Reference data managing (RDM) is an increasingly important process in financial institutions.
Reference data includes static business data from organisations such as credit agencies, financial service customers and market data from trading floors, among other data types.
Figure 1 shows the key types of RD across the top and the key process steps for managing RD down the left side.
Until recently RDM has relied heavily on manual processing because scrubbing, normalising, and consolidating data have generally not been automated.
In recent years, financial services companies have begun outsourcing these functions to achieve economies of scale.
Since the economic meltdown in 2008, the economics of the financial industry have changed to accelerate the drive to more outsourcing of RDM.
Trends driving RDM Outsourcing
There are a number of factors driving this trend towards RDM business process outsourcing (BPO).
Firstly, banks are looking to improve their efficiency to boost their profits in mature markets and, at the same time, they are looking to outsourcing to give them the flexibility to ramp-up quickly in emerging markets.
Secondly, outsourcing is an attractive alternative as banks move into new product areas, such as securities which require heavy manual processing.
Exchange traded derivatives, for example, require high volume processing and high degrees of accuracy, with minimal exceptions to be cost effective.
Longer transaction windows, coupled with shorter settlement windows, are together driving requirements for shorter turnaround times, are other trends driving banks towards RDM BPO.
Outsourcing to a third-party supplier can also make it easier for banks to manage a growing volume of regulatory requirements, such MiFID for capital markets, or KYC/AML for retail accounts.
Up to 70% savings
With the economy still facing difficulties, banks are finding it challenging to deal with greater demands and fewer resources. To address these challenges most are turning to third party suppliers for RDM support.
RDM BPO suppliers can typically help banks make initial cost savings of 20-50% and further ongoing annual cost savings of 1-2%.
They can help financial service organisations reduce their fixed costs by offering per-transaction pricing and buying their customers' delivery centres.
Suppliers offer platform migration services, allowing companies to modernise their platforms and share data across the organisation. They have developed scripts that can automate 5-15% of manual processes, generating savings of up to 70%.
Identifying the most accurate and timely data feeds within each domain, and eliminating redundant feeds, can leads to savings of up to $200m for global organisations
And by placing operations in multiple time zones, third-party suppliers can reduce turnaround times. They can achieve efficiencies by running a 24/7 operations, passing work across time zones to continuously process data.
Third-party suppliers can ramp staff up to meet unanticipated volume spikes or seasonal spikes in demand by drawing on personnel from other cyclical industries.
They have the flexibility to allocate internal staff to the highest priority work-loads, lines of business and geographies with highest volumes or priority of work.
Reference Data Definition
Reference data is defined “static business data, originating from outside the firm, used in a single application, system, or process”.
Working for multiple clients allows suppliers to internalise best practices from many banks into their operational standards.
These benefits provide compelling reasons to undertake RDM BPO engagements, but banks are also pursuing outsourcing for deeper strategic reasons. The market is changing rapidly and banks need support in adapting to those changes.
Specifically they are looking for support with compliance, predictive analytics and in growing customers, investment instruments, and products offerings.
New activities require manual processing, until they can be analyzed and automated.
In the meantime, these processes require scalable labour, labour arbitrage, and quality assurance. Lower cost labour allows a greater percent of the overall execution cost to go into quality assurance.
Deep process management
An RDM BPO supplier focuses on manual process execution. Good suppliers will have deep capabilities in process management, such as six sigma and lean processing, automation tools and consistent delivery.
They will have the ability to release low priority assets to other uses from other clients to increase capacity and reduce cost and they will have industrial strength hiring to scale up (and scale down) as business requirements change.
Finding the right supplier is not easy, as capabilities and disciplined execution need to be coupled with the ability to work with the bank organization, to achieve these goals.
Most successful engagements are built from smaller engagements (often not in RDM) where the two organisations find out how to work with each other effectively.
Initial compatibility is then strengthened by a disciplined proposal process where each side is able to propose solutions to the challenge, and finally the best ideas are formulated into a statement of work (contract) which can adapt over time to a changing business.
RDM is being outsourced due to the changes in the financial industry that are placing greater reporting burdens on banks and greater need to “reach beyond the bank’s zone of comfort” to pursue new business possibilities.
In that environment, no one organisation has the resources to successfully adapt data management without help.
By outsourcing RDM to a third party supplier, banks cannot only produce a temporary improvement in operational performance, but also they can continue to efficiently adapt as change continues. Successful RDM BPO engagements can be important components of a successful business transformation.
Andy Efstathiou is director of the banking sourcing practice at analyst NelsonHall