By Stuart Drew, Executive Vice President Financial Services at HCL Technologies

Ten years ago, the financial services (FS) industry was a very different place to operate in for IT outsourcing vendors. With a conservative, traditionalist approach to hiring external suppliers, outsourcing in any form was placed low down on the list of priorities for FS decision makers. Today, however, it’s a different story entirely, with the financial services sector now commonly perceived as the biggest consumers of IT outsourcing in industry today.

So what’s behind this increased appetite for IT services amongst banks and other financial institutions? Put simply, it’s an increased willingness to see the customer as king. Traditionally, banks in particular, would rarely engage with customers beyond promotional activity for specific products. In an industry that has never been so competitive and tough, the banking sector has been forced to wake up to the importance of building a relationship with its customers if they are to thrive.

Of course, many of the concerns expressed by those in the financial services sector about embracing IT outsourcing seemed, at the time, quite valid. In an industry that has increasingly found itself living in the shadow of regulatory pressures since the start of the global financial crisis, banks and other similar organisations realised that they had to tread more carefully. The more cavalier approach to investment taken by some in days gone by was quickly abandoned in favour of a more conservative approach. For example, increased scrutiny over data security meant that outsourcing was a non-starter. Trusting a third party supplier with potentially sensitive information was not considered as a viable option, and risk aversion quickly took a front seat.

Gradually, however, as this conservatism has abated, and the market matured, financial services organisations have woken up to the fact that a new philosophy was required. The main driver for this was the emergence of a new, technologically savvy generation of customer that they needed to work hard to connect with. Today’s new breed of customer is totally different proposition from anything the financial services industry has witnessed before. Whereas in years gone by, customers would happily stand in line in branch to cash in a cheque, today’s customers demand instant action on mobile devices, in the cloud and online. They demand the ability to have information at their fingertips, and feel that speaking to their bank how and when they want to do so is a fundamental expectation.

With increased pressure placed on financial services companies to build bridges with Generation Y, banks realised that the infrastructure was not in place to offer mobile solutions and more innovative solutions such as cloud computing need to be considered. Crucially, they also understood that they did not have the requisite skills in-house to implement this change. As a result, it wasn’t long before the industry discarded its traditional conservatism and turned to external specialists to provide the foundation of technology and infrastructure required to make this dream a reality.

There have, of course, been other considerations that explain the increased number of opportunities for IT services vendors in this sector. For example, there’s no doubt that, even today, cost is still a significant driver for banks, which continue to come under pressure to lower their cost/income ratios from historical highs. As a result, it’s becoming more and more common to see IT outsourcing specialists brought in to try and extract greater value and efficiency from existing legacy systems that are inflexible and not adaptable to new technology. Equally, an increase in industry regulation which, paradoxically, used to restrict opportunities for IT services vendors, now means that these same suppliers are now ideally placed to provide systems that can process regulatory reports with the level of consistency that has been mandated.

So what does the future hold for IT outsourcing in the financial services sector? There’s no doubt that we’re seeing an increased willingness to engage with customers across multiple platforms, and this will continue to drive IT outsourcing. As mobile, digital and cloud technologies continue to evolve, FS companies will continue to react with more offerings designed to enable them to connect even further with customers. It’s also well worth remembering that for many, increased regulation could mean that they have no alternative but to turn to IT outsourcing providers.

Increased regulation could also mean a greater emphasis on quality of service in the industry. As these standards continue to rise, it follows that demand for specialist providers capable of offering niche skills and expertise will increase accordingly. Nonetheless, it seems clear that an increased focus on the customer will continue to be the biggest driver. The need to cut the technology cloth accordingly when it comes to managing the systems that make this possible could, as a result, benefit IT outsourcing providers operating in the financial services sector for many years to come.

The perfect storm of increased competition, a struggling economy and demand from customers for new value-added services will continue to prompt banks and brokerages to outsource many business-critical functions, from back-office systems to infrastructure management. Clearly, when third party suppliers are concerned, there’ll always be an element of uncertainty amongst banks, in particular, and it’s clear that these leopards won’t necessarily change their spots completely overnight. Despite this, it seems clear that, for both vendors and end-users, when it comes to IT outsourcing in the financial services industry, the customer is, and will continue to be, king!