The Bloor Perspective: Recovery HR, offshoring and Basel II

There seems these days to be a general acceptance that the economy is picking up. It's not that everyone is talking about it but rather that they are no longer talking in the gloomy terms that we have come to expect over the past couple of years.

Enterprise business applications technology was a sector that was hit extremely hard in the recent economic downturn. Companies delayed any form of spending on applications that they could get away with. In the 1990s, it was the norm for companies to make big strategic decisions to implement technology to automate an entire range of processes. Companies changed their focus to implement technology to address specific points of pain, rather than the big bang approach.

As analysts who have followed the enterprise business technology market for a number of years, there have been some striking changes of late. One thing that stands out in particular is that technology vendors across the board are placing a greater emphasis on the mid-market as they attempt to find a wider audience for their solutions. This is something that is especially pronounced in the market for applications for managing customer-facing relationships.

All things supply chain have long been popular as technology fixes and this will not change any time soon. But there is a surprising renaissance in the market for human resource management technology. While this time last year, we would talk on average to six companies per year about applications they were developing for human resource management problems - technology for streamlining recruitment, retention, training and so forth - we are now being approached by nearer to six companies per month.

We can only speculate that the mass layoffs and cost cutting exercises that companies across the board have been forced to implement over the past couple of years have made people realise that their workers are often their greatest asset. While the economy may be more resilient that it was over the past couple of years, many commentators have noticed that the job market is not picking up at the same pace. With the technologies that are around now people are becoming much more wary of making hiring decisions.

The good news is that the technology companies have taken human resource management challenges to heart. This is an area that is currently enjoying a revival and one which Bloor Research will be taking a deep interest in over the next few months. Right now, HR is hot.

*Outsourcing: Thick and fast*
Announcements of outsourcing deals come thick and fast and they come thickest and fastest in the financial services industry. Do they think about 'what happens' if it all goes wrong? How and why do outsourcing agreements go wrong?

Case studies on failed outsourcing agreements are few and far. This is understandable, as they demonstrate failure by both parties. Neither party wishes to parade failures in public for case study or, indeed, any other purpose. They are normally quietly settled with both parties undertaking not to comment, as one of the settlement terms.

The overwhelming majority of outsourcing deals would appear to be driven by the desire to deliver short- to medium-term savings by the outsourcing party. The prospective operator of the service seeks to win the service and in consequence gain the economies of scale where similar outsourced services and processes are being operated for similar enterprises.

Such deals tend to place less priority and focus on improved quality of delivery and service, future upgrades and developments. The consequence may be one of two scenarios. The terms of the contract are satisfied but the customer feels frustrated - even cheated - because the contract cannot respond adequately to the ever-changing business environment and demands of the customer. In other instances the contract requires very high costly management resources to manage and maintain it, as minor issues become escalated, staff turnover rises and disputes over service quality become a regular feature of the relationship.

In the final analysis, it is probably only through offshore outsourcing deals which provide services in an economies with a substantially lower cost base, that overtly cost saving outsourcing deals can be conducted to mutual satisfaction.

Outsourcing deals within the Western economy probably work, where there is a cultural fit and where there are a wider set of mutually objectives are agreed by the senior management from both parties. While cost savings may arise, improvement in quality, mutual sharing in the risk/reward of changes and development in technology strategy are the types of objectives where, properly addressed, a fruitful partnership may result.

In many outsourcing deals the senior management involvement fades when it moves to operational mode. Cultural issues are more likely to be addressed and resolved through active participation in the operational aspects of the agreement. Senior management's active participation in the conduct of the operational processes, not merely the review and oversight of the conduct of the operational aspects, would identify risk and relationship issues earlier.

*That Accord*
The Basel Committee on Banking Supervision is to stick to its end-2006 deadline for the introduction of new bank capital rules, despite committing to a lastminute overhaul designed to simplify implementation of the regulatory framework. We think that is commendable - good to see the regulators are not being held to ransom by the market.

Improvements to the current framework include: changing the overall treatment of expected versus unexpected credit losses; simplifying the treatment of asset securitisation, including eliminating the 'Supervisory Formula' and replacing it by a less complex approach; revisiting the treatment of credit card commitments and related issues; and revisiting the treatment of certain credit risk mitigation techniques.

It must be understood that the recommended changes are at the more granular level but the fundamental framework and requirements are not any different - the key drivers remain. So what are these key drivers?

The most significant issue facing banks in relation to Basel II is aligning and upgrading data and existing IT systems infrastructure for completeness, consistency and integrity across the organisation. The systems to comply with Basel II requirements under the advanced approach for both credit and operational risk must be compatible with the existing IT architecture and provide suitable reporting facilities and analytics.

The second driver is governance and buy-in. Executive-level buy-in and awareness, followed by executive-level Basel II champions, must seize the initiative and remove all hurdles to a successful Basel II compliance. The role and responsibilities of each individual and department must be clearly defined to avoid confusion, especially with regard to operational risk.

Another important driver is the enterprise wide scope of the Accord. This means there is a need to bring in a risk culture across the whole organisation.

Shame on the banks that are using the delay in the publication of the Accord as an excuse not to introduce a Basel II program!

It is important to realise that Accord should offer considerable benefits over the existing system. It has brought about a greater awareness of among the businesses of their own processes, risks and infrastructure. It provides an opportunity to reinvigorate stagnant businesses.