Point of View

Banks thinking about insourcing need to think again

December 9, 2021

The Bottom Line: Insourcing is a red herring. Banks need to make strategic use of service providers that have invested heavily in local + offshore talent models to combat the global talent crunch and their cultural obsession with physical offices

Before any BFS enterprise makes the hard decision to insource work from its outsourcing partners, it must assess whether it is feasible from a talent standpoint. Through 2022, service provider partners, particularly those that have invested heavily in local + offshore talent models, like Infosys, Accenture, and Wipro, will offer hard-to-beat resourcing and delivery models for banks’ digital enablement.

Do not confuse a localization trend with insourcing

In a recent Data Viewpoint featuring our exciting Pulse survey data, we showcased how banks are embracing localized service delivery and slowing their use of offshore services for both internal captives and outsourcing, shown here in Exhibit 1. Banking and financial services (BFS) firms lead the charge for onshore delivery as localization becomes the new normal for strategic initiatives, collaboration, and relationship building. However, do not confuse a localization trend with insourcing. HFS is resolute in our belief that this does not herald the latest cyclical spike in insourcing from sourcing savvy banks. But not for the reasons you may think. The blush may be off the rose that is India (and other offshore hotspots) in terms of cost, applied innovation, attrition, and risk, but it is actually the global talent crunch and banks’ inflexible culture that will keep outsourcing firmly relevant.

Exhibit 1: Localization of service delivery takes center stage for BFS firms

Sample: 800 respondents from Global 2000 enterprises, including 54 BFS respondents
Note: Net trend calculated based on the difference between plans to increase versus plans to decrease
Source: HFS OneOffice Pulse Study, H1 2021

Offshore cost arbitrage is dead. The new currency is talent.

Ten years ago, when offshoring was gaining critical favor for more than apps development, BFS firms could get super qualified resources—MBAs from top schools, PhDs, data scientists, and a bounty of deeply skilled software engineering talent—for $25K–$35K in India and other popular offshore locations. Demand and associated costs have skyrocketed, driving prevailing rates to $75K–$90K. Offshore cost arbitrage is dead. Outsourcing firms have attempted, with some success, to prop it up using native automation capabilities, but this has really only helped in dire cases of mind-numbing manual work that was outsourced in the first place because it was less expensive than figuring out how to fix the root problems.

While offshore outsourcing, especially in India, has always had an attrition problem, one of the core strengths outsourcing firms developed early on was training and talent cultivation. This approach did not minimize attrition; it simply made it less painful to clients by using swift backfills with similarly skilled resources brought up to speed rapidly. Service providers’ training and talent cultivation skills have never been more important. In this age of the “great resignation,” we note with interest the skyrocketing rates of attrition reported quarterly by publicly traded services firms. The attrition is offset, however, by the continued rates of hiring. In the past quarter, we’ve seen notable talent additions with the likes of Cognizant (adding 17,200 employees last quarter), TCS (19,690), and Accenture (55,541) leading the pack. Nobody does talent attraction and cultivation better than services firms. Access to a continuous flow of the best talent will keep service providers incredibly relevant as we pound through a few years of massive digital acceleration.

Banks may be too culturally inflexible to attract the digital talent they need

As an element of the research for our recent Top 10 report Banking and Financial Services – The Best of the Best Service Providers 2021, we interviewed more than 50 BFS leaders from around the globe. In addition to getting the skinny on the strengths and weaknesses of their service provider partners, we also did a deep dive on their drivers and inhibitors for achieving digital transformation. As Exhibit 2 shows, banking leaders identified a lack of talent as the top inhibitor holding them back from achieving digital transformation objectives.

Exhibit 2: Banking leaders cite lack of talent as the biggest inhibitor to digital transformation

Sample: n = 51 BFS respondents
Source: HFS Research, 2021

As banks, particularly the largest global brands, have worked toward becoming technology firms in their own right, not just technology-enabled, they have invested heavily in their own tech and digital talent. As we approach almost two years of operating under the pandemic-induced reality of remote, digital work, banks (and the rest of the planet) have put their respective stakes in the ground for what the future of work looks like for their firms. Despite loads of headline-grabbing announcements of companies making “digital-first” working arrangements their permanent standard, the world’s largest financial institutions are much more tied to the cultural norms of working from physical locations. The CEOs of firms such as JP Morgan, Goldman Sachs, and Morgan Stanley have been outspoken about wanting to get people back to the office. Others, like CapitalOne, Royal Bank of Canada, and HSBC, have stated they are taking a hybrid approach.

While many BFS firms have implemented flexible remote work policies for the foreseeable future, these policies generally focus on balancing weekly days in the physical office and remote working. The impact from a talent perspective quickly becomes the same old mandate of yore, “Thou shalt be in proximity to the physical office.” HFS has had numerous conversations over the past months with frustrated banking leaders lamenting inflexible hiring practices that prioritize physical proximity over access to the best skills. For the foreseeable cutthroat future of attracting and retaining digital talent, banks’ cultural inflexibility may keep the best talent off their payrolls. At least directly.

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