By David Oxenstierna , Capco Partner

In today’s world of unrelenting regulatory growth accompanied by challenged revenues and margins, banks are caught in a catch-22: the need to maintain or even increase their spending on so-called change-the-bank projects (CTB), while being forced to reduce overall costs aggressively.

What is driving the pressure on CTB projects? In large part, the increasingly complex regulatory agenda that is forcing banks to undertake significant change in a compressed time frame. Some banks are still at the early stages of reacting to the regulatory pressures, either thinking (or hoping) that some of those pressures would go away or be changed, or awaiting  budgetary permission to invest in the necessary changes.

 Meanwhile, to remain competitive, banks must continue to develop new products and capabilities, enhance customer service, improve operational efficiency and decommission legacy infrastructure. The competition is not standing still. CTB projects have always been a key weapon in the war for improved margins.

 So how can banks square the circle? How can they reduce the cost of their operations, while increasing their capacity to innovate and comply with the dizzyingly complex new regulatory world?

 Historically, banks have focused on reducing costs in their everyday, run-the-bank operations. Many organizations outsourced day-to-day functions to nearshore or offshore locations. For most banks, however, that cost leverage has played itself out. Some banks, concerned about quality issues, are even starting to reverse that trend and move technology and operations functions back onshore.

 However, while all banks perform CTB projects, few have made any large-scale attempts to reduce the costs of their CTB initiatives due to their specialized nature. These business and technology change projects require special skills to manage and execute, and capable personnel can command premium compensation. In fact, given the regulatory and other pressures, many banks have been forced to hire consultants and contractors to carry out significant portions of their change work, and have thus seen their CTB costs go up.

 These cost increases are often due to the banks failing to engage with consultants in a strategic manner. The time is right for banks to consider a new CTB model that taps into the specialized, industry-focused capabilities of an external services provider. Called changeSourcing, the model delivers cost-savings benefits that go beyond a typical business process outsourcing model and can help banks structurally transform their cost base.

 The next blog will discuss four ways in which changeSourcing helps banks structurally transform their cost base.

David Oxenstierna is a Partner at Capco