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Journey to the outsource

Until 2000, there was little real competition in the market for outsourcing in the UK financial services as there were few serious players. However, falling margins have forced insurers to consider the case for outsourcing seriously.

Companies considering outsourcing fall into a number of categories:

•New business with unpredictable volumes and the overhead of building the infrastructure for launch and beyond cannot be immediately justified.

•Existing businesses wanting to reduce unit costs or free management time to focus on business growth.

•Businesses that have closed to new business but still have a book to manage. Here, the aim is to fix unit costs as the book decreases over time.

Margin pressure is likely to accelerate the growth of the outsourcing market. There are a growing number of players in the outsourcing market. Additionally, new players are gaining market share at the expense of the traditional outsource service providers. These new players will help market growth, increase competition and broaden available choice.

In the case of companies closed to new business, the economics of outsourcing can be difficult to argue against, particularly over the long term.

But in the case of a closed book in a company still writing new business, the business case for outsourcing is not as straightforward. There will be an infrastructure in place managing both open and closed books and removal of the closed book could remove economies of scale.

Unsurprisingly, the emerging market for outsourcing in life and pensions is focusing on big closed books, for example, the recent Lincoln Financial deal with Capita.

However, over the coming years, demand for cheaper admin of new business should shift to books operating within the 1 per cent regime.

If the approach to outsourcing is not robustly managed, we could see a raft of insourcing, damaged customer confidence, uneasy shareholders and no enduring financial benefits.

Organisations could find they have come full circle and outsourcing will have been a waste of time and little more than a kneejerk response to contemporary margin pressure.

What do we mean by robustly managed?

Watertight business case

The business case should include a detailed understanding of all current costs by activity/unit combined with an assessment of the importance of each activity to the core business proposition.

Do not forget your customers

While concentrating on sourcing options, it is easy to focus on numbers and forget the less tangible but critical aspects of the operation. What will customer perception of the outsourced service be?

Thinking that the hardest part is selecting the outsource service provider

All too often, we see organisations going through an exhaustive selection process, starting with a long list of potential outsource service providers and gradually whittling this down. Eventually, one candidate emerges as the preferred option. All involved heave a collective sigh of relief before returning to their day jobs.

Test capacity of the outsourcer

It is vital to challenge the resource capability of the proposed outsourcer – how many clients do they already have, how many new clients are currently migrating or planning to migrate to their service, what are their resource and investment commitments?

Wrong expectations

Too often, senior executives have the wrong expectations of what outsourcing entails. Outsourcing is not an effective tool to outsource a problem. We recommend that only those parts of the organisation which are currently running well should be considered for outsourcing.

Holding all the aces

The essence of a successful outsourcing deal is the relationships of the people who must make it all work. While it may look beneficial to the party outsourcing to hold all the aces in terms of the contract, as those aces are played the overall impact is likely to be damaging to those relationships. This is a recipe for disaster.

A good contract will be one with which neither party is entirely happy. Parties often negotiate adversarially – it does not work. Structure a deal that realistically reflects the interests of both parties. Remember that both parties must benefit in order to succeed.

Learn from experience

There is always something to be learnt from others who have been on this journey before you. Often, they are happy to share that experience with you.

On paper, outsourcing can help to control operational expenditure but the benefits beyond that must be understood. There may be a cost to the business that is not evident at the outset. Constant review of the relationship, the fit with the business and benefits being gained should be undertaken.

Outsourcing is a waste if undertaken without depth of thought, management understanding and commitment.

Over the lifetime of an outsource contract, the organisation should revisit the original business case rationale against actual experience.

Managed actively and thoughtfully, outsourcing can deliver the necessary cost savings and much more by allowing the organisation to concentrate on what it does best.

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