In or out?

Ruth Taplin and Graeme Fry

To insource or outsource, that is the question for financial institutions. What information is needed to make an informed decision? The authors of a recent book discuss some of the issues involved.

Outsourcing is an increasingly popular strategy deployed by a variety of institutions, including banks, multinational companies and small and medium-sized enterprises. 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 encountered 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 savings, but are a result of inadequate preparation of the initial service level agreements, lack of partnership and optimisation of resources, plus unrealistic expectations from both sides and cross-border issues.

Our newly released book, Outsourcing and Human Resource Management – an international survey, (edited by Ruth Taplin), assesses outsourcing from a wide range of countries and perspectives. The book, published by Routledge, looks at East Asia, Europe, the United States and other countries from a broad standpoint that goes beyond the traditional view of outsourcing as simply a search for cheaper labour, as happened in the phase of globalisation prior to outsourcing.

Insourcing and operations management

Below are solutions 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 for 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 technological aspects. It is the interface between the human resource and the technology that matters with insourcing.

In the book, Dr. Cint Kortmann, founder and international director of insourcing company Talent & Pro, explains how efficiently insourcing can work as an outsourcing solution for ABN Amro Hypotheken Groep (formerly Bouwfonds Hypotheken). The bank experienced high mortgage market volatility in the Netherlands. 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 close to three weeks to complete after quotations have been issued. Therefore ABN Amro HG has only a short time – no more than a maximum of two to three weeks – for deployment of employees from the flexible insourcing pool. The bank does not have the capacity to train new employees at peak times because it takes at least one month for an employee to become competent with the mortgage process.

Talent & Pro’s maximised delivery ensures that their personnel have passed their professional qualification and are familiarised with ABN Amro HG’s 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 is to have an open partnership with ABN Amro HG because it is 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.

Considerations when outsourcing

Emerging evidence and research, including a recent study from leading analyst Gartner, reveals 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 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.

The book 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 even 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.

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, 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.

Outsourcing Decision Matrix

OEE’s Outsourcing Decision Matrix comprises a matrix (over page) 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 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).

The use of this type of matrix can identify problems prior to outsourcing and allow appropriate action to be taken. Some organisations believe 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 the issues are not taken into account early in the process, then subsequent problems will come back to haunt the organisation with potentially severe business consequences.

Outsourcing Decision Matrix

	1	2	3	4	5
Productivity	Continually seeking improvement	Waste analysed and addressed	Process team understand the waste concept	Capacity planning implemented	Productivity not measured
Independence	Process independent from inputs external to the business	Limited reliance on external input	Service Level Agreements in place with consistent supply	Suppliers and communication channels are reliable	Processing is dependent upon external information
Boundaries	Boundaries of process defined and adhered too	Consistent handovers in and out of the process	Process Maps regularly reviewed	Process mapped	Process has not been documented
Predictability	Team continually improve process and update User Guides	New team members trained in the one best way of working	Process team designed User Guides	Documented procedures in place	Process teams decide on best way to work
Inputs	Volumes of rarities investigated and reduced	Process organised to isolate rarities	Concept of runners, repeaters and rarities understood	Team recognize some types of work take longer	Process team handle all work they encounter
Quality	Statistical tools used to drive quality	Capability of process is known and remains consistent	Quality assurance implemented	Process outputs inspected before release	Complaints and process quality not measured
Stability	Change process has been applied successfully	Change process in place	Process has had no recent changes or plans for major change	Plans in place for new technology, products or systems	Process requirements, inputs or systems have changed recently
Training	Trainers experienced in training Novices	Trainers identified within the process team	Training plans in place with post training assessments	Standard training available for new team members	Process team have not recently undergone Training
Financial Viability	Changes in salaries and exchange rates estimated	Potential drops in productivity estimated	Costs of support processes and management time is known	Potential gains in productivity have been Considered	All current process costs are not recorded
Reliability	Contingency plans prepared	Risks and anticipated problems Assessed	Process team involved in risk analysis	Risk analysis prepared	Plans for potential problems not Prepared

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.

Graeme Fry is an engineer by background and holds a degree in Electronic Engineering from Liverpool University. The early part of his career was spent as a design engineer working for British Nuclear Fuels in the UK and the General Electric Company in the US. He has extensive overseas experience having worked in North America, the Far East and the Caribbean region. His sector experience in engineering includes industrial controls, power generation, marine electrical systems and instrumentation.