Assessing Outsourced Distribution Channels

Abstract

We respond to recent failed initiatives of the Czech banking market to develop business models for the sale of retail deposit products, based on third-party distribution channels. We argue that the issue is the application of inappropriate capital budgeting methods. While static cost-benefit analysis seems to be generally appropriate for conventional banking projects based on branching or internet, they provide grossly misleading estimates of commissioning expenses, which can lead to completely unrealistic project assessments and poorly designed commission schedules. Alternatively, we derive a dynamic model based on statistical simulation (Monte Carlo) and using a real-life case study to illustrate the impacts of particular value drivers on commissioning costs. Our analysis shows that conventional and simulation-based budgeting generates inverse cost functions over time, and the difference becomes operationally tangible in the second and third year of the project, which is commensurate with the apparent timing of the bank’s business strategy revisions. To fulfill the goal of this paper, we demonstrate that statistical simulation is an expedient tool for managerial support and capital budgeting in cases where value drivers are impacted by non-linear dynamic processes.

Keywords: Consumer Banking, Capital Budgeting, Distribution Networks, Sales Outsourcing, Statistical Simulation

JEL Classification: G21, G31, M21