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Outsource magazine: thought-leadership and outsourcing strategy | August 24, 2017

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Shedding your baggage: solving the legacy complexity in Financial Services IT and Operations

Shedding your baggage: solving the legacy complexity in Financial Services IT and Operations
Outsource Magazine

It may be considered the best of times to run IT and operations in financial services, or it could be the worst.

Why the best? Because there is so much new ‘stuff’ to consider that anything seems possible. Because both IT and operations are not only expected to meet service obligations but also deliver business outcomes. Analytics, multi-channel propositions and robotics are all competing for attention, with the promise of being the ‘next big thing’.

Why the worst? All Financial Institutions (banks, insurance companies etc.), are sitting on legacy estate which, to say the least, presents a challenge. Legacy complexity is the elephant in the room, which simply cannot be wished away

Understanding the legacy complexity

In a Financial Institution (FI), legacy complexity may come from one of two sources – the IT portfolio or the product portfolio (or perhaps both!):

The IT portfolio: FIs have found that over a period of time, they have ended up with a spaghetti-like IT estate with multiple systems of different vintages or even heritages. The IT centric view of the legacy risk relates to those systems presenting a risk in terms of their ability to continue to deliver service. These may be platforms that are no longer supported by the original vendors, or legacy bespoke systems on older technologies for which subject matter expertise is difficult to find.

Typically FIs deal with this situation in one of three ways:

  • In-source: generally FIs continue to maintain these systems in-house. This is usually the most expensive option, but considered the least risky, as the FI has direct oversight and control over the care and maintenance of these systems. However, in practice, these systems tend to get ‘lost’ in the complexity of the IT portfolio and tend to only get noticed when something goes wrong.
  • Migrate to a new system: often FIs will consider migrating from an older system to a newer and more fit-for-purpose system. This maybe a sound technical solution but may be expensive and technically challenging, posing its own risks.
  • Outsource: often FIs will outsource the care and maintenance of a legacy system to a service provider, who in turn can create aggregate demand for that particular technology across multiple clients and create a business proposition. If well managed, this is the most suitable solution – balancing both cost and risk.

In the real world, the solution may be a combination of two or more of these options. In-house migrations, or migrations to a service provider’s platform with a service wrapper are often the two popular choices. Which of these options is suitable depends on the architectural constraints and complexities of the IT estate in question.

This however is only one half of the legacy risk equation.

The product portfolio: the second component, and one might argue the more complex one, comes from the product portfolio, particularly for a closed book of business. Savvy FIs pride themselves on keeping their products relevant and market leading and withdrawing those that do not find resonance in the market. However, as products are withdrawn, it creates an operational challenge; as the closed book of business still needs to be serviced for the existing customers. Declining revenues per book of business and the cost of maintaining capacity and capability to serve a run off business also present operational challenges. This is particularly acute in the life insurance and pensions sector where products are engineered with a particular time focus. Typically, FIs have dealt with the problem in one of three ways:

  • Continue to in-source: maintaining capacity in-house seems to be the path of least resistance though not necessarily the best use of the resources.
  • Migrate customers to new products or sell the books of business: often a business decision, this calls for moving a customer to newer and more relevant products, or selling the book of business to another company who may then take over the administration and the revenue of the books.
  • Outsource the administration and the operations associated with the closed books: FIs have used outsourcing as a suitable solution to address the legacy requirements from an administration requirement.

Before exploring outsourcing as a solution, it is useful to understand the true cost of the legacy risk, which in turn may have three components.

  • Cost of operations. cost to maintain ‘keep the lights on’ capacity; this may be as high as 60 – 70% (anecdotal evidence) of the total IT or operations budget.
  • Cost of remediation: diverting additional resources if there is a system issue.
  • Cost of regulatory action: finally, if there is customer impact on account of a service disruption, the regulator may fine the FI, and there may be further reputational damage, reflected in the share price.

While there is some evidence of FIs waking up to the legacy risk, most solutions still seem tactical (at either platform level or a singular product level) and never quite strategic. This may be for the very simple reason that IT and operations are managed by different departments within an FI and have different challenges, priorities and leaderships. This may make a comprehensive legacy risk identification and solution design difficult unless it is led by some with oversight of both IT and operations. Aecus recommends a comprehensive strategy, using outsourcing as a strategic solution to address the legacy challenges.

Exploring outsourcing as a solution

While outsourcing has been used to address the legacy risk tactically, perhaps there is a case for it to be used with a more strategic intent. Practically, this may mean the following:

  1. Assessing the IT and product portfolios to completely identify the legacy risk across IT systems and the closed books. Chances are there is a high correlation between legacy IT systems and closed books.
  2. Creating a stand-alone ‘stack’ of legacy risk and outsourcing it to a service provider. Usually, outsourcing is across a horizontal (IT, Finance, operations etc.) but in this case, the proposition will be vertical – i.e., all processes and systems as relating to the legacy portfolio. Scoping will be crucial here to create a discreet and visible proposition before being taken through a supplier selection and transition process.
  3. Managing the service from the service provider proactively. While the systems and process may be managed by the service provider, Sysc 8 of the FCA handbook is explicit that the overall accountability lies with the FI which needs to demonstrate appropriate control over its operations.

Benefits of managing legacy risk through outsourcing

  • True identification of risk. In the first place, an FI focusing on its legacy risk discreetly, will have clear visibility on the extent and nature of the risk and will be able to provision accordingly. Often legacy challenges within the portfolio come to surface in the worst possible manner (service disruptions!). In an outsourced solution, clear accountabilities and SLAs support good governance, mitigating any operational risks. Further, the use of outsourcing may reduce the operating costs, minimise remediation requirements and mitigate the threat of regulatory action.
  • Documented delivery processes and accountabilities. Perhaps the most important benefit of identifying legacy risk is documenting the ‘know-how’ that sits within legacy operations. This in itself is important from a knowledge management perspective and lends itself well to eventual scoping of the outsourcing proposition. The outsourcing process will deliver these to support delivery from the service provider
  • Management focus on strategy and not operations. The most important benefit of managing the legacy risk is the visibility and the comfort the CIOs office will have from this aspect. This in turn will free up management bandwidth and resources to focus on what the business really needs – and all the exciting new innovations can be explored to meet those needs.

Why would service providers be interested in the baggage?

It’s important to understand why legacy business may interest service providers as deal structure may depend on the attractiveness of the proposition. Simple economics of scale is key. Service providers may be able to create a successful business proposition for their clients and be able to create the scale necessary for profitability. They may be able to provide the necessary infrastructure in terms of IT systems, people and expertise (legacy technology experts, product experts etc.) and spread them across multiple clients. Also, legacy businesses are sticky – once a client has outsourced the management of a closed book – the likelihood of that decision being revisited is quite minimal.

The regulators too, may approve of this approach as it ensures there is a strategy for ongoing product support and supplier performance is more visible than internal performance and therefore easier to track.

Legacy issues present a significant operational challenge to FIs, from an IT as well as product perspective. Simple ‘keeping the lights on’ efforts consume significant management bandwidth and resources, with the threat of service disruptions ever present. Given that supplier capability has jumped forward in the past few years, outsourcing presents a viable solution to address that risk in a sensible way. However, outsourcing must form a part of a wider organisational transformation or simplification strategy, which must have a clear focus on legacy risk. The success of any comprehensive legacy management strategy will depend upon the buy-in of teams from products, operations and the service provider. Outsourcing the management of the legacy estate also does not absolve the FIs from maintaining appropriate governance and control – actually, they may need to demonstrate that the right governance is in place to manage service providers.

Ironically, while the world is focusing on the next big thing, for FIs, getting their own estate in order may be the route to creating value.

About the Author

Piyush Sodhi 150Piyush Sodhi is a Senior Manager in the Aecus BPO team with extensive experience in banking and financial services. Aecus is an award-winning consultancy specialising in helping clients to get the best results from ITO and BPO, in the financial services sector and other industries. Aecus helps clients with outsourcing strategies, implementation, optimisation and innovation.

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