Five considerations for banking and insurance core systems service model selection

When considering an investment in a core system, whether it be a new one or a replacing an existing system, it is almost impossible to avoid the issue of service model selection. Providers that, by default, would offer on-premises, license-based software deliveries are rare if not extinct, and most often the sell-side will propose a selection of additional services on top (or instead) of a software delivery.

Hannu Eskola

7.9.2022

Acronyms like SaaS, BPO and BPaaS are presented as evident solutions to issues that traditionally arise in larger software delivery projects. Additional services do indeed present a number of opportunities for the purchasing organisation, but at the same time pose potential challenges, especially when lacking previous experience from similar projects. 

Therefore, instead of picking all things shiny and new from the vendors' shelves, it is more appropriate to base the service model choice on a careful (but not overcautious) analysis of your own organisation. The following summarises a selection of issues to consider before picking the right acronym for your project.

Base your decision on strategy and internal capabilities rather than trends or external suggestions

As with strategic decisions in general, there is no one size fits all approach when selecting the right service model for your core systems. The decision should be based on organisational level strategy, internal capabilities, and compatibility with your ICT / third party services portfolio. There is no point in a one-off BPaaS implementation just to be able accommodate trendy buzzwords in corporate communications. Sticking to on-premises installations simply because "that’s just the way we have always done it" is equally reasonable. 

When analysing the internal capabilities you should focus not only on the existing and/or lacking capabilities in the outsourcing target area, but also consider the required capabilities in service governance and how they fit together with the skills and practices you have within your organisation.  

Requirements and contractual documents according to the product bought

Before you take your vendor-selection or bidding process any further than the RFI stage, you should know the type of service you are buying. The reason for that, although there are most likely also common requirements for all types of services, there is a clear difference between the requirement setting for a business service and a software license. This also means that in order to change the service model later on in the bidding process, you need to invest the time and effort needed to revisit, and where appropriate rewrite, your requirements before proceeding.

The requirements documents tend to end up among the contracts and you do not want to end up in a situation where a business process outsourcing contract refers to a software license requirement description.

Ensure the realisation of targeted cost and resource usage reductions when outsourcing

Outsourcing, regardless of the related acronym, often targets cost and resource reductions or re-allocation. With such targets, realistically evaluating the cost reduction potential is essential. Special consideration should be given to identifying and estimating both the costs arising outside the identified or intended target scope and the work required in terms of outsourcing service governance and monitoring. 

Reaching the desired outcome in general, and thus in costs as well, is to be able to agree on the service content in an effective manner. Different interpretations or expectations between the service provider and service subscriber are likely to bring significant additional costs. The likelihood for such deviations is greater when entering new outsourcing schemes for the first time. Using external experience in the bidding process or independent third-party auditors to evaluate the match between requirements and offered services can reduce the possibility of such error.

Finally, aim at limiting service provider costs to a targeted range via contractual arrangements. The easiest way to do this is not to leave any services outside the consumption- or subscription-based tariff. Easier said than done, but the closer you get, the better your chances of achieving the targeted results.

Look for outsourcing partners that know how to focus on their core competences

As one of the main ideas of both the BPO and BPaaS arrangements is to provide your organisation with greater process efficiency through an enhanced ability to focus on your core competences, you should also verify, not in the context of contractual documents but rather as an informative part of the vendor selection process, that your selected provider follows the same principle. For instance, when a service provider delivers a wide variety of add-on services that are produced in-house it is safe to assume that not all of these can be delivered with best-of-breed quality and costs. Providers that have a clear focus in services produced in-house complemented with add-on services from select third parties are more likely to provide you with a service package consisting of core competences from a network of providers. 

Always have an exit plan

Extensive business process or platform outsourcing arrangements tend to create a high dependency on the service provider. To limit the related risks, it is always important to have a valid and documented exit plan. Whether it is to insource the operations, ramp them down or change the service provider makes no significant difference. The important thing is to plan the exit and approve the plans at a management level before they are needed. 

The exit plan needs to be supported by the contractual arrangements with the service provider, so creating one really is an essential part of the vendor selection process. The level of planning needed should be in line with the criticality of the service for your business operations. It is not enough to define contract termination periods, the service termination should also cover important issues such as the rights and obligations related to service data contents, the rights to underlying software licenses (if any) and the principles for termination costs invoicing.