Economics

Digital Economy

April, 2004 No. 9

e-Banking snapshot

Outsourcing in Banks: Getting rid of IT
1. The market for IT outsourcing is one of biggest and fastest growing in Europe.

Firms which do not consider IT to be a core competency are delegating a large portion of their IT-based activities to the market. Last year, IT services worth approx. EUR 45 bn were assigned externally.
2. In general, outsourcing offers many advantages. A recent survey lists cost cutting,

strategic reasons, risk reduction and better quality as the top drivers. 3. Outsourcing is a two-edged sword, though. It harbours particular risks. Firms mainly hesitate to outsource because they fear to lose direct control. Moreover, there is the fact that confidential information is processed outside the firm as well as the risk and cost related to the migration process. 4. The financial industry has a long tradition of outsourcing. Banks were pioneers in this field and still account for the lion’s share. However, insurance companies have been catching up, particularly since the turn of the millennium. 5. Outsourcing continues to play a major role in the financial industry, banks and insurance companies show the strongest dynamic in outsourcing. Outsourcing in Western Europe’s financial industry will grow by 15% per year up to 2006.
6. The potential to “industrialize” is one of the main reasons for outsourcing in

financial services. Banks tend to have a much higher vertical integration than the manufacturing sector. German banks, e.g., create 80% of their products themselves, compared with 25% in the automotive sector.
7. More and more IT is outsourced by the financial sector. Among others, IT

infrastructure and IT-based processes play a major role when it comes to outsourcing in the financial business.
8. This is the result of an assumed loss of strategic importance. “IT doesn’t matter!“

Editor Hans-Joachim Frank +49 69 910-31879 hans-joachim. frank@db.com Technical Assistant Sabine Kaiser +49 69 910-31831 sabine.kaiser@db.com Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 DB Research Management Norbert Walter

was Nicholas Carr’s provocative statement. His argument was that the evolution of information technology in business follows a pattern similar to that of earlier technologies like railroads. As its availability increased and its cost decreased, it became a commodity input.
9. Nevertheless, IT will play an important role in the future – given that management

beats ownership. The majority of CIOs attach great strategic importance to IT. At first glance, this contradicts the ongoing outsourcing trend. One possible explanation might be that the use and management of IT resources – rather than ownership of resources – has turned out to be the strategic weapon.
10. Timely preparation is the key! IT outsourcing can be an instrument; by no means

is it a necessity. Those planning to shed parts of their IT resources face a strategic decision which is hardly reversible. Processes and partners, therefore, have to be chosen very carefully. Snap decisions may quickly backfire. Author: Jürgen Schaaf, +49 69 910-46830 (juergen.schaaf@db.com)

Firms which do not consider IT to be a core competency are delegating a large portion of their IT-based activities to the market. Firms mainly hesitate to outsource because they fear to lose direct control. Outsourcing is a two-edged sword. strategic reasons. 2004 front page Economics 2 . % 60 Source: Cap Gemini Ernst & Young. on average to EUR 100 bn up to 2008.8 Migration cost 0 10 20 30 36.4 53.6 61. Last year. IT services worth approx. 2004 Reasons against outsourcing Loss of direct control Confidential information processed externally Migration risk 38. EUR 45 bn were assigned externally.1 30 40 50 34. risk reduction and better quality as the top drivers. In general. The market for IT outsourcing is one of biggest and fastest growing in Europe.8 42. Source: Cap Gemini Ernst & Young. It harbours particular risks. outsourcing offers many advantages. though. Reasons for outsourcing Cost reduction Strategic focus Risk reduction Improved quality Faster reaction to change 0 10 20 29.April. A recent survey lists cost cutting. Moreover. 2004 EUR bn (left) % yoy (right) 25 20 15 10 5 0 1. Market volume will probably increase by 17% p. there is the fact that confidential information is processed outside the firm as well as the risk and cost related to the migration process.1 47.7 % 40 50 60 70 3.a.4 48. 2004 e-Banking snapshot European market for IT outsourcing 120 100 80 60 40 20 0 02 03 04 05 06 07 08 Source: DB Research.5 2.

6 6. outsourcing in Western Europe’s financial industry will grow by 15% per year up to 2006 (CAGR). Europe). The financial industry has a long tradition of outsourcing but public interest has developed only in the last few years. The number of outsourcing contracts in the financial industry rose from 2 in 1991 to an estimated 52 in 2003. Outsourcing continues to play a major role in the financial industry. 2004 e-Banking snapshot Outsourcing contracts in different sectors Insurance companies Financial services providers Banks Outsourcing contracts 70 60 50 40 30 20 10 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03e 4.April. particularly since the turn of the millennium.6 8. According to Roland Berger. insurance companies have been catching up.5 18 16 14 12 10 8 15.3 6 4 2 0 Volume (bn USD). Source: E-Finance Lab. volume 2001 26. G ov er nm en Pu bl ic .9 16. banks and insurance companies show the strongest dynamic in outsourcing. left Source: Roland Berger. Banks were pioneers in this field and still account for the lion’s share. Compared with other sectors.0 Annual grow th 2001-2006 (CAGR in %).7 7.9 6. 2004 front page Economics 3 U til iti es ad m in is tr a tio n In Tr su an ra sp nc or e t co m pa ni es t Te lc os Ba nk M an s uf ac tu re rs 5. right 16. However. 2003 30 25 20 15 10 5 0 Outsourcing in different sectors (W.

2004 Penetration of PCs and computer price index. create 80% of their products and services themselves. IT advocates and adversaries. compared with 25% in the automotive sector. USA 100 90 80 70 60 50 40 30 20 10 0 90 91 92 93 94 95 96 97 98 Source: DB Research. it became a commodity input. IT infrastructure and ITbased processes play a major role when it comes to outsourcing in the financial business. “IT doesn’t matter!” was the business writer Nicholas Carr’s provocative statement.309 16 deals (6%) 55 deals (22%) 114 deals (44%) 20 40 21. 2004. More and more IT is outsourced by the financial sector. Concentrating on core competencies not only helps to cut costs but also to gain strategic advantages. leads to the discontinuation of other activities or the delegation of these to the market. IT as an "infrastructural technology" had opened opportunities to gain competitive advantages. 1990-2003 Business processes 70 deals (28%) 20. Among others. 4 . Base: ITU. 2004 e-Banking snapshot Vertical integration of different sectors Automotiv industry 25 inhouse production 75 market supply Electrical engeneering 20 80 Banks 80 20 Source: DB Research 6. This is the result of an assumed loss of strategic importance.989 Value (USD m) Administrative processes Application development and maintenance IT infrastructure 0 5. however. The potential to industrialize is one of the main reasons for outsourcing in financial services. Banks tend to have a much higher vertical range than the manufacturing sector. Value of global outsourcing contracts of financial services providers by business area. application development and maintenance made up two-thirds of the global outsourcing deals between 1990 and 2003 (measured by value of the deal). BITKOM 300 250 200 150 in % of population (left) 1996 = 100 (right) 100 50 0 99 00 01 02 03 front page Economics 8. For a brief period. by consequence. which caused a heated controversy last year among scholars and practitioners. for example. This.771 69.182 60 80 7.April. IT infrastructure. His argument was that the evolution of information technology in business follows a pattern similar to that of earlier technologies like railroads and electric power. As its availability increased and its cost decreased. Source: E-Finance Lab. German banks.

6% 22. on our website www. free of charge. accepted responsibility for the distribution of this report in the United Kingdom under applicable requirements. One possible explanation might be that the use and management of IT resources – rather than ownership of resources – has turned out to be the strategic weapon. Deutsche Bank AG London being regulated by the Securities and Futures Authority for the content of its investment banking business in the United Kingdom. Ordering address for the print version: Deutsche Bank Research Marketing 60272 Frankfurt am Main Fax: +49 69 910-31877 E-mail: marketing.4% 19. and being a member of the London Stock Exchange. When quoting please cite “Deutsche Bank Research“. and do not necessarily reflect the opinion of Deutsche Bank AG or any of its subsidiaries and affiliates.0% 14. 2004 e-Banking snapshot Strategic importance of IT in 2004 Majority of IT decision-makers believe that strategic importance of IT w ill rise. D-60272 Frankfurt am Main. Contracts and service level agreements must be reliably designed. Any opinions expressed reflect the current judgement of the author. Deutsche Banc Alex Brown Inc. Processes and partners. have to be chosen very carefully. has. DB Research. Snap decisions may quickly backfire. The majority of recently surveyed CIOs attach great strategic importance to IT. therefore.dbr@db. Nevertheless. has accepted responsibility for the distribution of this report in the United States under applicable requirements. Timely preparation is the key! IT outsourcing can be an instrument. as designated.April. Neither Deutsche Bank AG nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this document or its contents.dbresearch. and nothing in this report shall be construed to be a representation of such a guarantee. Those planning to shed parts of their IT resources face a strategic decision which is hardly reversible.2% 38. by no means is it a necessity. At first glance.com You can also register there to receive our publications regularly by e-mail. Sydney branch.4% Unchanged IT budget 51. Significance of IT w ill … … remain unchanged Source: CIO. editor and publisher. Source: Dun & Bradstreet. The opinions presented are subject to change without notice.com © 2004. ISSN Internet: 1619-4829 / ISSN E-mail: 1619-6465 front page . all rights reserved. independent of the change in their budgets Rising IT buget 50. this contradicts the ongoing outsourcing trend. has accepted responsibility for the distribution of this report in Australia under applicable requirements. Deutsche Bank AG. 12/2003 Ex-post assessment of outsourcing deals (survey across all sectors) Insufficient cost / service situation 50 70 Failure in the first 5 years 20 Failure in the first 2 years 0 10 % 20 30 40 50 60 70 80 10. 2002 All our publications can be accessed.6% Reduced IT budget 47.0% 29. We do not guarantee its accuracy or completeness.8% % 80 100 0 … rise 20 40 60 … fall 9. Federal Republic of Germany. The information contained in this publication is derived from carefully selected public sources we believe are reasonable. IT will play an important role in the future – given that management beats ownership. Publisher: Deutsche Bank AG.0% 27.

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