Overcome fear of outsourcing

Colin Greaves, operations director at Newcastle Building Society, explores why outsourcing is not just a strategy for big players but can be a viable option for all businesses in these turbulent times

If you are in the building society sector you can’t help but have come across conflicting advice over the years – centralise, decentralise, in-source, outsource.

Whether we are in ‘a crisis’ is a moot point. Certainly it is a difficult market, with challenges few of us have faced before. Significant credit losses on sub-prime are the ‘norm’ and it seems hard to grasp the true scale of the issue when we nonchalantly accept losses of $17bn (HSBC), $7,8bn (Merrill Lynch) and $9.8bn (Citigroup).

Bear Stearns, already dubbed in some quarters as “America’s Northern Rock”, is the latest casualty. Its market capitalisation has fallen from $18bn in April 2007 to $240m in March 2008 and the firm had to be rescued by rival JP Morgan Chase. If nothing else, these stories exemplify that big is not always beautiful.

Cutting of interest rates, a slow moving housing market, threat of stagflation and big players pulling out of the market are all symptoms of a massively changed market.

The phrase ‘credit crunch’ has barely left the headlines over the past six months. It is inevitable with all this change afoot that financial institutions will have to evaluate themselves and their position closely in this volatile market.

What was business as usual is in danger of becoming survival of the fittest, with smaller, niche or more geographically centred organisations finding it difficult to assess costs in key problems areas effectively.

The financial year end, which last year coincided with the credit crisis, is often the catalyst for boards to review their strategic options and to develop the next generation of corporate and operational plans.

While attention has inevitably been focused more than ever on issues of funding, liquidity and capital rather than growth and profit, many will still be looking in the short to medium term at the management of costs and the development of income.

There was a view a few years ago, that there would be two kinds of organisations, those that in-source, and those that outsource. It was heralding the expected boom in outsourcing, initially in the IT sector but subsequently moving into business process outsourcing.

There has certainly been a significant growth in the latter. In 2007, Europe saw the greatest growth in the outsourcing market so far, surpassing the American market in both contracts awarded and total value.

According to the Quarterly Index from sourcing adviser TPI, the annualised value of new contracts awarded in Europe in 2007 was up almost 31% on previous year levels, compared with an increase of 13% globally. Even so there are still many organisations that have limited, if any, access to outsourced services for key business operations.

In late 2007, Newcastle Building Society carried out a review of the outsourcing market within the financial services sector. The findings confirm the view that while outsourcing is becoming more acceptable as part of modern business practice, especially among larger organisations, there remains a great deal of prejudice against outsourcing and many misconceptions still survive.

Perhaps most concerning is a lack of understanding of the costs and the consequent drivers behind outsourcing decisions.

Before attempting to understand why firms do not outsource, it is necessary to review the factors and considerations that influence the decision to ‘abandon’ hard earned skills and hand over to ‘strangers’ customers whose trust a firm has laboured to gain.

The most common issue the review highlighted was a lack of understanding of organisations’ internal costs. Most organisations rely on the multi-skilling of staff and the consequent job sharing that ensues.

Many firms believe they are effectively utilising available resources and that retaining customer contact ensures quality and service feedback is received directly into the heart of the organisation. Few have sophisticated systems for measuring the real time spent on customers or processes in support of customer service requests.

Experience has shown that unless true scale is brought to bear and processes are broken down to individual tasks, the cost of carrying out work is difficult to establish.

While there are tools, techniques and technologies to help carry out these functions, they are typically only brought into operation where the volume work means identified savings would be significant.

For many organisations, lack of knowledge of true costs results in several issues. These include unidentified processing costs, unknown staffing costs, inability to absorb overhead costs (heating, rent, IT equipment and so on), unawareness of whether service level agreements (SLAs) are being achieved (or over achieved) and a lack of quality assurance over task performance and desired outcome. It can mean, at worst, an uneconomic process with dissatisfied and undeserved customers.

Accurate measurement of work is essential to understand which processes should be prioritised for automation. Feedback from the review showed that a lack of understanding of internal costs meant it was impossible to evaluate external pricing was .

Companies felt that utilising internal resources was a much cheaper option. But there is a further issue, the irregular flow of work. This often hits organisations either as a peak, leading to missed SLAs, or as a trough, resulting in under-utilised staff.

A way in which the accurate measuring and understanding of a processes and the appropriate application of technology can help organisations reduce costs was ably demonstrated at our building society recently.

As the recent volatility in the market took hold, large numbers of savers opened new accounts to take advantage of the highly competitive rates on offer. A new automated account opening process had just been introduced which employed the latest in customer identification and verification technology. Over 87% of account applications processed completed automatically online, saving between 20 and 40 minutes per account.

Processing 50,000 account openings in one month alone saved over 400 staff at peak and all transactions were completed within agreed service levels.

Definition of the process also allows for clear SLAs, which can be incorporated at the contract stage and subsequently monitored. The full customer experience can be modelled and monitored from the time a call is answered to the processing on an item of work.

Selection of the right outsourcing partner can also mean consistent brand and cultural values are shared with the customer, making the relationship seamless in the customers experience. The use of image and workflow technology allows instantaneous monitoring of each customer contact and means information can be provided to a customer immediately. The true test is whether customer service is improved by the definition of the service, both in speed and accuracy of response. Many centres that have carried out such processes would attest to improved customer satisfaction, and as a consequence improved sale/cross-sale rates.

Another main concern uncovered in the review was the treatment of staff, particularly in smaller organisations. Firms’ commitment to their staff showed that many of them feared there would be job losses should outsourcing replace a function previously carried out internally.

Always a highly emotive issue, staffing is at the very core of outsourcing. Many firms decide to outsource because of problems in recruitment or retention. Decisions made purely on cost need to be balanced with a consideration on the impact the outsourcing would have on staff. Many organisations use outsourcing contracts as new initiatives to manage business expansion by freeing existing experienced staff who are often looking for a new and stimulating challenge and want to escape from more mundane or repetitive tasks.

Often the release of staff can be used to strategically change the operation, for example by refocusing internal staff on sales development, or to allow more rapid growth.

One of the more interesting findings from the review was that many organisations believe they ‘don’t outsource’. Yet, when probed, it was found that a large number seek external solutions for many elements of their business such as catering, printing, marketing, building services, fleet management and compliance.

The core driver behind these decisions are cited as cost and access to skills, with firms defending their case by citing an inability to scale up to achieve benefits. Having made this leap it would be natural to assume the next logical step for firms would be to review other business areas to see if the same type of arguments apply.

Another common reason given for not outsourcing was the perception that there would be a loss of ‘personal’ customer service. A significant factor worrying managers was the belief that customers want to deal with ‘my staff’ rather than a group of unknowns.

Perhaps this is best demonstrated by the stigma that is still attached to call centres in India and other emerging call locations such as China and South Africa. The barriers to overcoming such objections will take time and may for some organisations never be suitably answered – if you have a unique selling proposition then why change?

Indeed, globalisation is already being blamed for the current credit crunch, where too much commoditisation – perhaps including service – has already occurred. I am sure none of us want a one-size-fits-all solution to our customer service but we are in an environment where time for many is more precious than money.

Processing and call centres have grown because there are certain services that benefit from economies of scale, and elements of customer service that can be improved by automation. This works best for those organisations that take advantage of the efficiencies, and dedicate the right resources to other areas of service differentiation.

Challenges are faced by large and small organisations alike. But perhaps the opportunities for smaller organisation are bigger, as they tend to still have significant face-to-face contact with customers.

Organisations should not simply view outsourcing as a means of decreasing the size of the business but more of an extension and a development of their business, in most cases providing experience, expertise, technology, security against fraud and money laundering and the sharing of best practice.

Outsourcing should be viewed as the ability to create the space to enable organisations to get on with the real business.