Capco’s Michael Atack and David Ellis highlight the importance of taking a strategic approach to outsourcing initiatives whilst simultaneously building a deep understanding of the different market offerings
To identify the most appropriate sourcing model/vendor partner, it is important that organisations perform an outsourcing market scan.
The contraction in credit markets has exaggerated one of the constant challenges facing financial services firms: how to contain costs whilst retaining customers and income lines. Recently, an increasing number of organisations have sought to address this challenge through outsourcing, with varied success.
Be prepared – start with the end in mind
It is widely acknowledged that most outsourcing arrangements represent significant financial, operational and cultural change for a business. In order to seize the real opportunity provided by outsourcing, organisations must take a structured approach to defining what they need – both now and in the future.
Image 1: A strategic approach
As a first step, define your true strategic objectives, why are you looking to outsource, what are you looking to gain from outsourcing in both the short and long term and be clear that these objectives are in line with your wider corporate strategy. In defining these objectives, a number of questions should be addressed from the outset.
Is this a pure cost play? Are you looking to extract value from an outsourcing partner – perhaps by seeking a provider with a large pool of specialist resource? Or perhaps there is a potential shift in strategic direction that outsourcing could support; allowing a focus on your core business? It may well be a combination of the above and more – such objectives must be clearly articulated from the beginning, understood by all relevant stakeholders and revisited regularly throughout the outsourcing journey.
Once objectives have been agreed, a set of sourcing guiding principles must be developed to achieve stakeholder alignment. The outsourcing market is both diverse and complex and different models and vendors present different implications in terms of operating model, geographic location, vendor profile and cost base. A set of agreed guiding principles helps drive clarity and significantly aids the decision making process. Furthermore, early engagement of all impacted areas will help ensure any intra-organisation friction is identified and managed from the start.
Whilst guiding principles must be organisation specific and aligned to your key business drivers, below are some typical considerations often used to define guiding principles:
§ Customer experience: To what extent do you wish to preserve all customer contact and touchpoints internally or only across a subset of operational processes?
§ Geography: To what extent is geography/language capability central to your decision – is it relevant whether customer facing staff speak English as a first language or are based in a particular location?
§ Cost containment: How important is cost reduction and have specific targets been set regarding cost reduction or cost neutrality?
§ Technology footprint: Are you looking to reduce your technology footprint or the level of in-house technology support functions through platform rationalisation or changes in support model?
§ Partnership model: Is it important to identify a ‘partnership’ model whereby specialist vendor capabilities are exploited through effective collaboration – and is there internal agreement on what partnership means?
Once a set of principles have been established, it is critical to determine their relative importance (perhaps by applying weightings) in the context of the strategic objectives being pursued. Today’s varied outsourcing models combined with a complex vendor marketplace will often mean that varying levels of support will be offered against each of the principles defined. Therefore establishing relative importance across principles will be integral to the overall appraisal of future options.
Understanding the options
The financial services outsourcing market has become a considerable and evolving industry which can be difficult to navigate. This scale does however offer an increasing array of opportunities. To identify the most appropriate sourcing model/ vendor partner, it is important that organisations perform an outsourcing market scan. The scope of this market scan should be defined by the following:
§ Business scope – confirm and define at a high level the functions and processes being considered for outsourcing. At this stage of your outsourcing journey it is important to be open-minded about potential opportunities. Once you have selected the appropriate outsourcing model, it will be necessary to complete a feasibility assessment to determine the qualitative and quantitative benefits of outsourcing specific processes.
§ Commercial parameters – confirm whether any specific commercial parameters have been set that would preclude certain sourcing models from the exercise.
§ Sourcing guiding principles – the principles set earlier not only serve to set direction but will also shape the boundaries of the market scan across key dimensions such as technology, geography and potential partners.
Using these parameters, define relevant outsourcing models for analysis. For example, the models being analysed could be defined by geographic location – such as onshore, nearshore, offshore or perhaps by functional or industry focus – such as arrears management capability, financial service specialists or general outsourcing specialists.
Wide-ranging research should be undertaken to understand the current offerings for each outsourced model and potentially to understand the sourcing strategies adopted by other relevant financial service organisations. Clearly, the greater detail obtained at this stage the better the quality of the market scan. To support the overall review activity, it is often beneficial to approach a ‘neutral’ source close to the outsourcing market to deliver critical insights in respect of business models, offerings and vendor capabilities and reputations – enhancing the depth of the market scan.
The methodology illustrated below presents a logical approach to gaining a clear understanding of the sourcing marketplace.
Image 2: The sourcing market scan
Assessing the options
After conducting your market scan, revisit each of your sourcing guiding principles, as these should now act as variables in assessing the various outsourcing models. For example, where a principle exists that any partner should provide regulatory support, a non-financial service specialist is unlikely to provide the requisite level of experience, relative to an industry participant performing such services on behalf of multiple clients. However, where cost reduction dominates any outsourcing strategy, such a principle will be often best served by a large cross-industry outsource provider (due to geographic location and/or the ability to take advantage of significant wage arbitrage) relative to more specialist providers. These examples emphasise the critical importance of applying agreed weightings to the strategic principles defined.
As well as assessing the principles against the different sourcing models, it may be worthwhile to assess the principles against the option of not outsourcing. This is particularly relevant for organisations carrying out such an exercise to help determine whether to outsource at all. Image 3 is an illustrative example of a market scan of outsourcing models scored against defined guiding principles.
Image 3: Assessing the options against weighted principles
Confirming the way forward
Now that you have consolidated the data to understand, compare and discuss the outsourcing options, re-assemble the group of key stakeholders to gain agreement on the most appropriate model and the direction to pursue. Alongside the guiding principles analysis, the market scan intelligence will also provide data points on other key factors that should be central to your decision, including exposure to risk and indicative commercials. Indeed, organisations can also use this process to determine whether or not to outsource at all given corresponding levels of identified or perceived financial, regulatory or operational risk.
Once the preferred ‘Go-To’ model has been identified, subsequent activity should focus upon establishing a short-list of potential outsourcing providers. Normally, this represents a focused tender process; assessing potential vendors against your requirements and against each of the guiding principles identified earlier - as these principles should not only inform the preferred model but also be used to appraise each of the short-listed vendors. Your requirements should also include a number of key considerations relevant as you progress along your outsourcing journey. Examples of these and a summary description can be seen in Image 4.
Image 4: Other key considerations
Due to the progression of the outsource market, it may well be the case that certain vendors can differentiate themselves on these particular dimensions. Therefore, an outsource provider that can either assist in defining these dimensions, or indeed provide best practice examples of how to apply these, can be extremely valuable.
Conclusion
Approaching and indeed understanding the outsourcing market can be a daunting prospect. However, the increasing maturity of the outsourced market means that there is often an appropriate solution to meet your business needs – whether that is minimising cost, improving customer experience, extracting value from specific processes, leveraging third party capabilities or indeed a combination of these factors and more.
Applying a structured approach to the identification and appraisal of available options is paramount. By embedding the strategic objectives and principles throughout the entire process, organisations are much better informed and positioned to identify the most appropriate model and partners to meet their current and future strategic needs.
Michael Atack is managing principal at Capco and David Ellis is senior consultant at Capco
Date: 2nd, June, 2009
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