State Street bucked the AI trend by ditching outsourcing for in-house operations to cut costs. It’s working, COO says

For more than a decade, State Street operated joint ventures that allowed the financial services firm to off-load some IT and back-office tasks to outsourcing partners like Atos and HCLTech in India.

But in 2023, State Street pivoted, and over the course of several months, the company brought those operations in house. “It was a big question mark with a lot of our stakeholders,” said Mostapha Tahiri, executive vice president and chief operating officer at State Street, during a panel discussion at the Fortune COO Summit. “Why would you insource more people in an era of AI?”

Tahiri said there are two key reasons why State Street brought these operations in-house. The first is that for banks like State Street, which operate under a lot of regulations, costs could add up to make sure that third-party vendors are also compliant. Then, there was the issue of maintaining an incentivized workplace culture, as the employees that work for an external vendor aren’t ever truly bought into the vision driving the total organization.

“We’ve been progressing quite well with our transformation within our own operations, and then we wanted to cross the line to what is not sitting with us,” said Tahiri. He added that with those India operations now operated by State Street, any future business direction pivots can be done more quickly than if mandated to a third party.

Namita Seth, vice president of strategic growth at IT consulting and outsourcing company Cognizant, joined Tahiri on the panel alongside Corey Lee, COO of commercial banking at Capital One, and Thomas MacMillan, COO at health insurance provider EmblemHealth. Each company’s operating model varies not only by sector, but also by the unique history of every single organization.

“Even the most seemingly similar companies are very different when it comes to structures and cultural nuances,” said Seth.

She said that for a company like State Street, which has a global footprint, it makes sense to bring operations in-house. “There’s been a seismic shift to how much, and for how long, companies have outsourced,” said Seth. “It depends where you are on your journey. For State Street, they were mature on their journey.”

At Capital One, the ninth-largest U.S. bank by assets under management, the approach has favored vertical integration, when a business operates all across the supply chain. This differs from horizontal integration, when companies focus on one portion of the supply chain and buy up direct competitors. 

That vertical integration strategy is why Capital One paid more than $35 billion to buy Discover Financial Services, a deal that closed in May. Scooping up Discover gave Capital One, a credit card lender, the ability to tap into Discover’s payments ecosystem. Discover is a credit card issuer, similar to Visa and Mastercard, whom Capital One has had to rely on when issuing credit cards. Merging the two allows Capital One to switch at least some of the company’s cards to the network owned by Discover.

“The benefit of vertical integration with the network allows our thin margin business to strengthen its margins and allows us to lean in harder and invest even more in building, organically, this national bank,” Capital One CEO and founder Richard Fairbank told analysts during the company’s first-quarter earnings presentation in April.

Each of Capital One’s different business units, which includes commercial and consumer banking, has a different president and head of operations. Corey Lee, COO of Capital One’s commercial banking division, says businesses must ask themselves if they have the right leadership that’s willing to defer to a centralized body or if they prefer to make all decisions for themselves.

“You have to look at that, not just from a theoretical perspective, but look at the people you have, the culture you have, and say, ‘Is this going to work?’” asked Lee, who has held leadership roles across nearly all of Capital One’s business divisions since he joined the company in 2011.

Lee also asserted that businesses need to be cautious about finding the right balance of a cohesive corporate culture, while also respecting the local nuances between an office in Virginia and another location in the Philippines. Each operation, he said, should be given some leeway to do what makes sense for them.

“Over time, you’ll start to build something that’s beautifully unique, but very much aligned with the culture you have and trying to build closer to headquarters,” said Lee.

At EmblemHealth, which serves more than 3 million customers in New York City and the tristate area, the biggest challenge the not-for-profit insurer faces is delivering technology solutions horizontally in a manner that’s also cost effective.

“As an insurer, we’re fairly heavily regulated at the federal, state, and commercial levels,” said MacMillan. The business is complex, offering health insurance plans for businesses of all sizes, individual plans, and government-backed offerings through Medicare and Medicaid. “Our biggest challenge is building the needs of the different verticals … but in a consistent way and in a cost and administrative structure that allows us to make our numbers,” added MacMillan.

EmblemHealth has developed “expertise centers,” which serve the company’s various regulated entities, and taps into these centers for technology solutions related to billing, paying customer claims, IT, security, and core infrastructure. 

“You really get breadth of thought and deep knowledge, localized in one place, but really decentralized in terms of each of our core business units consuming their services and their knowledge,” said MacMillan.

This story was originally featured on Fortune.com