Technology

Shifting the focus from cost to value

December 2007

For the financial services industry, the outsourcing of technology applications and services has already been around for a long time. However, we are now seeing a significant shift in the expectations of organisations entering into these arrangements. Outsourcing's ability to deliver cost savings is by now well understood - as are the various tools now available in the marketplace for achieving this goal. Today, outsourcing is expected to deliver benefits across a broader range of dimensions. In short, the focus has shifted from cost to value.

The past five years have witnessed a huge spurt of growth in the outsourcing marketplace, as more organisations have moved to gain benefits from the offshoring model. And as the marketplace has grown, so outsourcing contracts have become more sophisticated to the extent that they are now adept at putting in place models that ensure cost reduction. If nothing else, the competitive nature of the outsourcing market has seen to that.

The move towards broader, value-based expectations is pronounced. In particular, we are seeing three core dimensions coming to the fore - cost, customer-centricity and agility. With businesses increasingly demanding high performance from their IT operations across each of these dimensions, CIOs have been striving to find ways of embedding these interrelated expectations into their outsourcing agreements.

A turbulent marketplace for mortgage providers

The mortgage industry has enjoyed a prolonged boom period. However, the prospect of an imminent downturn is now a very real one, especially in the wake of this summer's credit crunch and its anticipated knock-on effect for the residential property market. In this environment, we expect to see a shift in focus in line with trends in the broader financial services industry - in other words, a move away from a buoyant sales market and new product launches towards aggressive cost reduction and intensifying customer-centricity.

Customer attrition will inevitably become more pronounced as the market tightens and, for the mortgage providers, this means that their ability to retain existing accounts (via a twin focus on cost and customer empathy) will assume ever greater importance. At the same time, increased market risk will be an inevitable fact of life, forcing mortgage providers to build risk management into their growth strategies - which will, in turn, place real strain on existing cost models.

Under these conditions, mortgage providers will have little choice but to radically reassess their approach to outsourcing. In other words, the same value drivers that we have already seen being adopted by the broader financial services industry (cost, customer-centricity and agility) will assume ever greater significance for the mortgage industry.

Putting this into perspective

A recent Accenture survey of senior executives in the financial services industry, which included mortgage providers around the world, sheds considerable light on the evolution in attitudes towards outsourcing. The 230 participating executives largely agreed that their outsourcing arrangements have, to date, met or exceeded expectations. However, there was also agreement that, from now on, the quality of the outsourcing provider - and its ability to deliver real value, rather than just cost reduction benefits - will play a much bigger role in future decisions about who to partner with and how agreements with these partners should be structured.

According to the survey, conducted in conjunction with the Economist Intelligence Unit (EIU), the quality of the outsourcing provider has become increasingly important as organisations have grown more mature in their expectations. Many respondents clearly stated that they saw real room for improvement in their outsourcing arrangements.

Of those that said they would, with hindsight, have handled their outsourcing differently, 28 per cent indicated that they would have chosen a higher-quality outsourcing provider - even if that vendor was more expensive. This was more than five times the 5 per cent of executives who said that they would have chosen a cheaper vendor, even if that resulted in lower-quality delivery.

Driving new behaviours

This trend towards quality and value is, in turn, driving new behaviours across the supplier spectrum - a spectrum that embraces product providers, multinational outsourcers and Indian outsourcers.

For the product providers, the principal impact is that they have had to concentrate on developing products that are capable of delivering enterprise-wide benefits to organisations. They have also had to employ new capabilities to enable them to articulate and communicate the key business benefits of these products and the ways in which they can be deployed. As a result, we have seen an increasing number of product providers seeking out and entering into strong alliances with outsourcing providers or developing strong service and consulting skills.

For international outsourcers (such as Accenture), there have been a number of major consequences. First and foremost, the new marketplace has called for a deepening focus on ensuring the integration of key competencies - namely outsourcing delivery and domain consultancy. This is essential if international outsourcers are to deliver real value benefit to their clients from now on. At the same time, international outsourcers have had to strengthen their overall outsourcing capabilities, boosting employment in key delivery centres. For example, India now represents Accenture's largest employment base worldwide and this transformation (along with the integration of competencies across operations) has marked a major step-change in our ability to deliver value benefits to our clients at low cost.

Meanwhile, amongst the India-domiciled outsourcing providers, the trend is towards a growing number moving into the international outsourcing space, in the process acquiring business domain expertise and global competencies.

The value imperative

Over the next five to seven years, we expect the outsourcing market to be increasingly shaped by the need to combine key service delivery capabilities (principally outsourcing and business domain consultancy), as well as achieving seamless integration between cost/value deliverables. While some of the international outsourcers have already adapted their organisations to these twin imperatives, it is likely that the Indian outsourcing industry - which is less far advanced along the track of integrating consulting and IT delivery competencies - will find itself being asked some tough questions in the months and years ahead. And, inevitably, there will be some clear winners and losers within that industry grouping.

The impact on customers

A similar shift in behaviours should be expected to take place in the customer landscape. Increasingly, every outsourcing contract will need to be structured around a model which manifestly ensures integration with clients' business objectives - and with the requirements of these clients' customers. Outsourcing agreements will have to be developed which integrate cost benefits with enhanced business value/agility and customer-centricity.

Most of these agreements are already now so wide that they affect a broad (and fast-expanding) universe of stakeholders and, for this reason, they need to deliver against the proliferating expectations placed upon them. Satisfying the CIO is no longer enough. Increasingly, outsourcing contracts will have to deliver against the mandates of managing directors across the client's business.

Cost and quality expectations will inevitably become more and more closely interrelated. This will, in large part, be driven by the rise of a new generation of financial services consumers. In the mortgage market, consumers are nowadays much better educated when it comes to understanding the benefits of individual products and what they have to offer. Also, consumers expect to buy their financial products in just the same way as they buy other key goods and services. Clear behavioural preferences exist and it is essential for mortgage providers to understand these and respond to them promptly.

Customer-centricity and agility are therefore likely to become major considerations. Organisations will have to understand consumer expectations - as well as being equipped to react swiftly and intuitively to shifts in what will be a more and more volatile and competitive marketplace. At the same time, mortgage providers will also need to be able to sell their products more proactively - educating consumers about how their products address needs rather than reacting to a specific demand.

For all of the above reasons, mortgage providers will expect their outsourcing agreements to be able to deliver real benefits across a far wider range of factors than cost alone. As we said earlier in this article, cost reduction is now a given. From now on, outsourcing will have to integrate this benefit with broader value-based factors, as well as ensuring real customer-centricity.

Expanding capabilities and measuring benefits

To match these emphatic trends, some outsourcing providers have already moved towards integrating specific business-sector expertise into their existing outsourcing capabilities. This is an essential step. If outsourcing agreements are to take account of customer demands - seamlessly incorporating these into IT structures - then a truly in-depth understanding of the client's business requirements must become part of the overall offering. By the same token, outsourcing providers will have to structure their outsourcing offerings so as to deliver benefits swiftly and iteratively, as their clients' businesses expand and evolve over time.

At the same time, if they are to drive real value into their client offerings, outsourcing providers will have to combine IT and BPO capabilities with business consulting expertise. As the boundaries of outsourcing continue to expand, this will be a mandatory requirement - especially where the target market operates large, complex transaction platforms (in the way that mortgage providers do).

The challenge - for outsourcing providers and their customers - will be to develop indices that can measure the delivery of these broader value-based benefits across the business. SLAs and at-a-glance displays of key data will no longer be sufficient. Instead, contracts will need to adapt to be based around effective value-measuring models. For both camps - mortgage providers and outsourcing providers - this will be a vital development. If contracts cannot convincingly articulate key value-parameters upfront, outsourcing relationships will swiftly be undermined and, ultimately, irrevocably damaged.

Back to our survey - expanding horizons

Our survey highlighted that outsourcing is continuing to expand. Financial service organisations are now manifestly more prepared to outsource more IT-related activities - even those that are considered core to the business; 46 per cent of the application management of secondary systems, for example marketing or HR applications, is currently outsourced. However, in three years' time, respondents expect that figure to rise to 56 per cent. Similarly, while 36 per cent of software testing and certification is currently outsourced, 47 per cent of those activities are expected to be handled by external providers in the next three years.

To be specific, the biggest increases in outsourcing over the next three years are expected to be in website management (from 39 per cent to 51 per cent), IT helpdesks (from 31 per cent to 46 per cent) and desktop management (from 29 per cent to 43 per cent). Meanwhile, nearly 40 per cent of core systems (application management of strategic/primary systems) is considered suitable for third-party management.

Lessons learned

As they turn to IT outsourcing engagements over the next three years, financial service companies can learn from the experience of others in overcoming some of the obstacles commonly encountered when partnering with a third party.

The main difficulties that companies have encountered in establishing and managing their outsourcing arrangements are largely self-made: 48 per cent of survey respondents said that the greatest difficulty they faced was the lack of internal expertise in managing outsourced functions effectively; 25 per cent indicated that a poor understanding of their particular business needs by the outsourcing provider had posed significant problems.

Clearly the 'understanding gap' needs to be bridged. As we have already outlined, outsourcing providers will have no choice but to deepen their knowledge of clients' specific business sectors. And, by the same token, organisations will have to take steps to increase their understanding of what outsourcing has to offer - and how it can help them to achieve their goals.

Improved contracts - which incorporate models capable of measuring broader value-based benefits - will do much to address this gap. When asked what they would do differently when negotiating their outsourcing arrangements, 39 per cent of executives said that they would make sure that SLAs were better defined to eliminate ambiguity. But as we have shown above, SLAs and KPI-oriented data displays alone will not be sufficient to meet the far broader expectations being placed on outsourcing agreements. Sophisticated value-measuring metrics will have to be developed and agreed upon.

Piyush N Singh is a senior executive in Accenture's Banking practice