Managed services describes the practice through which a company’s day-to-day technology is managed by third party providers. There are a number of reasons why financial institutions do this, including:
- Reduction of the total cost of ownership (TCO) of technology
- Acceleration of the return on investment in next generation technology
- Overcoming a lack of in-house expertise
- Offsetting an unwillingness to invest in the development of expertise in non-core technology
Additional operational drivers include the reduction of operational risk, a desire for continuous improvement of operations, and the optimization of resources.
The utilization of managed services has increased rapidly, as companies deal with increasingly complex IT operations and, at the same time, deliver on increasingly demanding business objectives. Sprawling infrastructures and siloes can slow innovation and growth, while the internal resources needed to manage complex IT systems in-house can make the total cost of ownership (TCO) unfeasible – especially at a time when many financial services companies are investing time and manpower into meeting new regulatory requirements.
Technology outsourcing improves efficiencies
The analysis shows that institutions that have taken on a Managed IT Services Provider (MSP) have greatly reduced the burden on IT departments. This has freed internal staff to focus on the company’s core business, including areas that may generate competitive advantages, while also benefitting from predictable costs, an optimized infrastructure and enhanced operations. A case in point is Campbell Soup Company, which decided to outsource application development/maintenance and computer systems operation to IBM in 2001 (IBM Global Services 2005). By doing so, Campbell’s internal IT team could focus on such activities as linking IT strategies to specific business strategies and delivering higher value solutions at an accelerated pace. As a result, Campbell could realize significant savings through increased efficiency and productivity.
The cost reductions firms have achieved by outsourcing IT activities, such as applying release upgrades, housekeeping, network monitoring, and infrastructure troubleshooting, are significant. Knittel and Stango (2007), found that IT outsourcing reduced operating costs by approximately 30 percent in the U.S. credit union industry and saved over $6 billion for the industry as a whole. In comparison, institutions that are not using a managed services provider must cover the cost of additional internal staff, in addition to hardware, operating system and network costs.
Several case studies document cost savings associated with IT outsourcing (e.g., Lacity and Willcocks 2000; Levina and Ross 2003). However, these studies focus on the costs directly related to IT (e.g., systems development costs). Operating costs not related to IT (e.g., sales, general and administrative costs) Operating costs not related to IT (e.g., sales, general and administrative costs) account for a much larger portion of firms’ total operating costs, sometimes more than four times as large as IT-related operating costs, and can directly influence profitability.
As regulatory compliance demands evolve and challenges to growth goals and sustainability emerge, financial institutions require a reliable and flexible information technology (IT) environment. Developed specifically for financial institutions, RSM US LLP’s Financial Institution Technology (FIT) as a Service helps reduce risks in today’s complex IT and regulatory environments while overcoming IT staffing challenges. Contact RSM US LLP for more information at 1-800-274-3978.