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Applying the Shared Services Model to Optimize Risk, Compliance, and Operations Processes - Anthony A. SchianodiCola

Anthony A. SchianodiCola
New Coordinates
Outlook 2017

The banking industry has long used shared services centers to reduce operating costs, improve service quality, and adapt to changes in business demands. Many risk, compliance, and operations activities have characteristics that are highly conducive to process centralization, making shared services an optimal sourcing solution. Due to the uncertainty of regulatory changes and market pressures that lie ahead, banks should reconsider opportunities to leverage shared services delivery models when planning for the unexpected.

Situation Overview

As we enter into the new year, banks will likely continue to face elevated levels of regulatory and market uncertainty. The future outlook for the regulatory landscape is particularly unclear, as the Trump administration and new Congress take office to advance stated policy agendas. While the focus is likely to be on a general rollback of Dodd-Frank and other banking regulations, the extent and timing of this change remains largely speculative. Some regulatory requirements recently passed by the Consumer Financial Protection Bureau (CFPB) and other oversight agencies could be eliminated altogether. Others may remain in place, but undergo significant alterations that depart from what the industry has become accustomed to. Yet other areas, such as financial crimes and anti-money laundering (AML), may actually experience stronger oversight and enforcement due to the incoming administration’s stated commitment to combat terrorism.

At the same time, continued pressures to boost profits in a low margin environment have encouraged many banks to aggressively pursue both mergers and acquisitions (M&A) and organic expansion initiatives. This typically translates into greater volumes, accounts, and transactions that must be handled by risk, compliance, and operations personnel. While these functional areas often grow with the overall size of the bank, the reality is that they are usually expected to do more with less. As organizations grow and change, these functions are ultimately challenged to deliver higher levels of service quality with less financial, human capital, and other resources.

Banks should proactively address these challenges by developing service delivery models that can adapt to regulatory and organizational changes, while providing enhanced levels of performance at reduced costs. This is especially true for risk, compliance, and operations functions, which often sit in the crosshairs of both regulatory and market forces. Some banks may be able to weather environmental changes by standardizing, automating, and reengineering processes within business units. For others, the optimal solution may lie outside of these existing organizational structures.

The Shared Services Model: A Tried and Trusted Solution
A shared services delivery model allows an organization to centralize non-core support functions into standalone, semi-autonomous operating units called shared services centers (SSCs). SSCs typically work for and report to individual business units, which serve as their internal customers within the bank. The work performed by SSCs is narrowly defined by service level agreements that outline the receiving business unit’s service expectations.

Given today’s challenging business environment, SSCs deserve to be given a closer look by banks that have yet to determine their potential as a viable sourcing solution. Since they can operate in locations with abundant labor resources, SSCs provide advanced levels of flexibility to organizations looking to scale quickly. Their centralized design facilitates advanced process standardization, enhancing the ability to alter processes in response to business, market, and regulatory demands. This is an essential feature for functional areas that are subject to higher levels of unanticipated change, such as regulatory compliance.

SSCs also provide a cost effective sourcing solution for banks that are heavily focused on improving their bottom line. Process efficiencies can be gained through dedicated efforts to continuously improve standardization, automation, and technology, translating into shorter turn-around times for service delivery. Central, data-driven reporting on operational and financial performance also assists in identifying areas to optimize process efficiency. Further cost reductions can be achieved by taking advantage of opportunities for labor arbitrage and economies of scale.

SSCs also provide banks with an opportunity to enhance the quality of their services. Consolidating specific activities into one or several SSC facilities enables banks to establish robust governance and control frameworks to effectively manage service delivery. This promotes the ability to design and implement extensive quality assurance measures that identify and mitigate risks related to service level defects. Central reporting capabilities complement this by providing periodic analysis on key risk and performance indicators to SSC site managers and business unit sponsors.

While the SSC model is not a novel approach for most banks, it remains an invaluable strategy to build a truly efficient and flexible organization—one that has increasingly been adopted by banks to handle activities such as account remediation review, regulatory reporting, know-your-customer (KYC) validation, and data validation. The shared services model has proven to be a tried and trusted solution for organizations seeking to build operations that are receptive to change, while maintaining enhanced levels of efficiency and service quality.

Potential Activities for Shared Services Migration
Most non-core support activities can benefit from migrating to SSCs. Risk, compliance, and operations functions are particularly well-positioned for this, as many processes and activities performed in these areas have characteristics that are well suited for process centralization.

When evaluating activities that would benefit from a shared services model, one should confirm that the activities in question meet one or more of the following criteria:
  • support, non-core;
  • repetitive;
  • routine;
  • mature;
  • transaction- or volume-oriented;
  • high level of production volume;
  • high potential for standardization; and
  • high potential for automation.

For risk and compliance, there has been a growing focus on using SSCs to perform data management activities such as regulatory reporting, remediation review, and transactional data validation. Sourcing these activities to SSCs allows business unit compliance personnel to focus on higher-level activities that are more closely responsible for supporting the organization’s overall regulatory strategy. This is also true of other areas, such as AML and complaints management, where the migration of non-core activities from business units to SSCs can enable risk and compliance personnel to focus on value-creating activities that strengthen an organization’s ability to accomplish its long-term strategic goals.

Areas in banking operations can realize similar benefits from using SSCs. Call center customer service is a prime example of this, and has long been an area that has benefited from using shared services and other centralized operating models. More recently, banks have begun to leverage SSCs to perform other non-core activities. In the loan originations process, for instance, migrating data validation and similar review and approval activities to SSCs has significantly helped organizations ensure that uniform standards are applied to even the smallest of tasks, resulting in measurable improvements in service quality for bank customers.

Select Activities for SSC Consideration

Risk and Compliance

  • Regulatory Reporting
  • Remediation Review
  • Know Your Customer (KYC) Validation
  • Anti-Money Laundering (AML) Monitoring
  • Regulatory Complaints

  • Review and Approval/Data Validation
  • Quality Control
  • Call Center Customer Service
  • Collections
  • Payments Processing
Shared Services versus Alternative Centralized Operating Models
Many bank activities are initially conducted in a decentralized manner internally within an organization’s business units or head office. Centralizing non-core support activities to internally designated teams, separate standalone SSCs, or outsourced vendors can help banks build more adaptable and durable methods of service delivery. While these three operating models help lower costs, improve service quality, and increase process flexibility, the potential benefits and constraints vary among them.

Internally consolidating processes within individual business units is the most basic form of centralization. It typically involves developing teams of full-time employees that are specifically designed to perform a set of clearly defined non-core support activities. This model significantly leverages existing knowledge capital from within the organization, and allows for the creation of a significant control framework to ensure services will be performed at the highest quality. However, cost savings and scalability benefits are usually minimal, largely because this model relies on staffing full-time employees from within the business unit.

On the other end of the spectrum, outsourcing allows banks to completely divest certain processes and activities from the bank and transition them to an outsourced vendor. This is typically the most cost effective arrangement, as outsourced vendors usually have access to low-cost sources of labor – as well as superior systems, processes, and technologies – that enable outsourced vendors to perform the work with greater efficiency. This model is also highly scalable, and banks can typically rely on vendors to quickly adapt to changes in work volume. However, banks relinquish control of their ability to manage service quality and risks. In particular, outsourcing amplifies data security risks, an especially relevant concern for compliance activities that often require access to customer account data.

Establishing an SSC is considered a “middle of the road” approach to centralizing risk, compliance, and operations activities. They generally provide a more equitable and balanced distribution of the benefits and constraints associated with process centralization. In a shared services environment, work is still performed within the organization, but in one or more standalone units located away from business unit and head office facilities. Because SSCs are developed in locations with access to economical labor sources, they are better suited than internally centralized models to achieve significant cost savings from economies of scale and labor arbitrage. This is true of SSCs comprised of full-time employees (captive SSCs), as well as those that consist of contract-based employees from outside vendors (co-sourced SSCs). Co-sourced SSCs can involve vendors that specialize in having extensive and readily available access to economical labor, and they can be more cost effective and scalable than captive SSCs, where changes to workforce size result in increasing or reducing full-time headcount. Compared to outsourcing, SSCs lend themselves to stronger control frameworks that let banks better manage performance and risk. Because of greater oversight and control, SSCs tend to adjust better to changes in business demands and task complexity, which may be more challenging for outsourced vendors to handle.

Next Steps

As is often the case, gathering support and buy-in from the top is crucial for anyone seeking to implement long-term organizational change. If you believe your organization stands to benefit from a shared services model to deliver targeted risk, compliance, and operations activities, aim to have open and thoughtful discussions with key decision-makers within your organization. If those conversations reveal that process efficiency, effectiveness, or flexibility are major areas of concern, it may be the right time to explore the feasibility and impact of a shared services solution.

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Treliant Risk Advisors, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the 2017 Outlook issue. To subscribe to our quarterly newsletter, please Contact Us.