Press Release, Luxembourg,  8 January, 2024.   

A paradigm shift is sweeping through Luxembourg’s financial centre, with PwC Luxembourg’s latest Sourcing Strategies Survey revealing unprecedented trends that are reshaping outsourcing practices in the industry. Outsourcing remains a dominant force in the Luxembourg financial landscape, with an astounding 90% of respondents outsourcing some kind of activity. Regardless of size or sector, financial institutions are adopting distinctive approaches, whether it is full outsourcing of an activity, or a partial outsourcing, which is less and less common.

With financial institutions grappling with the imperative to innovate and adapt, outsourcing has emerged as a strategic solution, bringing with it a myriad of benefits. Foremost among these advantages is the significant reduction in operational costs, followed closely by better quality of service in second place. The findings align with the broader trend where organisations are prioritising efficiency and cost-effectiveness in their outsourcing arrangements.

As financial landscapes continue to evolve, outsourcing remains a pivotal strategy for staying competitive.

In her foreword statement, Cécile Liégeois, Clients & Markets Leader, PwC Luxembourg states: “Our world is entering a new economic era defined by sticky inflation, high interest rates, and uncertain growth. Geopolitical instability and trade disruptions are the new normal, while the threat of climate change becomes more dire year after year. Moreover, new technologies – particularly artificial intelligence and its offshoots – appear poised to redefine virtually every sector and industry, in addition to the very way we work or handle matters as crucial as cybersecurity and data privacy. In this new context, financial institutions have no choice but to scrutinise their operational models, enhance their efficiency, and remain agile, all while navigating the intricate and perpetually evolving regulatory landscape.”

Anticipation of regulatory changes sparks evolution

As the European Union prepares to roll out the Digital Operational Resilience Act (DORA), the outsourcing landscape in Luxembourg is, and will be undergoing major transformation.

The asset and wealth management (AWM) industry, facing pressure to optimise operations, is at the forefront of outsourcing adoption. PwC’s AWM Revolution series underscores the crucial role outsourcing plays in streamlining operations and ensuring the survival of industry players in these dynamic times.

Risks and regulatory limbo

However, the outsourcing surge is not without risks. Luxembourg and the wider EU find themselves in regulatory limbo, initially, navigating the complexities outlined in the European Banking Authority’s 2019 Outsourcing Guidelines and a subsequent CSSF Circular. The impending DORA further adds to the complexity, with stakeholders grappling with enhanced due diligence and oversight requirements, ensuring that all outsourcing chains are well managed.

Diverging strategies and concentration risks

The survey reveals a tug-of-war in the Luxembourg financial sector, torn between the need for efficiency through outsourcing and the escalating challenges posed by stringent regulations. Businesses are either doubling down on outsourcing or moving away from it altogether, abandoning partial outsourcing in favour of former options.

The concentration risks arising from outsourcing to a single, large contractor are on the rise, raising concerns that align with the principles of DORA, emphasising the need for oversight and monitoring.

Eye-opening insights and expanded survey sample

PwC Luxembourg’s 2023 Sourcing Strategies Survey stands out for its comprehensive scope, surveying top executives and operational heads of prime financial establishments and service agencies in Luxembourg. With a sample size of 342, a significant increase from the previous year, the survey offers a more detailed and robust analysis of outsourcing trends in the financial sector.

The diverse pool of respondents, including Alternative Investment Fund managers, management companies, and insurance companies, paints a balanced picture of the industry. Notably, banks account for only 21% of respondents, down from 66% in 2021.

PwC Luxembourg’s Sourcing Strategies Survey is a beacon in navigating the evolving landscape of outsourcing in Luxembourg, providing invaluable insights for financial stakeholders as they prepare for the transformative impact of DORA.

DORA will change outsourcing

DORA, set to revolutionise outsourcing across the financial sector, compels regulated entities to swiftly adapt to a new era of compliance. The recent survey indicates varied levels of understanding among respondents, but the forward-thinking nature of the financial sector suggests an increasing seriousness in handling DORA as its enforcement date approaches in January 2025.

As the financial sector and the broader economy face the dawn of a new economic era, decision-makers are confronted with heightened risks. Market conditions are becoming more challenging, emphasising the critical importance of strategic decisions on knowledge investment and outsourcing. The ability to discern which areas to invest in and which to outsource has never been more crucial for financial institutions seeking to thrive in the evolving landscape.

Cécile Liégeois concluded, “DORA will change outsourcing across the financial sector and regulated entities will need to quickly adapt. The degree to which survey respondents understand this imminent paradigm shift is varied, but the forward-thinking nature of the financial sector suggests that the seriousness with which DORA is handled will increase as its enforcement date approaches. Ultimately, those that prepare for DORA in advance will enjoy the fruits of their labour once the regulation enters enforcement in January 2025.”

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