, and the software comes from Temenos. Tesco, which is also building a new bank from scratch, has chosen to go the other way, building an IT infrastructure from scratch, though Fiserv has been chosen to provide the account processing solution with the Signature bank platform.

For most banks and financial services firms, there is not an option to go entirely in one direction or another: the outsourcing of parts of the business have to be considered independently. So what parts of a bank can you hand over to a third-party before you stop being a bank?

Glasgow-based legal firm Brodies is recognised as a specialist in this area - its team was short-listed in The Lawyer magazine's 2010 awards for its work in the financial services industry. Andrew Rigby, lead senior lawyer in the firm's Technology, Information and Outsourcing Group, says that there is very little that can't be outsourced. "Probably legal and compliance is the only thing you can't get rid of, and that's simply because it's against the regulations: in theory, anything else could be outsourced."

Why you'd want to is a different question, and the answer to that is key to the characteristics of the business.

But let's step back and look at how the outsourcing business has changed in the past few years. The first thing that everyone says is that there has been a movement away from the cost arbitrage model of simply using cheaper overseas labour to a complex mix of reasons, including tactical and strategic issues, such as the ability to quickly start projects or isolate business functions in the case of mergers and acquisitions, for instance. Some might cynically say that there is also a lot of outsourcing simply to get things off the bank's balance sheet.

From an operational point of view there can be a variety of drivers for exploring outsourcing. Outsourcing can be used to manage or reduce risk when organisations no longer feel they have the skills in-house to effectively manage the business as it stands, or it can even prove to be a catalyst for operational re-engineering, or the desire to make a step change in the way an organisation operates. It may even be used to reduce product development lifecycles to enable organisations to roll out a new product or service administered by a third party, and bring that product to market in a much more cost effective and speedier fashion than could have been achieved in-house. Often, an outsourcer can satisfy the need for a previously unsupported function or can be part of a new strategic direction as many companies look to move out of administration processes altogether, focusing on brand and service.  This focus away from operations may also be attractive to those organizations struggling to keep pace with the regulatory agenda.

Whatever the underlying intention, the result is a change in the way the market operates, and what buyers and sellers of outsourcing capabilities want from each other.

James Curzon, managing principle of the Banking Team at Capco, says that buyers of both ITO and BPO are looking for speed, cost management and growth from their vendors who now need to underpin their services with business agility and innovation. Buyers are becoming ever more demanding, seeking their ITO and BPO partners to differentiate themselves in the market.

"The key metrics have moved away from purely cost reduction and now are focused on ‘value added' services like research, HR and innovative technology and a vendor's ability to support extensive ‘change/transformation' agendas within an organisation," he says.

‘‘Buyers are looking to evolve strategic long term outsourcing relationships - moving away from traditional project based services and staff augmentation to aligning collaborative partnerships supporting ever changing business and IT models. Small and mid-sized organisations are looking in greater detail at outsourcing their software and applications near shore."

The development from simply providing cheap labour through to providing value-added intellectual property services can be seen by looking at some of the regional differences that exist in the market.

As offshoring continues to grow in 2010 the traditional hub of India is still a major player but an increased level of both ITO and BPO is moving to newer regions like the Philippines and China. Eastern Europe continues to provide a cost effective option for offshoring with Poland and the Czech Republic key to Eastern Europe development, says Curzon.

A marked change has developed over the last year with the Middle East also expanding into offshore capability with small pockets of vendors developing capability in Turkey, Israel and the UAE. Business intelligence is fast becoming the key differentiator within the ITO space within financial services. A number of major Indian outsource service providers are offering this value add service as part of their core ITO offerings

Indeed, Middle Eastern clients are following much the same journey as their US and European counterparts did some five to seven years ago. They're looking at their business operations and asking themselves - what is core and what's non-core to us? What is essential to the running of our business, and what might be done effectively by a trusted partner? For instance, a boutique finance house might outsource all of its operations except investment research and portfolio construction, trade execution and client service, placing functions such as legal, compliance, technology and human resources in the hands of external providers.

In many ways, the Middle Eastern clients are asking some of the same questions that were experienced six to eight years ago in the European and US markets. However, the Middle Eastern companies have the advantage of being part of the ‘secondary wave' of companies looking to outsource business processes to offshore locations, and as such, they can learn from the experiences of their predecessors in the US and Europe.

As a result, Middle Eastern companies can ‘leapfrog' straight to outsourcing slightly more complex functions than their Western counterparts were able to.  Locals report seeing a great deal of demand for expertise in research and analytics, for instance, where the outsourcer is providing high-value secondary research on organisations, company information and reviews of certain markets.

At the other end of the scale, the largest of the traditional outsourcing firms, TCS, is well advanced in its transformation into a global IT services player - it might say that the transformation is complete, with a heavy emphasis on intellectual property: its recent Q1 results highlighted that between April and June this year, the company filed 26 patent applications and was granted one in the area of object oriented models. To date, the company has applied for 323 patents and has been granted 61 of them.

Mike Mathias, director at TCS says: "When banks looked to outsource at the end of the 1990s, and into the beginning of this decade, a lot of the work was application development and the model was about resource augmentation - it was a cost arbitrage play - but the world has moved on considerably and that is no longer sufficient: the customer needs have changed considerably, so we have changed considerably."

Part of this change for TCS has been increasing its presence in Europe and the hiring of local management, such as Mathias, who after four years with the company is a veteran of its European expansion. "Over those four years we have grown in Europe and it now represents 10% of our global business. There are some very large opportunities there - we have just won a global deal with a major French bank, for instance."

The task facing a company like TCS undergoing such a metamorphosis is not dissimilar to what the US computer giants did when they arrived in Europe: IBM always to a very local approach, establishing manufacturing facilities and hiring locals, others - particularly during the early days of the PC in the mid-1980s - just parachuted in a sales team from Utah, or wherever, and shipped the boxes over on container ships. Now everything comes on container ships from China, the analogy is a bit clunky, but the point is that good local knowledge is key to success.

"You need to have high quality local people building the relationships and overseeing the work that is being done as you move from resource augmentation model to a skills-based model, so in France we have hired more local people and consultants, and we are doing that all over Europe."

This transition to a skills-based model is not something that only TCS has been doing, though it has been doing it for a while now. "I think it is an evolution for the industry," says Mathias. "When you go in and talk to clients, they are basically saying that what they are looking for is transformational change, and they want to work with organisations that have the wherewithal, the appetite and the capability to team with them to effect that transformational change. That represents a huge opportunity for us."

This plays to the strengths of the larger players, he says. "Banks are looking to reduce the number of organisations that they are working with on the one hand, but on the other hand they are willing to take a lot of time to work with the right partners - they are now more focussed on outcome, on business benefits, and that actually plays well to us given the depth of capability we've built up - for instance in the UK we've hire about 150 local consultants over the past couple of years, who are involved in everything from process change to IT strategy to change management and IT service delivery. We need to bring those people on board to team with the banks and make those changes."

Rapid changes in technology are also changing things in the market, as new IT methodologies and practices come into being - many banks are actually technically very conservative, for reasons of security and stability, and so do not want to risk ripping out their entire infrastructure to take a bet on what may turn out to be the latest fad. Some years ago, the technical world was abuzz with the notion of thin-client computing: little or no processing power at the desktop, where results could be delivered from remote applications hosted in central server farms. One or two banks took big gambles on this - Nomura was well to the fore - and they stumbled badly, and publicly.

The adoption of cloud computing is at a similar junction: most non-financial businesses are comfortable with the concept, but financial services IT people tend to suck in their breath and mutter about security. Outsourcing allows them to take advantage of the cloud concept - and most do with grid or utility computing models anyway - but without much of the perceived risk.

‘‘Cloud computing (particularly around data management, enterprise wide storage capability and data architecture) is becoming the single most innovative change to second wave ITO outsourcing delivery structures," says Capco's Curzon. "ITO vendors are changing their businesses to respond to clients' demands of building capabilities to solve technical problems, expand services and more recently building consultative front end and customised solutions for reporting and governance as a key differentiator."

Reporting and governance? Back to the lawyers: "My view is that if you know what you're doing, and if you have done enough legwork, you can outsource anything," says Brodie's Rigby. "The major problem for most financial institutions is their understanding the complexity of the relationship that you are entering into and the homework you have to do."

Panel: Capco's criteria for outsourcing success

The ability to select, implement and govern outsourcing arrangements relies on a number of key building blocks for success according to Capco:

1.
Strategies and approach - ability to define target strategy and the transition states to get there.

2.
Communication - effective communication through the vendor selection lifecycle and onwards post contract.

3.
Expectations - understand the ‘value add' components of the selected supplier and managing expectations within the buying organisation.

4.
Scope - clearly defined scope, allowing for transformation measurement to be captured.

5.
Project Management - effective execution of the strategy and integration of the vendor into the organisation.

6.
Objectives - short, medium and long term objectives set out and bought into by all parties.

7.
Deliverables - key deliverables documented, understood and cascaded with timeframes.

8.
Risk management - risk management from a governance perspective and risk management for an issue management/resolution viewpoint.