Using automation to reduce risk in financial services in 2019

In November 2018, the Central Bank of Ireland produced a discussion paper which included a review of outsourcing across the Irish financial sector. As part of this, the Bank surveyed 185 regulated companies, which had between them 7,700 outsourcing contracts in place.

By Eleanor Winn

The findings of the survey, according to the Bank’s report, were “disappointing”. The report stated that “The level of board awareness and quality of governance and risk management remains far from satisfactory.”

Using automation to reduce risk in financial services

The Bank says that it has increased its focus on the compliance of outsourced services, including how regulated financial services firms manage those services. Its reviews (which included on-site inspections) revealed a number of issues, most notably a lack of awareness among board members of the potential risk of outsourced services, and the board’s own responsibility to ensure that risk is managed effectively.

One area of risk comes from the increasing role of technology in financial services, and the way in which the increasing numbers of outsourced contracts are managed and resourced. The report states the importance of regulated firms having an outsourcing policy which includes lines of responsibility for due diligence, ongoing management and review of outsourced arrangements, as well as decision making and escalation processes to ensure the board (who, after all, have ultimate responsibility for the compliance of these contracts) have the information they need to stay on the right side of the law.

A successful and compliant outsourcing contract relies on good management, and both sides committing to – and then actually doing – what they’ve agreed at the beginning of the contract. Service level milestones and contractual commitments all need managing, some with an entire team to  make sure things don’t slip, deadlines don’t get missed, deliverables are met, reviews are done on time.

If the provider commits to delivering a report every month, for example, someone has to be responsible for making sure it happens. On the client side, someone needs to remember that the report from the provider is due. The contract might be clear on what needs to be done – but a contract doesn’t make it happen, people do.

The problem here is that complying with the terms of the contract – and the regulation that governs it – relies on human efficiency. And no matter how many calendar alerts you have, or spreadsheets you use, human efficiency is fallible. It leads to error and omission, which in turn can lead to significant risk.

Automation can be a powerful tool in reducing risk in four areas of outsourcing management that are currently heavily reliant on manual processes:

1. Contract compliance – automatically scheduling and tracking all the obligations stipulated in the contract and making sure the contract complies with local laws
2. Financial compliance – for example, have the right rates, discounts and rebates (agreed in the contract) been applied to an invoice? Are payments being made and received on time and within the terms of the contract? Are the right credits being applied? Automation can create the bridge between increasingly complex P2P (procure to pay) and O2C (order to cash) systems .
3. Service performance – part of your outsourcing contact should be regular reports on service levels. Have they been breached? Are resolution times being met? How do they compare to what was expected? How do you assess comparative performance between service/technology providers? If service levels go beneath the contracted threshold, an automated process can check and apply the appropriate service credit.
4. Governance – how well is each contract managed? Automation can circulate minutes, assign actions, manage sign-offs trigger reports and hold people accountable. .

Automating manual processes in these areas reduces the risk of human error – of the wrong rate being applied to an invoice, or a report not being filed, or a security review deadline being missed. When productivity and efficiency are critical to margins, and compliance is a significant reputational issue and therefore a core business concern, having someone manually check back through documents to schedule tasks makes little sense. Far better to free them up to focus on delivering the work and providing real value to the business.  The most successful organisations will redeploy people to higher-value, non-repetitive tasks which bring the business far greater value.

One of the biggest problems in outsourcing contracts is ‘value leakage’ – between five and thirty percent of the value of a deal that slips away in badly done invoices, misinterpretations of the contract, and handling errors. No wonder the bank’s verdict was “disappointing”. The good news is that automation can enforce behaviours on both sides of the relationship that stops that value disappearing. It avoids the unnecessary costs of putting right mistakes, or duplicating effort. And it can create value for the business, by improving adoption rates, or freeing up people to innovate in core business areas.

Eleanor Winn is a sourcing expert and trusted advisor with extensive experience of outsourcing, business development, contract negotiation, project management and people development with a particular interest in emerging technologies such as RPA, AI, RSO and Blockchain.

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