Whether to outsource is no longer the question most financial services companies are asking themselves. In the banking industry, we are all familiar and comfortable with buying services from third-party suppliers-activities such as software development, credit-risk assessment, plastic-card production or paper-check printing have been farmed out to specialists for as long as most of us can remember.
The real question brought to the forefront of the discussions about offshore business-process outsourcing is: "What is the best sourcing strategy to pursue?" In the digital age, where information moves instantaneously and customers can be scattered from Seattle to San Diego to Miami, business managers can select providers in multiple locations in the U.S., as well as overseas; 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 dreamed could leave the bank's back office. Faced with an ever-extending range of possibilities, the leading financial services companies in the country today are investing a lot of brain power in considering how to better manage their sourcing activities, adopting flexible policies that allow them to procure labor and materials from a combination of locations that makes most sense for the business. The goal is to sustain 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. They are piecing together sourcing activities that allow them to get the best 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 that this is still an industry moving cautiously out of the early adopter phase. While BPO is gaining acceptance, many of the vendor-selection processes today still choose choose one sole vendor as the preferred supplier. 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. The importance of vendor selection in creating durable and profitable outsourcing arrangements cannot be overstated, and for those already outsourcing it is time to seriously consider a multi-vendor strategy.
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.
There are a few areas in life where "one size fits all" is an appropriate model. In BPO, that is definitely not the case. It is almost impossible to create an off-the-shelf BPO offering appropriate across all companies.
Despite being in the same industry, they have individual personalities,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.
Industry specializations are built over time, as is a detailed understanding of a process repeated millions of times a year for multiple customers. The top provider of secure credit-card account opening services is unlikely to be the same as the leading proponent of insurance-claims processing, or the expert in handling the paperwork associated with share dealing.
One of the main advantages of having a roster of suppliers is achieving 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. 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 each process is performed in an optimal location. Such a configuration will undoubtedly save time and 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 multiple parties are 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 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. The goal is to steadily improve performance, and if one supplier does better than another, his methods could provide clues to the best practice for that process. Similarly, if one supplier is failing at a particular process, the ability to judge performance versus an alternative allows rational decisions about whether to ask that supplier to focus on a different process instead. Even where banks opt for a captive outsourced operation, having external vendors to measure it against can benefit the business.
Kannan Ramachandram is vp of product management for eFunds' Global Outsourcing Division.
