Entry No.46f

IT Writers Awards

Standfirst
Many run-of-the-mill application service providers (ASPs) are finding the financial service arena a tough nut to crack. Isolating a customer's shabby internal business processes could be the answer. Cameron Tomes reports.

Graeme Towers, chief manager - Operations Centres at the Commonwealth Bank, shrewdly offered a straight bat in response to this leading question. 

What are the chances that Commonwealth Bank is quietly forging a nice little application service provision (ASP) profit centre of its own by offering extensive experience and unmatchable scale in back office processing resources to existing bank customers and ultimately external entities?

Certainly the "tale of the tape" suggests that Com Bank is intriguingly poised to take the vanilla ideals touted by the vast majority of ASP proponents to a higher, business-oriented plain. In doing so, the bank is effectively doing unto the ASP community what its spruikers have been proposing to do unto itself and other financial services organisations for some time.

Com Bank's operations centres in each capital city manage the business process outsourcing (BPO) side of the bank's relationship with its customers and suppliers. The centres process over 300m cheques and vouchers per annum, including those for the Reserve Bank of Australia, while on the retail front over 22m customer accounts are maintained. In addition, the centres provide a range of services including financial accounts processing and payroll processing.

Clearly, here, we're not just talking about outsourcing mundane Office applications or increasingly popular, yet maintenance-intensive ERP and CRM systems. Com Bank has identified a distinct profit centre within its own walls, in back office processing, and suspects that this business function could be thrust onto the commercial stage through partnerships with small business and major customers alike.

But, back to Dr Towers and those non-committal comments about a possible ASP-style service for what is definitely a business critical resource.

"We're not involved in any ASP-type work, but we do offer our back office processing capabilities and infrastructure that can be hung off an ASP model," Towers said. "The bank hasn't devised an ASP direction as yet. Our e-commerce department and our customer service divisions will determine that direction. However, I can say that there are a number of proposals under review," Towers added. One such proposal resulted in Com Bank signing a BPO alliance with the spun-off IT services arm of Mincom and, now global ASP, Tequinox in May this year to provide and manage total business service provision (BSP) to the market. Both parties claimed this as a world first in the bank/ASP relationship stakes, suggesting a back office processing marriage with ASP-style services would "have a significant impact on businesses seeking to streamline their operations through the outsourcing of non-core functions".

As Towers tossed up his options over the most strategic channel to expose the bank's back office processing prowess, Tequinox came to the party willing to share its ASP expertise in return for a commitment from Com Bank to provide back office services for its customers.

According to Bill Hodgson, executive vice president at Tequinox, customers shouldn't assume that the current crop of ASP models doing the rounds could make all their application provision and support headaches disappear. Rather, ASP solutions offer far greater value if they are deployed in conjunction with business process outsourcing strategies. "The ASP model goes part of the way by reducing the risk and cost of efficient IT delivery to business, while BPO delivers similar efficiency in terms of practical business outcomes," he suggested. 

In Hodgson's opinion the ASP movement has suffered for some time from a "fair bit of hype" surrounding its potential to deliver strong business solutions.

"For all the talk and hype most customers are still asking 'where's the beef to the concept?' The (ASP) market is growing steadily but it would do better if we could leave out that extra hype," Hodgson suggested.

He said Tequinox's partnership with Com Bank reflects a commonly held view among financial services players that ASP solutions, as they are proposed, don't pack the necessary business process efficiency punch these organisations are seeking to complement their own internal re-engineering and rationalisation strategies.  "The real hot spot for financial services is not necessarily just ASPs, which try to address business issues and deliver wonderful business benefits by throwing more technology at the problem. The world is becoming IT saturated - we don't need much more. 

"Organisations have to think a lot harder to derive serous business benefits, more serious than a standard ASP can provide," Hodgson added.

As an ASP in its own right, Tequinox can't afford to rubbish integral components of its business. With that in mind, Hodgson was quick to suggest that while many financial services organisations are dabbling in pure application outsourcing, the attraction of outsourcing business processes is very desirable indeed.

"As these organisations move down the direct purchasing, e-procurement and e-commerce roads they are all looking to get rid of semi-core business functions that were historically part of the way they did business. They also want to rationalise staff costs associated with the old business functions they are intending to replace with e-business solutions." That is not to say banks, for example, are prepared to hand over mission-critical business processes to just any old Joe, as Hodgson can well attest to.

"They'll only outsource accounts payable services, for example, to organisations if they're convinced the results will be better than those produced internally and that the provisioning partner provides a trusted, secure and reliable service in return," he said.

So how do both organisations stand to benefit from this joint venture?

According to a press statement released at the time of the launch, the alliance signifies the growing customer demand both organisations are witnessing for the outsourcing of non-core business processes. Through the partnership Tequinox will offer enterprise payroll and accounting applications to Com Bank and its customers which are integrated with existing IT infrastructures. In return Com Bank will make available its back office processing resources for Tequinox customers.

"Organisations are seeking the benefits of economy of scale, process rationalisation, and management expertise that specialist service providers can offer," Hodgson said in providing the strategic reasoning behind the deal. "We can bring business to the bank and they in turn can provide business to us."

For Com Bank's Towers, ASP partnerships like that struck with Tequinox (Com Bank has expressed an interest in developing ASP initiatives with other providers) are essential for the bank to maintain an economies of scale edge.

"Our aim is to become the industry's back office processing centre and exploit the scale we have established in the business," Towers explained.

"Many organisations, particularly start-ups and small businesses, don't want to run their own back office functions because it's a costly exercise and not their core business. The bank, on the other hand, runs the back office as a profit centre," Towers said.

However, unlike most ASP approaches, Com Bank has no interest in hosting its customers' accounting, payroll, CRM or ERP systems infrastructures. That's Tequinox's job. Rather, Towers believes the real advantage of the Tequinox relationship lies in the higher service levels that can be delivered back to customers.

"They (Com Bank) have all the makings to be a best practice BPO player using their back office processing skills and infrastructure," Hodgson said. "We could offer solid ASP skills so it made sense for us to consider ways in which the two organisations could work proactively to deliver best practice in all areas of our businesses."

Adopting a different approach to application service provision, SAP is putting its considerable enterprise application integration muscle behind a web-enabled infrastructure platform, called mysap.com, which the vendor claims can aggregate information residing on a range of disparate applications on a central site.

The various modules are priced individually depending on each customer's needs. However, Iain Blacklaw, financial services director for SAP Asia Pacific, suggested there are plenty of SMEs looking to palm off their costly accounting and human resources systems.

You'd think Blacklaw would know what it takes to crack it in the financial services arena. Having worked at Westpac for roughly 12 years running the bank's back office operations, he knows only too well the economies of scale that can be achieved through this side of the business. However, many financial services organisations have "lacked the right infrastructure" to deliver customised online applications to customers, Blacklaw claimed.

"There is a distinct lack of application partitioning that enables banks to deliver services and business functions on a client by client basis," he said. 

Given these perceived deficiencies, SAP is working over time to extol the benefits of its mysap.com infrastructure to its existing banking customers, National Australia, Commonwealth Bank and Westpac. SAP's aim is to convince these organisations that flexible business systems can be developed internally with a view to replicating them online for those small business customers that can't afford to buy costly best of breed payroll and accounting systems.

"Banks have the capacity to service their small business customers when they want to be served but have yet to tap into that capability," according to Blacklaw. "Banks might conduct most of their batch processing work overnight, but most small business customers are intensive banking and accounting system users during the day."

He suggested that it would be in the banks' interests to increase the capacity of their various batch processing centres to meet their customers' financial services needs during the day.

However, while SAP claims its mysap.com infrastructure could be the BPO/ASP panacea financial services players are seeking, Blacklaw argued that technology invariably takes a back seat when it comes to strategic planning discussions.

"Banks run massive specialised processing centres which specialise in production cycle techniques, workflow and tracking systems that are state-of-the-art. And for organisations like Commonwealth Bank, it is a very strong competitive proposition," he said.

"Banks succeed because they invest heavily in people, place and process. They have the scale, infrastructure and the expertise to make the ASP function work.

"However, they don't have the commercial front-ends to really make it happen and exploit and ASP market," Blacklaw said. And that's where technology solutions, such as mysap.com, emerge as the glue that holds everything together.

Where banks once built their technologies from the ground up, the trend now is to open the purse strings and invest in best of breed web-enabled solutions that can not only derive costs savings but also rationalise business processes, according to Blacklaw.

"Banks need to change their thinking from a 'we lend you money approach' to a 'we provide you with a service approach'. At the end of the day, the ASP model is simply about driving supply." J

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While the focus of financial services organisations has been drawn onto outsourcing non-core business processes to ASPs, there is still life in the old model of hosting generic applications, such as messaging and office products.

That's the theory being espoused by managed network services provider Equant, which established an ASP division just last year. However, before you start wailing that any man and his dog can host Microsoft Word or Excel for a customer, Peter Pastars, general manager of Equant's Asia Pacific ASP division, suggests many so-called ASPs lack strong management expertise to support their offerings. "We've listened closely to the sales pitches of other ASPs and, by and large, most of them say the biggest hurdle is establishing partnering arrangements," Pastars said. "If an ASP is serving an application to a customer and something goes wrong with the comms link who does the customer call? Do they call the ASP provider, is it a communications line problem, is it the hardware or software, an operating system problem, or do they need to deploy an engineer?" he questioned. "There are roughly eight layers to an ASP service which need to be addressed by the provider to avoid such disaster stories." Equant claims its ASP aspirations will benefit in the long run from the close integration with its other business units - network design, integration services and support. Equant is willing to bet the house on its ability to build an integrated ASP arm from the ground up. As a result, the organisation has shied away from simply acquiring an established ASP operation.  "By incorporating the expertise of the other divisions we can track comms line failures and manage software and hardware remotely from network operations centres in Sydney, Atlanta, Paris and Singapore. "So you could say we kind of fell into the ASP market," Pastars said. Equant offers ASP services for messaging platforms, including Outlook and Exchange and last month unveiled a managed ASP service for Microsoft Office applications.

However, while these so-called vanilla solutions may not set talks with financial services organisations alight, (Equant has yet to venture into the sector) Pastars said it is important that the division doesn't bite off more than it can chew too quickly. "With ASP solutions you have to crawl before you can walk. We'd prefer to get our toes in the water first before we jump into hosting tailored business solutions, such as back office processing," he suggested.

"What we're doing may sound very vanilla but it takes a lot to get that vanilla layer right. Once we build our competence in this area then we can start to talk with enterprise ERP systems and back office systems and eventually host e-commerce transactions." J

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It is intriguing that ASPs, BPOs and BSPs have cemented flavour of the month status given that each of these concepts have been around in various guises for many years. Put simply, the ideas are not new, it's just that customers now realise the necessity of rationalising their business operations to compete in an online world.

According to Bill Hodgson, executive vice president at Brisbane-based global ASP-cum-BPO provider Tequinox, there is no point in pursuing past practices of trying to create markets that you think customers want. He said that while customers express interest in divesting themselves of non-core business processes the value proposition of providing BPO/ASP services becomes evident.

"The market, particularly small business, is screaming out for organisations to develop best practice services that can take certain business functions off their plate," Hodgson argued. "Large organisations, which have the scale and various levels of management control, can maintain their enterprise systems, but those same systems don't apply anywhere near as well in middle to small markets."

Hodgson estimated that Tequinox could help reduce Commonwealth Bank's internal accounting and payroll overheads by as much as 25% by hosting these applications. However, it would surely have to outlay considerable dollars to build comparable server and database infrastructures to that of the bank's to drive costs down.

"The bank already performs the functions it is outsourcing to us. They pay their invoices and they know exactly what costs they incur. "Knowing that, we can't hide behind anything if we're providing them with that same service," Hodgson said. "To make money we have to deliver a service that's more cost effective and just as reliable and trusted as the bank's internal operations." Just because Com Bank represents such as massive brand in Australia doesn't mean Tequinox can slacken off in its endeavours. Hodgson said every move Tequinox makes with Com Bank is governed by service level agreements, while challenges from competing ASPs are also on the cards.

"In this business you will always be market contestable," Hodgson warned. "A competitor may come up with a better function or the outsourcing organisation may learn to do it better and you'll be out of a job" J

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