Whether to outsource or not is no longer the question most financial services companies are asking themselves. In the banking industry, we are all familiar and comfortable with buying in services from third party suppliers-activities such as software development, credit risk assessment, production of plastic cards or printing of paper checks have been farmed out to specialist companies for as long as most of us can remember.
The real question, brought to the forefront of the discussions about offshore business process outsourcing (BPO), is "What is the best sourcing strategy to pursue?" In the digital age, where information moves instantaneously and customers can also be scattered from Seattle to San Diego to Miami, business managers have the option to select providers in multiple locations in the U.S., as well as overseas suppliers; there are more choices to be made than many companies know how to effectively manage. Now it is possible to outsource functions and activities that nobody ever dreamed would be able to leave the back office of a bank or replace the work done in some of its branches. Faced with an ever-extending range of possibilities, the leading financial services companies in the country today are investing a lot of brainpower in considering how to manage their sourcing activities smarter, adopting flexible policies that allow them to procure labor and materials from a combination of locations that makes most sense for the business-helping them sustain a competitive advantage, improve operational performance and provide better standards of customer service.
Those ahead of the curve are already adopting "best-shoring" as a strategy. Acknowledging the global economy, they are piecing together sourcing activities that allow them to get the best of all that is possible in the world. Because of this it comes as no surprise to see that Forrester Research recently estimated the growth of the U.S. outsourcing market to reach $146 billion annually by 2008, with three million new jobs created, of which about 40 percent will be overseas.
The phenomenal growth curve in BPO disguises the fact that this is still an industry that is moving cautiously out of the early-adopter phase. Whilst BPO is gaining acceptance, many of the vendor selection processes happening today still only have the agenda of choosing one sole vendor as the preferred supplier of services. Top tier banks have dipped their toes in the BPO pond, but even where several hundred jobs are outsourced these are frequently viewed as pilot projects. Therefore, when expanding BPO activity, they often stick with one provider for additional projects or, if the pilot was deemed unsuccessful, re-open the selection procedure to determine another single supplier.
Although the pilot project approach is to be recommended, the focus on one supplier has disadvantages. In the early stages, time can be wasted transferring operations to one company and then looking for a new partner when the initial project fails. It is often advisable to run simultaneous, if perhaps smaller, pilots with a handful of suppliers, giving better opportunities for benchmarking performance and analyzing cultural fit and management competence. In the long term, putting all your eggs in one basket in an industry that is becoming more sophisticated by the day might lock you in to a supplier relationship that is less than optimal. Like captive centers, where the parent still owns the people, buildings and all the related costs of a remote operation, the downside of sole supply arrangements is that you potentially lose touch with market reality and can no longer benefit from advances in technology, more advantageous pricing or the ability to engage somebody who has built up real expertise in the kinds of processes you are outsourcing.
In BPO, being able to draw comparisons across a range of suppliers is often the best policy, to keep them all honest and ensure you get the best deal available. This is one instance where it is can be a good thing to use the same supplier as your competitors because the supplier will have honed its service delivery for the same and similar processes to an extent that probably no single bank operation would ever have attained and the benefits obtainable from best practices in a niche competency can considerably aid operational performance.
There are a few areas in life where "one size fits all" is an appropriate model. In BPO that is definitely not the case. Buying organizations are some of the world's leading banks, Fortune companies with impressive reputations to maintain and a valuable customer base to protect. It is almost impossible to create an "off-the-shelf" BPO offering that is appropriate across all these companies, for despite being in the same industry they all have individual personalities, completely unique technology infrastructures, diverse marketing strategies and myriad approaches to customer care. A successful BPO solution in this environment is, more often than not, a sophisticated, tailor-made one. Unfortunately, where a vendor may have deep process knowledge in one kind of process, it is rare to find one that can provide a perfect fit across the whole spectrum of business units, products and services that make up the modern retail bank, insurance company, brokerage company or credit card issuer. By limiting the approved vendor list, an organization is limiting the potential value to be gleaned from outsourcing.
One of the main advantages of having a roster of suppliers is the achievement of supreme operational flexibility. Operational management has learned to cope well with the peaks and troughs of demand, but there are costs involved with planning and maintaining capacity internally which disappear when a process is outsourced and it becomes the vendor's responsibility to ensure that people and equipment are available when needed and not billed at other times. Having multiple suppliers, particularly in an onshore/offshore model, means that processing can follow the sun, can flex to accommodate seasonal traffic or specific marketing campaigns and can be orchestrated so that each process is performed in an optimal location. Such a configuration will undoubtedly save time and spare dollars.
Some would argue that there are disadvantages to multi-vendor strategies too; for example, the challenge of protecting intellectual property or customer data privacy may be greater if there are multiple parties involved. For obvious reasons, outsourcing providers maintain watertight "Chinese walls" between processes and, where they also work for your competitors, it is possible to construct physical separations between teams in highly controlled environments.
The ability to benchmark one of the players against the others helps too. The way to tell if a process is performing is from its key performance indicators, expressed in terms of Service Level Agreements (SLAs). The goal is to steadily improve performance, and if one supplier does better than another his methods could provide clues to what best practice should be for that process. Similarly, if one supplier is failing at a particular process, the ability to judge performance versus an alternative allows rational decisions to be made about whether to ask that supplier to focus on a different process instead.
From the client's perspective, a multi-vendor environment can be structured to ensure success. The governance effort for outsourcing projects needs to be process-driven and centralized, with the creation of common templates and reporting formats for all vendors to facilitate monitoring. If vendors can be encouraged to partner with each other in a wider alliance, it can be productive, especially where they each manage pieces that contribute to a larger process. Buyers should also discourage destructive behavior among their supplier pool; for example, setting down guidelines to prevent the poaching of each other's employees.
Outsourcing being a people business, ultimately the decision that can make most difference to the results of your project is whom you choose to work with. By selecting the appropriate vendor for each process, creating a network of partnerships with best-in-class companies, not just "best-shoring," but also "best-partnering," it becomes easier to safeguard against disappointment and failure.
Kannan Ramachandram is vp of product management for eFunds' Global Outsourcing Division.
