6 Things Financial Services Should Get Right in Moving to a Build Operate Transfer Model

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In a constantly evolving world, large banking and financial institutions need to explore innovative service delivery models that balance in-house capabilities and external expertise. That is, if they want to provide best-in-class experiences for their customers. Emerging as an alternative to traditional outsourcing, the build-operate-transfer (BOT) model can help reduce costs and improve service quality by allowing institutions to focus on their core functions while simultaneously leveraging third -party expertise at an expedited pace.

Just like fashion and hairstyles, service delivery models are very much cyclical. Sure enough, 2022 has seen an uptick in conversations about BOT constructs for IT and business process services in the Banking and Financial Services (BFS) industry.

A BOT model allows an institution to engage a third-party provider to set up (typically at an offshore or nearshore location), optimize and transform an IT or business process service delivery operation and then transfer it back after a defined period of time (typically because the in-scope services are seen as differentiators in the medium to long term). 

Why consider a BOT approach?

There are five principal reasons why financial institutions would consider a BOT approach in today’s dynamic and fiercely competitive environment.

  1. Access skills that are increasingly hard to find in the market (including data engineering, cyber, data science, etc)
  2. Lower the risk of providing a market-strength service across multiple regulatory jurisdictions
  3. Take advantage of an existing supplier location, for example an innovation lab or technology hub
  4. Increase the speed to transform operations, which is so crucial in the battle for attracting and retaining customers
  5. Drive greater focus on specific lines of business, such as lending or payments, and improve the firm’s ability to serve (and delight) customers – the crucible of transformation in BFS today.

Despite the attraction and the growing number of conversations about BOT models, financial institutions remain somewhat wary, hence we have not seen as many implemented as we might have expected. This is partly because it is a significant undertaking, and today’s CEOs have a long list of priorities. It is also because designing the most appropriate BOT model and associated success criteria can be difficult.

How to make BOT successful

To simplify the process and mitigate risk, financial institutions should follow these six steps:

  1. Pick a provider based on a combination of the following criteria: industry expertise, commercial transparency, demonstrable value in delivering the in-scope services, a contractually committed program of continuous improvement and innovation, and – ideally – knowledge of your organization.
  2. Ensure the BOT center includes staff from the financial institution as well as the provider. Successful models typically include a staff layer to bridge between the center and the “mothership,” especially during the “B” and “O” phases.
  3. Consider pricing each phase separately to align incentives – for example, fixed price for the initial design, milestone-based “build,” outcome-based “operate” and milestone-based transformation and ”transfer.”
  4. Regardless of who is providing the services (provider during the “O” and enterprise client post-“T”), there must be appropriate KPIs (including SLAs) as part of a robust governance framework to measure business value and return on investment (ROI).
  5. Be contractually clear about the conditions for the “transition” part – who can initiate, under what circumstances would the “T” not take place, what happens to the employees, and what are the commercial implications of extension?
  6. Don’t think BOT is pain/risk free; it isn’t. Be wary of minimum revenue commitments, sudden resource attrition at each phase of the BOT, dilution of value through suboptimal governance and inflexibility of model change options.

There’s little doubt that, in theory, leveraging a BOT approach can bring market-leading expertise rapidly to an organization, allowing it to access new service delivery capabilities and talent without sacrificing quality or time to value. But, as with all theoretically good ideas, there are many obstacles to overcome in reality to achieve the benefits.

As a leading technology research and advisory services firm, ISG has helped many financial institutions with BOT strategy, design, implementation, transition and governance. We understand when they should be considered, how to design them, best practice commercial terms, pricing structures and KPIs, and can help organizations execute the right strategy to meet their goals. Contact us to find out more.

About the author

Owen Wheatley is Lead Partner for the Banking & Financial Services (BFS) Practice with responsibility for senior client relationships, business growth, go to market strategy and delivery excellence through the management of high-performance advisory teams across multiple regions. He sits on the Executive Committees in both the USA and Europe, has served major banking & financial services clients around the world and continues to be a widely published thought leader in the industry.

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