Amid continued macroeconomic headwinds, enterprises across all sectors are taking a wait-and-see approach to new initiatives and investments. HFS Research’s tracking of expected annual budget changes has seen planned IT budgets, inclusive of technology and services spending, move from an 11% increase in 2022 to just 3% in 2023. While the declining investment trend is consistent across industries, the focus areas still garnering investment vary.
At the start of 2023, HFS surveyed 200 enterprises about their priorities for business services spending—aka business process outsourcing (BPO)—including 53 banking and financial services (BFS) enterprises. Using the banks’ plans to invest across different areas of business services, we were able to generate a simple two-by-two matrix mapping the planned degree of adoption with spending plans. Here are business services investment priorities and recommendations for banks during the wait-and-see economy:
- Evangelize or deprioritize. Areas of business services with the lowest levels of adoption and investment landed in the lower left quadrant. This quadrant includes sales and supply chain, and marketing and finance and accounting (F&A) are there, too, but just barely. Business services that landed in this quadrant are the lowest priorities for banks. Banking leaders focused on these initiatives either need fantastic business cases or they need to deprioritize these areas for the time being to make headway elsewhere. Marketing has the potential to drive differentiation with data-driven offerings and loyalty programs. F&A may get some play through an enhanced focus on the treasury function, given elevated interest rates.
- Differentiate. Business services with low adoption but higher planned levels of investment landed in the upper left quadrant, which includes procurement and ESG initiatives. Banks investing in these areas have an opportunity lead their peers in these areas. While procurement is likely more of an optimization opportunity, ESG is an essential investment area that can yield differentiated value for banks ahead of requirements for greater transparency and reporting.
- Must have. The business services with the highest levels of adoption but lower investment are the essentials—the must-have requirements for running effective banking business operations. These include customer experience and HR. Talent remains one of the top three challenges for banks, driving the need for effective HR support. Customer experience (CX) aligned to contact center and self-service capabilities remains a critical pillar of banking operations across all channels as banks seek to attract and retain customers. High adoption but lower levels of investment suggest a strong focus on process optimization. Be sure the inevitable generative AI pilots are well tested before risking CX.
- Double down. The coveted upper right quadrant, which in this case represents the magic mix of high levels of adoption and investment, is home to two critical areas of business services investment—data management and legal, risk, audit, and compliance. The bank failures earlier this year put a fine point on the need for ongoing investment in legal, risk, audit, and compliance. This area tends to get funding when something goes wrong, like regulatory enforcement. This cycle needs to be broken and needs much more automation adoption to beat down overly manual work. Data management and related smart analytics represent massive opportunities for banks today as they seek to better manage and activate their data across myriad lines of business and functions. Banks need to ensure their data management investments yield insights and outcomes.
The Bottom Line: The business services priorities for banks today include legal, risk, audit, and compliance and data management. Banks need to ensure these investments yield clear and near-term outcomes in the face of continued macroeconomic headwinds. Business services providers need to ensure they bring their best business cases and are laser focused on delivery excellence.
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