Financial service outsourcing model: risk and control
Abstract: Financial service outsourcing has developed rapidly under the background of globalization. By outsourcing non-core business to service providers, financial institutions can save operating costs, concentrate superior resources to develop core business and enhance core competitiveness. On the basis of discussing the connotation of outsourcing mode, this paper analyzes various risks in financial service outsourcing, and probes into how to control the risks. ?
Keywords: financial services; Outsourcing; Risk; Control?
First,? What is the connotation of financial service outsourcing model?
For the meaning of financial service outsourcing, the Basel Committee defines it as "on the basis of continuous operation, the supervised person uses a third party (either a subsidiary within the supervised group or a company outside the group) to complete part of the business that should have been completed by himself." In this new business model, financial institutions use "external specialized resources" to reduce costs and improve efficiency in order to gain greater competitive advantage. Its core idea is "do what you are best at, and let others do the rest". Laabs believes that service outsourcing refers to the organization's strategic use of external resources (professional or efficient service providers) to engage in the organization's non-critical or non-core business, and it is "entrusting some non-critical functions of the organization's operation to external resource providers through contracts". Quinn and Hillmer (1994) put forward outsourcing in order to make the technology and resources of enterprises get the most appropriate and effective allocation, so as to produce the greatest benefits. The specific way is to concentrate the resources of the enterprise on the core activities of the enterprise and provide non-strategic needs and businesses without special capabilities from the outside. Yan Yong and Wang Kangyuan (1999) pointed out: "Outsourcing refers to entrusting some important but non-core business functions to senior outsourcing partners outside the company, and concentrating the knowledge and resources inside the enterprise on those core businesses with competitive advantages to provide customers with the greatest value and satisfaction". Xu Shu (2003) thinks: "Outsourcing is a strategic management method for enterprises to keep their most competitive core resources and integrate other resources with external specialized resources to optimize resource allocation and realize their own sustainable development." ?
From the above point of view, it can be seen that outsourcing, as a business model, is the innovation and development of value chain division of labor and comparative advantage theory, and it is also the expression of increasingly refined, specialized and efficient social production. While the business model of financial service outsourcing brings huge benefits, it also means the arrival of new financial risks. The document of financial service outsourcing issued by the Joint Forum led by the Basel Committee on Banking Supervision is the proof of paying attention to the financial risks caused by financial service outsourcing. ?
Second,? What are the main risks of financial service outsourcing?
Outsourcing has many risks. Lacity, Willcocks and Feeny( 1995) believe that the biggest risk comes from hidden costs. They pointed out that outsourcing may have intangible transaction costs and management costs. Transaction costs include resource allocation costs, organizational adjustment costs, and establishment costs. Management cost is the cost that human resources must be invested to manage outsourcing contracts. Nielsen (1996) thinks that there are also contract negotiation costs, partner selection and evaluation costs, dispute resolution costs and so on. Michael. j？ Earl, Wesley? p？ Wilcock and David? f？ Finney (1996) studied the risks of outsourcing from the aspects of weak management, inexperienced staff, business uncertainty, outdated technology, inherent uncertainty, potential cost, loss of organizational learning ability, loss of innovation ability, continuous "triangle" relationship, indivisibility of technology and ambiguity of outsourcing focus. Lv Liwei (2003) believes that there are potential risks in personnel, organization, decision-making, relationship and culture in the process of outsourcing mutual activities between enterprises and partners. ?
Based on the above research and risk classification in financial service outsourcing documents, the main risks of financial service outsourcing can be summarized into the following ten types: (1) strategic risk: the third party may not reach the overall strategic goal of the contracting institution when handling the business on its own; The contracting agency failed to effectively supervise the contractor; Contractors do not have enough technical ability to supervise contractors. (2) Reputation risk: poor service quality of third parties; Can not provide customers with the same standard of service as the contracting agency; The operation mode of the third party does not conform to the traditional practice of the contracting organization. (3) Compliance risk: the third party fails to comply with relevant laws on privacy, consumer protection and prudential supervision, and there is no strict system to ensure compliance. (4) Operational risk: technical failure; There are not enough financial resources to complete the contract work, and remedial measures cannot be taken; Fraud or mistake; It is difficult for contractors to inspect outsourced projects or check the risks brought by high costs. (5) Return risk: over-reliance on a single contractor; Financial institutions lose their business processing ability and cannot recover the outsourced business when necessary; The cost of quickly terminating outsourcing contracts is extremely high. (6) Credit risk: improper credit evaluation; The quality of accounts receivable has declined. (7) Country risks: risks caused by political, social and legal environment. (8) Performance risk: performance ability; The choice of applicable law is very important for international outsourcing. (9) Regulatory obstacle risk: the regulated institution cannot provide data and information to the regulatory authorities in time; It is difficult for the regulatory authorities to understand the contractor's business activities. (10) Centralized and systemic risks; The risks brought by contractors to the whole industry are considerable, which are reflected in the lack of control over contractors by various financial institutions and the systemic risks faced by the whole industry. ?
Third,? Risk control of financial service outsourcing?
1.？ Risk preparation before service outsourcing of financial institutions. Financial institutions should have a clear understanding of the strategic risk, national risk and system risk brought by service outsourcing before determining service outsourcing. Financial institutions should make an overall outsourcing plan and evaluate whether related businesses can be outsourced and the outsourcing risks. It is generally believed that the outsourcing of core management functions is contrary to the responsibility of company managers to manage the company. Therefore, management functions such as strategic supervision, risk management and strategic control cannot be outsourced. Outsourcing should not affect the full and unlimited responsibilities of managers within the scope of relevant laws and regulations (such as banking law). When deciding whether to outsource, the management of financial institutions should comprehensively analyze the costs and benefits of outsourcing in combination with the core competence, management advantages and disadvantages and future development goals of the institutions. ?
At the same time, the management should have a comprehensive understanding of the advantages and disadvantages of outsourcing, and evaluate the core competitiveness, management advantages and disadvantages and future goals of the organization. Employers must take appropriate measures to ensure that they can abide by the laws and regulations of the home country and the host country. The board of directors of financial institutions (or equivalent institutions) is fully responsible for ensuring that all their outsourcing decisions and outsourcing activities carried out by third parties comply with their outsourcing policies, and internal audit should play an important role in this regard. At the same time, establish specific policies and standards for outsourcing decision-making, including evaluating whether related businesses are suitable for outsourcing and to what extent. We must consider and limit the risks brought by outsourcing multiple services to the same service provider. ?
2.？ Partner selection and risk control. Scientific evaluation of outsourcing partners will be particularly important, which is actually an important part of risk control. The choice of outsourcing partners can be measured by the following index system:?
Financial institutions can take the following measures to control the risks of outsourcing partners: (1) Complete competition control. The outsourcing business of financial institutions is usually an ordinary non-core business. For most financial institutions, risks can be avoided through perfect competition. (2) Contract control. Financial institutions can stipulate their rights and obligations with outsourcing partners, service quality standards, outsourcing execution procedures, payment, intellectual property terms, extension of subsequent contracts, etc. through contracts. When using contract control, the more detailed the relevant issues, the better, so as to avoid the trouble caused by chaos to outsourcing cooperation. (3) Technical management output control. In order to avoid moral hazard, financial institutions can apply for patent protection for related technologies, and some technologies needed for outsourcing can be provided to partners in a black box way. At the same time, financial institutions can participate in the supervision and management of outsourcing business activities, and learn a lot of accurate information of outsourcing business in time through on-site management, so as to take corresponding measures to prevent risks and avoid losses caused by time delay or information distortion. (4) Control of incentive mechanism. Financial institutions can encourage partners to improve service quality control, reduce costs and improve service quality through price incentives, order incentives, goodwill incentives, information incentives, elimination incentives, organizational incentives, and new product/technology development. , mobilize the enthusiasm of partners, eliminate the risks caused by information asymmetry or unethical behavior, and achieve a win-win situation. (5) Equity control. In order to avoid losing control of outsourcing partners, financial institutions can appropriately buy the shares of partners or hold shares with each other to share information, strengthen communication and increase mutual trust. ?
3.？ Effective and standardized supervision of financial service outsourcing market. In order to standardize the outsourcing behavior of financial institutions and avoid and control risks, effective supervision of the financial outsourcing market is also one of the main means to control risks. As the supervisors of financial service outsourcing, such as CBRC, CSRC and CIRC, they should refine the requirements for the supervised parties and do a good job in external supervision of outsourcing. If the regulated institution is required to ensure that its outsourcing arrangement will not weaken its ability to fulfill its obligations to customers and regulators, nor will it hinder the effective supervision of regulators; The outsourcing relationship should be regulated by a written contract, which should clearly stipulate all the substantive contents of the outsourcing arrangement, including the rights, obligations and expectations of all parties; The regulated institutions and their service providers shall establish and maintain emergency plans, including remedial plans for sudden disasters. When evaluating the regulated institution, the regulator should regard outsourcing as an indispensable part of its overall business. ?
At the same time, regulators and regulated institutions should establish comprehensive outsourcing risk monitoring procedures to record outsourcing activities and their relationship with service providers. When establishing the outsourcing risk management plan, it includes the following aspects: the scope and importance of outsourcing business; The management ability of the supervised institution; Supervise and control outsourcing risks; The ability of service providers to control potential business risks. When determining the importance of outsourcing business and establishing a risk management plan, we should consider the possible financial, reputation and operational impact of the service provider's failure to perform the contract; Potential losses that may be caused to the employer's customers and peers by the service provider's breach of contract; The influence of service outsourcing on financial institutions' compliance with regulatory laws and regulations and its changes. In a word, a comprehensive outsourcing risk management procedure should be to monitor all relevant aspects of outsourcing, which will create good internal and external supervision conditions for financial institutions' service outsourcing and make financial institutions' service outsourcing achieve the goal of mutual benefit and win-win. ?
Fourth,? Conclusion?
Economic globalization makes financial institutions inseparable from outsourcing. Compared with developed countries, the service outsourcing of financial institutions in China is still in its infancy, and there is still a long way to go, especially in risk control, which deserves further in-depth study. ?
References:?
1. Zhu Yanyan The Geometry of Project Outsourcing of China Enterprises. China business times, July 2003-11.
2. Uncle Xu. A review of the research results of western business outsourcing. Foreign Economy and Management, 2003,12 (25):13-17.
3. Lu Liwei. Risk management in business outsourcing. Modern Management Science, 2003, (2): 69-70.
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