By: Audrey B.
Outsourcing of back office processes such as data entry services remains one of the easiest functions to outsource, as more companies are learning. Back office outsourcing is now seeing increasing adoption across various industries and among different verticals, including the banking and asset management sectors.
Almost a year ago, the banking industry drew attention as a report from research and consulting firm Marketsandmarkets found that U.S. banks are outsourcing bank office processing duties at an increasing pace. Growth estimates were for $67.2 billion in 2015 from $38.1 billion in 2008. The report cited IBM (NYSE:IBM) and Accenture (NYSE:ACN) as dominating the bank back office outsourcing market. As we indicated in a previous article, banks such as HSBC (NYSE:HBC) have been looking into fund back office outsourcing in China. Other banks like Citigroup (NYSE:C), JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) are also planning to outsource back office processes to India. This indicates that Marketsandmarkets' estimate could be on course.
Meanwhile, the asset management industry is taking a lead from banks as rising regulatory costs and increasing competition among asset management firms is placing pressure on profits. On February 6th, the Financial Times reported on a study conducted by Accenture and RBC Dexia, that more than half of asset management companies surveyed forecast their return on equity to fall below 15% this year. That's down from the average 20%. This will likely push more of these companies to outsource non-core business functions, including back office processes.
Law firms are also looking at outsourcing back office processes, as seen by Morgan Cole’s deal with Integreon. The law firm signed a deal with legal process outsourcing company Integreon to run its library and information service. Commenting on the deal, Integreon’s head of global sales John Croft stated:
The fact that another law firm is signing up to the centre is just a sign that more firms are realizing that some parts of their support services can be provided more effectively through outsourcing. This is especially true for library and information services where it means gaining access to a wider range of material at a lower cost.
Even other outsourcing companies are seeing the benefit of outsourcing back office processes: Global document management and outsourcing company, Xerox (NYSE:XRX), undertook restructuring efforts which included outsourcing some of its back office functions. The company went ahead with its downsizing efforts as reported on the 17th of February, as part of the restructuring Xerox CFO Larry Zimmerman spoke of in a conference call with Wall Street Analysts last month. According to Zimmerman, Xerox's restructuring efforts are in part due to its strategy to outsource some of its back office functions to its subsidiary, ACS.
Shrinking profit margins and ever increasing competition across different industries are now pushing more companies to adopt outsourcing methods; in this case, back office functions. The goal is to focus more on core business functions. Aside from these, the continued global economic recovery and changing regulations are also pushing financial institutions to mitigate risks and bring down costs by adopting outsourced models. With the recovery still in progress and the changing economic climate, it is expected that more companies will continue to adopt outsourced models, especially in the back office.Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.