Most multinational banks have extensive experience performing work in low cost geopraphies leveraging different offshoring models, including establishing a company-owned captive or using outsourcing vendors. However, changes in market dynamics are causing major banks to reevaluate their offshore strategies.
The first major change impacting bank offshore strategies is the evolving regulatory environment. Partly a result of the 2008-09 financial crisis, the U.S. financial services industry is experiencing the most significant period of regulatory change since the 1930’s. Regulators are now focusing much greater attention on the potential risks of offshoring to bank safety. The second major market dynamic impacting offshoring are the changing expectations of banks’ customers. Banks are increasingly competing on customer experience and adapting their technology and internal operations to provide seamless omni-channel experiences to their customers. This requires banks to relign back and middle office functions to support the customer experience, often requiring greater levels of integration between various bank departments and offshore processes. Traditional offshoring approaches are now being challenged to integrate more effectively to support the end-customer experience, and are often being measured on impact to Net Promoter Scores.
Enter the “Hybrid Captive”, an approach that is gaining increasing attention as an effective offshore delivery model that helps banks navigate these new market imperatives. The “Hybrid Captive” mixes elements of the company-owned captive model with the vendor provider model.
Key features of the hybrid captive include:
- Resource mix – The bank and the vendor will each provide certain resources required to execute the desired processes. For heavily regulated processes, the resources providing the core functions and supervisors/managers may remain on the bank’s payroll, while the vendor will provide lower level resources. This allows the bank to maintain strong control over the processes desired by regulators, but still leverage vendor capabilities and scale.
- Facilities and Administrative support – Typically the vendor provider will take ownership of securing and fitting up facilities and providing administrative support functions, such as recruiting, training, and on-site IT support. This allows the bank to take advantage of the provider’s local knowledge, scale, and hiring engines at a lower cost.
- Ownership structures – Various ownership structures are possible, including fully bank owned or provider owned. In some cases, an optimal approach is to establish a joint venture structure that allows the bank to demonstrate strong ownership and control to regulators. In such structures, the vendor can contribute resources and capital to fund the initial set-up of the hybrid captive.
Hybrid Captives will play an increasingly important role in helping banks address today’s challenging market dynamics. Many banks have been willing to utilize outsourcing and offshoring only for non-critical processes, retaining in-house the complex and critical business processes, thereby limiting the value of outsourcing. The Hybrid Captive approach offers a new way for banks to realize more value from outsourcing since it allows a bank to capture the benefits of outsourcing while maintaining a high level control typically reserved for the most complex and critical processes. In a Hybrid Captive both sets of employees (buyer and provider) work as one team from one joint-entity to handle the single process end-end – leveraging the respective strengths of the bank and it’s outsourcing partner.
The Hybrid Captive outsourcing model has multiple benefits:
- Provides a way to navigate increasing regulatory requirements and scrutiny of offshore outsourcing relationships
- A Hybrid Captive helps reduce fixed costs. The bank can minimize its start-up investment costs by instead leveraging the provider’s delivery network/co-locations.
- While the Hybrid Captive preserves existing relationships and channels of communication, it also provides for an integrated control over operations and for greater operational flexibility
- Hybrid Captives make way for improved resourcing, skills and talent. What’s more – both sets of employees stand to gain equally and immensely from best-in-class training, which makes the handling of escalations much more efficient. Needless to say, both sets of employees also gain a deeper understanding of the company and its business, which leads to more tangible business (increased revenue and profitability)
- The Hybrid Captive model fosters innovation, collaboration and team spirit
HCL is a pioneer in Hybrid Captives. For a large Global Custodian with Investment Services, HCL was able to achieve $ 500 Mn in savings through the Hybrid Captive model which gave the Custodian a dual benefit - the Control of a captive, and the benefits of HCL’s Ideapreneurship (Value creation). In this case, HCL rebadged 100% of the Custodian’s staff.
In another case, HCL brought to play the assisted captive model to reduce cost of operations for a large Banking and Financial Service Provider. This model ensured that the client did not need to make any upfront investment, and still benefited from seamless transition management across geographies taking into account staffing and risk mitigation.
In conclusion, Hybrid Captives undeniably provide a step change to the existing business process outsource (BPO) scenario. Hybrid Captives make it possible to have a leaner environment that is scale-able, flexible and agile. Hybrid Captives are definitely THE WAY FORWARD.