Anyone looking objectively at the financial services market would probably see an industry that is in danger of undermining its foundations.
But there is a way to build certainty in uncertain times by providing consumers with the products they need in ways they want to access them outsourcing.
Outsourcing isn’t the answer to all the industry’s woes but it will have a role to play as financial giants struggle with outdated legacy systems, increased scrutiny from the regulator and a redress exercise for payment protection insurance claims.
The arguments for and against have been aired many times. Those in favour point to the fact that outsourcing delivers a flexible and cost-effective resource, while its detractors say the best way to get a job done is to do it yourself.
But the challenges facing financial institutions mean they have to be able to offer a far greater degree of certainty both to the regulator and their customers. They are looking for something other than an in-house solution to give internal teams some breathing space, while still delivering the level of service their customers expect and the regulator demands.
The certainty of using an outsourcer, which designs its systems to deliver to multiple masters in a changing environment, has increasingly become a key consideration for many companies when deciding how best to undertake specific projects.
An outsourcing contract is unequivocal it means the job will be done to the standard required by the client and its customers while ensuring that regulatory risks are reported on so the client can fulfill all its regulatory obligations.
This takes a weight off the shoulders of any in-house management team struggling with competing priorities for its resources.
By outsourcing a task, or parts of it, financial institutions have access to additional trained and skilled staff. They also have the comfort of a contractual relationship which gives them legal rights of remedy if anything goes wrong.
Like other financial institutions, regulated financial outsourcers are subject to scrutiny by the Financial Services Authority. They have multiple clients to manage, each with their own service levels and customer expectations. There are also parent companies or shareholders to consider as well as external auditors. In a nutshell, any company which outsources can be assured that the service they receive will be of the standard they are used to working to because the outsourcer has too much to lose by falling short.
“Operational rigour, where administrative teams are held accountable for the outcomes, is rarely applied to internal administrators”
However, the key point is that as in any productive business relationship, the terms of engagement need to be clearly stated at the outset and progress reviewed regularly. This might be the intention with an in-house project team, but the time and effort required to ensure a project is properly scoped, legally tied up and delivered to the right standard is arguably greater with an in-house team than an outsourcer.
There is a perception with an in-house option that you can constantly change your mind and rejig the arrangements if you don’t get it right first time. Outsourcing is about getting it right at the start and putting the effort in at the beginning on both sides to ensure that happens.
A financial outsourcer will dedicate teams to new clients and assign account managers to address governance issues. They should hold monthly performance meetings with clients and ensure the servicer is delivering against pre-set targets.
This type of operational rigour, where administrative teams are held accountable for the outcomes they achieve, is rarely applied to internal administrators.
Look at the PPI debacle. Financial institutions were found guilty of systemic failures, initially in mis-selling PPI and then in handling and processing complaints. As a result they must now compensate tens of thousands of customers.
It’s an administrative challenge on an industrial scale. The reward for getting it right is that lending institutions will be able to move on. The penalty for getting it wrong could come in the form of fines, but banks may also find their reputations are damaged beyond repair.
So what are the options open to organisations facing this conundrum? Some will take the view that the only way to guarantee success is to do it themselves.
That’s fine but it will require significant resources in terms of trained staff, office accommodation and management time. To put the challenge in perspective, the FSA has estimated that there may be as many as 550,000 complaints needing to be processed each year for the next five years. This is no small exercise.
In the post credit-crunch era, many financial institutions have significantly reduced staff numbers and office space so gearing up to meet this monumental challenge will not be easy. There is also the danger that in allocating resources to this pressing priority, other projects may suffer. And if anything goes wrong, banks will have to shoulder the blame and the financial consequences.
But it isn’t just exceptional circumstances like processing PPI complaints that is driving the use of outsourcers. All financial institutions are aware that the regulator is paying far greater attention to the way in which they address customers’ needs. If there are service shortfalls, particularly those which lead to customers not being treated fairly, fines could follow.
So is the use of third party firms simply the easy option? No in many instances it may be the only option if resources are insufficient to meet an immediate need. It may also be that the investment in staff, training and technology is too great to justify for what may be a short-term project.
The use of outsourcing is now commonplace in many other industries, from processing television licenses to producing programmes. For financial services firms, outsourcing provides certainty at a time when little else is certain in their industry.