Most financial institutions use external vendors to facilitate communication, regulation and complex analytical and processing requirements. However, as many vendors are now embracing automation technologies themselves the evaluation and choice of vendor has become more complex.
The case for Investing
Robotics (e.g. automation) and AI (e.g. machine learning) offers businesses the prospect of improved efficiencies and access to new markets which can ultimately deliver an improvement in the bottom line.
Investing in these new technologies can offer the opportunity to reduce the time taken to perform routine tasks so that staff can be deployed more efficiently, thereby increasing productivity. It can be used to undertake portfolio analytics and risk assessments that previously had been the preserve of larger institutions in a fraction of the time, saving the cost of directly employing staff with the prerequisite skills.
The case for investing in such technology however needs to be carefully thought out. The cost of “doing the maths” in house can be prohibitively expensive and alternative vendor solutions can be expensive to implement requiring sizeable upfront expenditure. This can be more acute when engaging with larger vendor organisation who have a sizeable employee base to support. Such out lay may not lead to a significant reduction of cost or increased efficiency. Return on investment can be slow to materialise.
Recognising these challenges to their client base some challenger vendors are adopting minimal integration requirements (lean and agile to coin more popular terminology) and commercial terms based on the benefit to OPEX rather than a CAPEX expense. This approach means that businesses can assess and measure the potential benefits of technological solutions and effectively deploy these on a “cost benefit” basis.
Banjaxed by the Brand
Another consideration that many businesses sight when appointing a vendor is brand. This is a proxy for quality but it can be a misleading one. Big firms typically have a strong brand established in their core services but applied across all of their offerings. Unfortunately, this measure can become more misleading in fringe products far from core services. In such product areas the requisite technological, industry and regulatory understanding can be concentrated in a few key staff. When these staff move on, as staff have a tendency to do, the technology behind the product remains but the understanding and insight required for an effective implementation can be eroded and even lost.
When appointing a vendor, businesses should try to discount the brand and interview the key staff and subject matter experts behind the vendors technology to ascertain the quality of the service. This should also be done when key staff working at an incumbent vendor move on. Comparing and contrasting the results of such interviews across would-be vendors helps to inform the conclusions drawn. References from other businesses using prospective vendor technology should be sort. Request the phone number of a counterpart in a similar firm using the specific vendor service and phone them.
If the vendor service helps fulfil a regulatory requirement understand the strength of the vendors regulatory understanding and even their regulatory contacts. This does not have to be across the board but within the specific regulatory area that the service is concerned with. Regulators will not endorse a vendor service but they are likely to confirm that a company, or individuals within a company, are known to them.
Where is your Data?
Most importantly understanding what happens to your data is a business imperative. If the vendor service requires movement of data out of your IT architecture/ infrastructure make sure they evidence the adherence to the relevant standards. If the service makes use of cloud providers, such as AWS, Azure or Google, so much the better as these automatically conform to the latest security standards. Remember a number of high profile vendors and service firms have had very public data breaches. A conversation about these with vendors and the lessons learnt can be very informative.
Ensuring that your data stays within the country/region in which you operate should reduce the risk of data theft. Your vendor should be able to facilitate this. If not, you will need to satisfy yourself of the ramifications of your data leaving your jurisdiction. A recent study of global corruption undertaken by Transparency International (see figure 1.) should be borne in mind. The more corrupt a society the greater the chance of your data being stolen. It is not just customer data that is sort but also corporate information for example the specifics of capital positions.
Figure 1: Global corruption. Source: Transparency International www.transparency.org/cpi
Surprisingly, some large vendors do operate arcane internal systems. They can, due to their size, operate captive outsourcing centres in the developing world. It can be more cost effective and simpler for them to transfer your data to such outsourcing centres for processing rather than invest in the development of in house automation that they so readily espouse to the industry and their clients.
Many external countries have different employment laws to the UK with much higher staff attrition. For example, according to Statistica the average voluntary turnover for FS staff in India in 2017 was 18% which is double the published rate for the UK (according to XpertHR). Your vendor contract might provide the assurances required to mitigate against the additional risks of your data being processed overseas. However, these contracts can do little to protect your intellectual property and sensitive information from individuals who are twice as likely to work for a competitor organisation where they are no longer bound by their contract to your vendor (and in some cases your vendor’s outsourcing vendor!).
Finally, are you benefiting? Does the additional governance and due diligence required to scrutinise these contracts still justify the original decision to use the chosen vendor? If outsourcing forms part of their service who is benefiting? Is the cost benefit passed onto you or is it retained by your vendor?
Vendor selection doesn’t need to be challenging but discounting brand may help to provide a more honest understanding of the services on offer.
John Willoughby, Director, elanev