Plentiful deals and flush years are a distant memory for most financial services organizations. The banking, capital markets and insurance industries have been staggered by repeated economic blows over the past two-plus years, leaving many companies structurally challenged to regain lost momentum in a thinner, slow-growth global market environment.
For these institutions to return to fighting trim before their competition, the best chance may rest with the fast-emerging solution called business process outsourcing (BPO).
BPO can help these companies escape economic stasis to become performance leaders again. To do so, senior management must rethink their business models by focusing only on those products and processes that deliver growth, productivity and shareholder value. By eliminating all other functions nonessential to their respective models, executives can reinvigorate performance, reduce costs and boost price-to-earnings ratios.
Determining the distinctive
With revenue growth depressed and cost of equity high, firms can look to BPO to protect margins and minimize capital investments. One major European bank undertook an analysis of all its business lines recently with an eye toward outsourcing non-distinctive functions. The reason? Escalating cost-income ratios were damaging the bank’s stock price. The bank has since signed an agreement to outsource data centers in one important region and has put procurement and accounts payable on its BPO short list.
And it’s no wonder. Financial services firms succeed in the market by doing an excellent job on the products and services that matter most to customers. In tough times, when the competition is sharper and customers more selective, it is vital to invest more in the functions that drive market success and less on non-distinctive areas that can be executed better and cheaper externally.
If they can find an external provider that can deliver measurable operational and cost advantages over internal resources, companies can improve end-to-end performance, structural agility and raise their market profile through the resulting enhancements in technology, information and data accessibility and back-office efficiency. More importantly, as BPO allows senior executives to focus their attention where it belongs—on long-term strategy and the competitive transformation of their businessesµit can become a catalyst for organizational change.
Blazing the trail
Indeed, there are a number of examples within and outside financial services that illustrate how BPO can evolve from labor arbitrage to replatforming to eventually effecting overall business transformation. In insurance, for instance, Accenture services processing units in France, India, Italy and the Netherlands currently deliver tailored BPO solutions to global and regional insurers. The expanding list of capabilities these units offer includes policy management and product creation processes, annuity, life and health products support, policy servicing, administration, Web systems management, pension fund administration, back-office and IT optimization.
“We have begun to think about outsourcing broadly,” says Paul Idzik, chief operating officer at Barclays Capital, the investment banking division of Barclays Bank, in “Outside upside: Finding focus through financial outsourcing,” an Accenture White Paper written in cooperation with the Economist Intelligence Unit. Indeed, banking, insurance and capital markets firms have announced a string of major outsourcing initiatives in 2002-2003.
Beyond financial services, travel services company Thomas Cook UK is a good illustration of a leading company that applied BPO as a lever to turn and lift its whole business. Thomas Cook mapped out a collaborative five-year, three-phase transformational program focused first on business recovery and a return to profitability, followed by performance enhancement and growth. In the first phase, 13 corporate sites that were individually handling their own finance and accounting, human resources administration, information technology and project delivery work were closed and all processes consolidated into a single service center.
As Marco Trecroce, group business transformation and operations director at Thomas Cook, notes, “The change in the staff was incredible. They started to see that we are serious about changing the operating model, serious about not keeping everything in house, serious about looking at new ways to provide services, concepts that the business had never heard of before.” Within 16 months, Thomas Cook stemmed its losses and regained the path to profitability.
Taken together, these initiatives underscore the growing trend of the world’s leading companies targeting a widening array of business processes and services for strategic outsourcing.
Grasping the larger concept
Financial services firms limited BPO in the past to only a few back-office functions. But now, banks are outsourcing not only credit card processing, but also operations for mortgage origination and servicing, business lending and back-office operations. In the past 18 months, JP Morgan Chase, Westpac and Sparda-Banken are among those announcing new outsourcing deals in one or more of these and other areas.
Commercial banks are turning their attention to BPO in attempts to whittle away at a burgeoning cost base estimated at $900 billion to $1.1 trillion. Outsourcing of human resources administration alone is growing at 54 percent per year, invoicing and billing at 40 percent and accounting at 35 percent. Core systems operations, trade finance, cross-border payments, learning, and customer relationship management (CRM) are other areas strongly under consideration.
Insurance firms, as noted earlier, are moving in the same direction. A bear market in equities has taken its toll on investment income and on customer demand for insurance products. Life insurers have abandoned some lines, while property & casualty providers still reel from the aftermath of events like 9/11 and the Europe floods of 2001. BPO holds particular promise here in such functions as closed book aggregation, open book and new product processing, product and policy management, accelerated claims processing for insurers and self-insured “captives,” learning and CRM applications.
In capital markets, several global investment banks have been among the early BPO explorers examining the emerging value propositions BPO offers across the industry. As much as 80 percent of product accounting and 97 percent of financial accounting could eventually go the BPO route, along with more than 50 percent of finance processing and up to 70 percent of cross-product operations. Strategic opportunities for capital markets companies include securities, OTC derivatives and corporate actions processing, reference and market data services.
The bottom line and beyond
Depending on the nature and extent of its application, BPO can lower a company’s costs from 10 to 70 percent. The elimination of inefficiencies caused by bureaucratic politics or institutional obstacles, along with access to state-of-the-art technology, economies of scale and labor arbitrage are among the reasons for the success of BPO in cutting expenses and capital outlays. Growing recognition that BPO delivers in this respect is driving implementations to double-digit growth.
Yet while executives rightly view BPO as a valuable cost-reduction solution, an increasing number also recognize it as a catalyst that can ultimately spur business transformation. In a sense, the demand emphasis for BPO is shifting from a purely financial to a more strategic approach. In so doing, it is prompting more and more C-level executives into step-by-step reexaminations of the structure, efficiency and effectiveness of their business models.
Often stereotypically conservative, with a cultural bias for control, most financial services firms have been late and reluctant embracers of BPO. But the array of challenges confronting the industry makes control for control’s sake a costly indulgence. The early movers are pressing ahead, pushing costs out the door and transforming their organizations into leaner, more competitive machines. The rest of the industry has only to decide how far behind it is willing to fall before it starts to play catch-up.