Today bank and finance companies have been forced to squeeze costs from their credit back offices through process optimization, enhanced solutions and standardized procedures. Despite these efforts, many companies are still under pressure to drive additional cost savings and are beginning to explore the benefits IT managed services arrangement.
A managed services arrangement, which is an agreement for services associated with performance measurements, is certainly not a revolutionary concept for the banking and finance industry. For some time, financial institutions have allowed external vendors to manage processes such as call center and infrastructure services. But they have historically kept their software solutions in-house, especially those that extend across numerous functions and processes.
The perception has been that those solutions are too strategic, too complex or too missioncritical to be entrusted to an outside firm. That perception, however, is beginning to change for a number of reasons. For starters, the concept behind managed services has evolved beyond a contractual relationship into more of a collaborative partnership, with banks retaining more control and decision-making within the agreement.
Moreover, while IT systems once provided companies with a strategic edge over the competition, that view has shifted in recent years. Bank & finance companies now differentiate systems into two main categories:
1) CORE, those systems that directly relate to the business strategy.
2) NON-CORE, those that are necessary but, by themselves, provide little strategic value.
This is an important distinction, as it allows the bank & finance companies to explore alternatives for getting maximum value out of its resources. Given these recent trends, the companies are recognizing that by partnering with an external services provider for application maintenance and support, they can reduce costs, add operational value and gain a strategic edge in an increasingly competitive business.
Why Managed Services?
Initially, the key benefit driving many bank and finance companies to outsource their credit applications has been cost reduction. Outsourcing maximizes efficiencies and drives down costs by simplifying, standardizing, centralizing and automating application development and support through the use of best practices, advanced technologies and experienced technicians. Managed services firms also pass on cost savings through economies of scale by offering similar services to a wide range of clients.
Cost reduction, however, is not the only compelling reason motivating banks to look to outside help with these applications. Outsourcing application maintenance and support is increasingly seen as a strategic tool that can provide value and improvements across all operations. Some of the strategic advantages to be gained include:
- Greater Focus on Core Competencies
Outsourcing allows bank & finance companies to focus on what they do best, while gaining access to world-class application expertise they could not otherwise attract or afford. The arrangement also enables the managed services firm to do what it does best: write and repair application code, ensure that application upgrades are applied in a timely manner, and recruit and retain employees with the right mix of technical skill and industry knowledge. By introducing best practices to the credit management operation, managed services providers can offer improved service levels—not only in IT performance, but across the organization.
- Reduction in Risks
Service level agreements and guarantees place the responsibilities of quality and timeliness on the vendor, reducing risks—such as application degradation, technology and skills obsolescence, loss of key personnel and project delay—once shouldered entirely by the companies.
- Improved Regulatory Compliance
An IT service provider with an understanding of both the business and technical aspects of credit management also has a thorough familiarity with regulatory requirements, including state and federal privacy regulations, fair lending practices and other key governmental requirements. Managed services providers with this dual expertise can modify systems on an ongoing basis to meet existing and evolving regulatory demands.
- Faster time to Market
Because credit is a key part of the portfolio, completing projects and applications quickly is critical to achieving a competitive edge. Through resource scalability, managed services enables banks to launch more projects faster and easily prioritize projects in response to market changes.
- Accurate Cost Calculation
Managed services provide executives with a true picture of what they are spending on IT maintenance and support, now and in the future. This understanding makes for easier and more accurate long-term planning and budgeting.
- Improved Customer Relations
Outsourcing ensures that applications are performing optimally, guaranteeing, for example, a mutually agreed-upon percentage of system “uptime.” This helps banks improve customer service and relations and, as a result, effectively retain existing customers and attract new ones.
- Increased Revenue
Better performing systems mean higher quality and more income. While quality sounds like a nebulous term, the benefit of it within a managed services credit solution can be effectively measured through quantitative calculations, such as the decrease in outstanding delinquent receivables, the increase in operational productivity, the increase in outbound collections call volume, the number of recoveries dollars, the number of loan originations, the cost of loan origination, the increase in new customers acquired, the cost of new customers acquired and overall customer attrition rate.
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