Business Process Outsourcing in the European Financial Industry

Table of Contents

List of Figures

List of Tables

Acronyms

1. Introduction
1.1 Problem definition
1.2 Structure of the Seminar Paper

2. Introduction to the European Financial Sector

3. Introduction to Business Process Outsourcing

4. Business Process Outsourcing in the European Financial Sector
4.1 The Value Chain in the Financial Sector
4.2 Managing Business Process Outsourcing in the European Financial Sector
4.3 Introduction and Definition of Documents Logistics
4.4 Business Process Outsourcing in the Field of Document Logistics
4.5 Business Process Outsourcing in the Field of Transaction Banking

5. Concluding Remarks and Future Development

Appendix

References

List of Figures

Fig. 1: Market Capitalization in the Worldwide Banking Industry in 2004

Fig. 2: Worldwide banking in 2003

Fig. 3: Diagram of a Generic Value Chain from the Finance Industry

Fig. 4: Document Logistics in the Primary Functions of a Bank’s Value Chain

Fig. 5: Generic Process Chain of Transaction Banking

Fig. 6: Generic Outsourcing Forms

Fig. 7: Document Logistics in the Value Chain of a Universal Bank

Fig. 8: The Importance of Document Logistics for a Company’s Success

Fig. 9: Transformation of Universal Banking to Specialized Banking Forms

List of Tables

Table 1: BPO Document Logistics Analysis in the European Financial Sector

Acronyms

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1. Introduction

Business Process Outsourcing (BPO) is one of the current major developments in the European economy. For many companies, it is a possibility for establishing a new presence in a different industry or branch; one example for this trend is the fact that Kienbaum Management Service GmbH offers BPO services in the field of document logistics.^[1]

1.1 Problem definition

Besides establishing a new presence in new markets, BPO also leads to significant cost reductions and quality of service improvements. Therefore it is an important strategic tool for the European financial sector which has experienced increasing costs and shrinking margins during the last ten years. This seminar paper focuses principally on BPO in the European financial sector. Therefore, other industries are only relevant in comparisons with the European financial sector. To highlight the current European development from diversified banks to specialized financial institutions, transaction banking is explained as one of the specialized banking forms with the highest growth rate during the next years. An emphasis is also set in this paper on document logistics in the European financial sector and BPO possibilities in this field. The field of document logistics in the financial sector is not heavily researched. Therefore academic publications in this field are of high interest for the academic community as well as for professionals managing document logistics.

1.2 Structure of the Seminar Paper

After a foreword in chapter one, chapters two and three focus on the introduction to the European financial sector and BPO and include basic definitions. After that, chapter four includes the main part of this seminar paper and puts an emphasis on BPO in the European financial sector. After describing a generic value chain and stating BPO trends, an introduction is given to the field of document logistics and BPO possibilities in this field. Chapter five then gives a conclusion and highlights the future development of BPO in the European financial sector. Finally, an appendix includes the figures which are not integrated in the text and is followed by the references section.

2. Introduction to the European Financial Sector

In this chapter, an introduction to the European financial sector is given which is necessary to develop a general understanding of European banking institutions and their environment.

The European financial sector must be seen in the context of the international financial industry.^[2] Six banks with market capitalizations^[3] over US $ 100 billion dominated the global finance market in 2004 which can be seen in the following illustration (figure 1).^[4]

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Fig. 1: Market Capitalization in the Worldwide Banking Industry in 2004

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Source: sinn, dayal and luther (2005), p. 8.

Among them are three European banks: Citigroup, HongKong Shanghai Banking Corporation (HSBC) Holdings and The Royal Bank of Scotland. Nevertheless, two other European banks (UBS and Santander) were close to market capitalizations of US $ 100 billion.^[5] This shows the importance of the European financial sector in the global context of the finance industry.

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Fig. 2: Worldwide banking in 2003

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Source: sinn, dayal, pitman, grasshoff and herbeck (2004), p. 13.

The other argument pointing to the importance of the European financial sector can be seen in figure 2 which shows that the continental European banking market (without the United Kingdom) in total ads up to 23.7 percent of the worldwide market for banking in 2003. Including the United Kingdom, European banking even adds up to 34.8 percent.

According to sinn, dayal, grasshoff and herbeck (2005), the European financial sector can be clustered into the following sub categories:

- Asset Managers (institutions which manage investments for a fee - providers of retail broker services and money or wealth management.)
- Consumer Finance (credit card companies and providers of personal financial services)
- Investment Banks (providing capital market and corporate finance services)
- Mortgage Finance (mortgages and mortgage insurances)
- Transaction Banks (providers of standardized and outsourced services in the financial sector)
- Universal Banks (diversified banks with broad business portfolios).^[6]

Currently, European financial institutions are under pressure due to profitability requests from shareholders and harsh competition in the financial industry. Banks experience competition even from completely different industries: the field of consumer finance is branching away from traditional financial institutions (universal banks and consumer finance companies) and are more and more directly offered to the end customer by the respective industries (for examples in the automotive industry, consider the BMW or Daimler Chrysler banking institutions).^[7]

In addition to that, the amount of vertical integration^[8] in European banks is considered to be too high to achieve an optimum profitability.^[9] Hence, one possibility for vertical disintegration is using BPO as strategic tool for concentrating on processes in the value chain with appropriate margins. This development of vertical disintegration has already happened in the automotive industries which lead to the collaboration of suppliers with car manufacturers. Furthermore, BPO can also be used for reducing product offerings which do not fulfill target profitability. In particular universal banks are prone to have these offerings in their portfolio due to their business model.^[10] However, businesses and product offerings which do not fulfill target profitability can be outsourced in complete processes to specialized providers and banks. This process is explained in the following chapter of the seminar paper.

3. Introduction to Business Process Outsourcing

After giving an overview over the European financial sector, this chapter includes an introduction to BPO and the underlying principles and concepts. This introduction is the basis for sections 4.2 and 4.4 which focus on BPO in particular business functions.

BPO can be defined as “the management of one or more specific business processes or functions (e.g. procurement, accounting, human resources, asset or property management) by a third party, together with the information technology (IT) that supports the process or function”.^[11]

This definition illustrates that BPO is not limited to a certain business process but can include business processes from any business function. Nevertheless, this seminar paper puts a highlight on BPO in the European financial sector. Therefore only business processes are analyzed which are relevant for the European financial sector.

The field of outsourcing can be categorized into two subfields: internal and external outsourcing.^[12] BPO belongs to the field of external outsourcing. Besides BPO, the field of external outsourcing also contains selective and complete outsourcing.^[13] These two other subfields also define the concept of BPO. BPO includes the outsourcing of a whole business process and not only a segment of the process chain whereas complete outsourcing emphasizes outsourcing activities of whole functional business units.

Nevertheless, the location of the company which sources services in can also be used as a criterion to classify outsourcing: nearshoring (for instance moving a call centre from Frankfurt to Poland) and offshoring (for instance moving IT or call centre services from a European company to India).

Focusing on the most important economic principles with implications for BPO, it can be said that economies of scale^[14], economies of scope^[15] and experience curve effects^[16] are relevant in this context. These effects can lead to cost reductions as well as quality of service improvements at the institution which realizes the outsourced business processes.^[17] An example for economies of scale in the financial sector is the bundling of customer transactions or the processing of printed documents (for instance cash remittances or money transfers) into electronic documents.^[18]

Another important business principle in the field of BPO is the concept of core competencies which was developed and published by prahalad and hamel (1990). Core competencies are important in particular for the financial industry to concentrate on the strengths of a bank. Products should only be offered when core competencies of the bank are involved along the value chain of the product. prahalad and hamel (1990) state that core competencies have the following characteristics: “First, a core competence provides potential access to a variety of markets. […] Second, a core competence should make a significant contribution to the perceived customer’s benefits of the end product. […] Finally, a core competency should be difficult for competitors to imitate.”^[19]

Nevertheless, David Probert from the University of Cambridge states that companies also need to concentrate on the individual business context when they think about BPO: “People have spent a lot of time trying to work out what’s core and not been terribly happy with the answer they came up with. A better question is ‘what’s important in the business we’re in’? ”^[20]

The framework of the New Institutional Economics (transaction costs, principal/agent and property rights theories) can also be used for analyzing BPO cases.^[21] However, these theories will not be used in this seminar paper due to complexity reasons.

Finally, one of the most important concepts behind BPO is based on cost theories. BPO can be used to transform fixed to variable costs. Nonetheless, this transformation and the resulting business benefits are based on the particular BPO agreement with the provider of the outsourced services.

4. Business Process Outsourcing in the European Financial Sector

After a general introduction to BPO in chapter three, this chapter now stresses BPO in the European financial sector. First, a typical value chain of a universal bank is described and analyzed. After that, potential fields for BPO in this generic value chain are further explained. One of these fields is BPO in the area of document logistics which is analyzed in sections 4.3 and 4.4

4.1 The Value Chain in the Financial Sector

The financial sector is heavily services oriented which can be seen in the following diagram of a generic value chain from the finance industry.^[22]

Fig. 3: Diagram of a Generic Value Chain from the Finance Industry

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Source: duke university (2005), p. 1.

[...]

^[1] Kienbaum has a strong reputation as a human resource consultancy. Nevertheless, the company does not have a reputation for providing back office services. For further information about Kienbaum’s offerings, see http://www.kienbaum.de/cms/de/geschaeftsfelder/management_consulting/shared_services.cfm.

^[2] The European financial sector includes institutions from the European Union. According to wikipedia (2005b), there are currently (in 2005) 25 countries which are members of the European Union (in brackets are the dates of accession): Austria (1995), Belgium (founding member: 1952/58), Cyprus (2004), Czech Republic (2004), Denmark (1973), Estonia (2004), Finland (1995), France (founding member: 1952/58), Germany (founding member: 1952/58), Greece (1981), Hungary (2004), Ireland (1973), Italy (founding member: 1952/58), Latvia (2004), Lithuania (2004), Luxembourg (founding member: 1952/58), Malta (2004), The Netherlands (founding member: 1952/58), Poland (2004), Portugal (1986), Slovakia (2004), Slovenia (2004), Spain (1986), Sweden (1995) and United Kingdom (1973).

^[3] See figure 5 in the appendix for further information about the worldwide market capitalization.

^[4] See sinn, dayal and luther (2005), p. 9.

^[5] See sinn, dayal and luther (2005), p. 9.

^[6] See sinn, dayal, grasshoff and herbeck (2004), p. 25 for further information about these categories.

^[7] See fuchs (2005), p. 28.

^[8] See porter (1998), pp. 300 - 323 for the impacts of vertical integration and disintegration.

^[9] See Schober (2004), p. 24.

^[10] See kovarova and linden (2003), p. 17.

^[11] halvey and melby (2000), p. 1.

^[12] The definition internal and external outsourcing refers to the organization of a company and its external environment.

^[13] See figure 6 in the appendix for further information on the subcategories of outsourcing.

^[14] “Economies of scale refer to declines in unit costs of a product as the absolute volume per period increases.” porter (1998), p. 7.

^[15] Economies of scope have a higher effect on the business performance in specialized provider of outsourcing services compared with diversified companies.

^[16] “Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage. This broader effect was first noticed in the late 1960s by Bruce Henderson at the Boston Consulting Group (BCG). Research by BCG in the 1970s observed experience curve effects for various industries that ranged from 10 to 25 percent.” wikipedia (2005a). See also boston consulting group (1972), pp. 14 - 75 for the development of the experience curve concept which is based on the principle of the learning curve.

^[17] See moormann and möbus (2004), p. 168.

^[18] The bundling of transactions is further analyzed in section 4.5.

^[19] See prahalad and hamel (1990), p. 80.

^[20] David Probert (Institute of Manufacturing from the University of Cambridge), published in dwyer (2005), p. 22.

^[21] coase (1937), pp. 386 – 405 developed one of the most important concepts in the field of New Institution Economics.

^[22] The concept of the value chain was published by porter (1985). However, porter (1985) developed a generic value chain which was not focused on a particular industry. See porter (1985) p. 60 for further information about the value chain concept.