Outsourcing - In or Out?
Banking Technology December 07/January 08
By Ruth Taplin and Graeme Fry
This article can be viewed as PDF (approx 5MB).
Outsourcing is an increasingly popular strategy deployed by a variety of institutions, including banks, multinational companies and small and medium-sized enterprises (SMEs). However, the literature on outsourcing does not reflect this increasingly complex and important practice in the global economy, having considered it largely from the narrow perspective of cost-saving analysis. Banks in particular have been outsourcing many of their back office and human resource functions but have been encountering a lack of performance, high attrition rates and data leakage either through lack of training of outsourced personnel or fraud. None of these problems are to do with cost saving but inadequate preparation of initial service level agreements, lack of partnership and optimization of resources, unrealistic expectations from both sides and cross-border issues. Outsourcing needs to be assessed from a wide range of countries and perspectives which is done in the latest book to be published on the subject, Outsourcing and Human Resource Management –an international survey edited by Ruth Taplin by Routledge, which looks at East Asia, Europe and the United States and other countries, from a broad standpoint – with particular emphasis on the role of human resource management – that goes beyond the traditional view of outsourcing as simply a search for cheaper labour, as happened in the phase of globalization prior to outsourcing.
Insourcing and Operations Management
Below we look at solutions as proposed in the book from an insourcing and operations management perspective in relation to banking and banking technology.
Insourcing is a way of sourcing highly talented personnel in whatever numbers and however long they are needed by the company. Personnel will work within a bank for example, alongside employed staff without actually being employed by the bank. It allows the business management team to focus the overheads and responsibilities of the employed, full-time staff members on the core company activities, leaving the peripheral work to be dealt with on a more streamlined basis. Management time is also freed up as there is not the need for day-to-day management involvement with those individuals who are insourced as they will generally take their directions from the management of the insourcing company. A well trained insourced team can deal with any aspect of banking including any technological aspect. It is the interface between the human resource and the technology that matters with insourcing.
Dr. Cint Kortmann has shown in the book through his insourcing company Talent&Pro how efficiently insourcing can work as an outsourcing solution for ABN Amro Hypotheken Groep (formerly Bouwfonds Hypotheken). This bank
had the experience found in The Netherlands of high mortgage market volatility. Fluctuating interest rates in particular require a flexible, readily available workforce that can be brought in when there is a sharp increase in demand for mortgages to be processed and quoted in a matter of days. The mortgage process takes
some three weeks to complete after quotations have been issued.
Bouwfonds Hypotheken have only a short time for deployment of employees from the flexible insourcing pool which can be no more than a maximum of two to three weeks. The bank does not have the capacity to train new employees at peak times and it takes at least one month for an employee to become competent with the mortgage process.
Talent & Pro to maximize delivery ensures that their personnel have passed their professional qualification and been familiarized with the Bouwfonds Hypotheken process and systems through trainers provided by the bank.
Such training ensures that all employees in the insourcing pool have the right knowledge and competences prior to being insourced, thereby being fully operational immediately.
Talent&Pro’s aim has been to have an open partnership with Bouwfonds Hypotheken, this being essential in delivering an integrated solution to a customer who has insourced personnel delivering core activities. It is
essential to be able to share ideas and implement requirements quickly and efficiently.
Critical Considerations when Outsourcing an IT function, business process or operation
Emerging evidence and research according to Graeme Fry of Operations Management specialists oee, including a recent study from leading analyst Gartner, is revealing that companies lured into outsourcing by promises of
cost savings may be letting themselves in for long-term problems that outweigh any short-term gains. The key issue for organisations considering outsourcing an IT function, business process, or operation, is that labour arbitrage opportunities may blind them to the associated operational risks. Companies risk compromising their customer service and reputations in the belief that an operation can simply be "lifted" and then "shifted".
At the same time the falling cost of technology and services also means longer-term outsourcing contracts signed only a few years ago can quickly become uncompetitive. In his contribution to the Outsourcing book, Graeme Fry, discusses these issues and suggests the use of an Outsourcing Decision Matrix to enable organisations to comprehensively evaluate the critical factors, including the supporting technology issues, that will impact on the success, or otherwise, of an outsourcing project.
Many banks see the successful outsourcing of a business operation or function bringing significant benefits by reducing costs, improving capacity and freeing up management time to focus on more critical issues. The arguments are even more compelling when the benefits appear so large that the decision to outsource appears self-evident, requiring little cost-benefit analysis, or sufficiently detailed interrogation of the potential technical issues. Unfortunately the absence of a sufficiently analytical approach can lead to outsourcing projects failing to deliver their projected returns.
Sufficient experience is now available to demonstrate that many outsourcing projects develop operations management problems that erode, or destroy, the planned benefits. The viability of the outsourced operation, even though it has been transferred to a lower-wage economy, can be undermined by these operational problems, many of which could have been identified and resolved prior to transfer.
Optimising Resources
The causes can often be minor and would, in the normal course of events, be resolved quickly. However, once an operation is outsourced and separated from the experience and the expert support it had previously received, then the minor problems can become large and expensive management issues. At the same time failure to optimise processes before outsourcing will undermine the benefits of any changes in technology associated with the outsourcing project.
The Outsourcing Decision Matrix
oee’s Outsourcing Decision Matrix comprises a matrix of ten critical business issues that need to be addressed when considering a project for outsourcing:
- Productivity
- Independence
- Boundaries
- Predictability
- Inputs
- Quality
- Stability
- Training
- Financial viability
- Reliability
The Decision Matrix has been created using experience gained from assisting businesses to prepare operations for outsourcing, to rescue outsourced processes, or to return processes back in-house. The descriptors in the matrix indicate where weaknesses may lie, and how much work may be required to prepare the process for outsourcing. The columns of the matrix describe how the attributes of the process may develop from being immature and inappropriate for outsourcing (column 5) into the high-performing attributes (column 1).
Click to view the Matrix as a PDF.
The use of this type of matrix can identify problems prior to outsourcing and allow appropriate action to be taken. In some organisations a mindset exists that an operation can be passed to an outsource partner and, at that point, all the problems and risk are also transferred. This is not the case. Experience and emerging research confirms that there is no substitute for a clear understanding of the operational issues surrounding a decision to outsource. If they are not taken into account early in the process, then subsequent problems will come back to haunt the organisation with potentially severe business consequences.
Graeme Fry is a Director at oee.
Ruth Taplin is Director of the Centre for Japanese and East Asian Studies, London, which won Exporter of the Year in Partnership in Trading/Pathfinder for the UK in 2000. She received her doctorate from the London School of Economics and is the author/editor of 14 books and over 200 articles. She has been Editor of the
Journal of Interdisciplinary Economics for 12 years. Currently she is a Research Fellow at Birkbeck College, University of London, the University of Leicester and a number of universities globally. She is Visiting Professor at the School of International Business and Management, University of Warsaw, Poland, and was a Visiting Fellow at the University of Mumbai Economics Department in January 2007.
