Outsourcing from inside the industry

It is sometimes possible for an organization to become a service provider for its competitors and still be in competition with them in other areas. The financial services sector is currently throwing up a number of interesting examples of client organizations that are seeking competitive salvation by outsourcing services to apparent competitors and others that are happy to adopt the service provider role.

Churchill Insurance has adopted a service provider role in certain parts of the UK insurance business. As an example, United Assurance recently outsourced its general insurance business to Churchill Insurance. In this deal, United Assurance will continue to sell general insurance products but they are underwritten and serviced by Churchill. The servicing responsibilities taken on by Churchill include telesales, policy servicing and claims handling.

Within the retail banking industry there is a small but growing trend for some banks to provide a range of business processing services to other competing banks. This can happen when a bank is in ’start-up’ mode in a new location, when entering a new area of business or simply because competitive pressure makes it the best option. This type of service provider is becoming a factor in other areas of the banking industry. For example, in the investment banking industry Deutsche Bank has been providing a range of BPO services for Abbey National Treasury Services since 1995. Deutsche Bank claims that in certain areas of investment banking it has enabled Abbey National to act as a virtual bank, because it has been able to set up a trading business without having to build the delivery mechanism.

It is interesting to speculate how this practice might develop. There are some people in the banking industry who believe that the European banks will have to pay a high price for the efforts they were forced to make over the late 1990s in order to become Euro and Y2K compliant. They argue that in the rest of the world this time was largely spent improving the flow of transaction processing by adopting newly available technology. The obvious conclusion from this is that the European banks have a lot of catching up to do if they are to achieve a reasonable competitive standing.

Any sizeable organization that realizes that it is in danger of falling behind in the competitive stakes must seriously question its chances of catching up. Whatever the industry it must be accepted that catching up now will be much more difficult to achieve than at any time in the past. Just when you have installed and implemented the latest technology to gain the competitive edge you find your competitors are moving on to the next development. More positive managers will reason that once their competitors have implemented the next year’s technology developments, they will, in turn, enjoy a competitive advantage for only a short period of time. The sceptics will counter this by pointing out the damage that could result in the meantime. This is the classic scenario that causes organizations to think about the main alternatives to going it alone – sharing services with competitors, outsourcing or preparing the company for acquisition.

The banks, of course, are suffering the brunt of the technology revolution. The advent of telephone banking alone would have been sufficient to bring about dramatic reductions in the number of branches remaining open. But the television and internet potential raises all manner of questions about the future nature of banking that cannot be fully answered at this point in time.

Obviously, the mergers and acquisition alternative will continue to play a part in the future, just as it has done in the past. If a bank does not fall victim to an acquisition, its management will be hoping that some magical new marketing initiative will be developed that will dramatically increase business – it’s always far easier to obtain improvements and savings when business is booming. If the marketing breakthrough is not forthcoming then we are back to improving competitiveness by either internal project, sharing services with other banks or outsourcing.

The banking industry has probably gone through more internal performance improvement projects than any other sector. As a result, I would expect that senior executives in the large banks would now look at the prospect of carrying out major new internal projects with some trepidation.

The creation of industry-shared service centres, where each participating bank contributes according to its size and needs but no one bank acts as the service provider, will probably win some advocates. To make a success of an arrangement like this it will be necessary to create a separate joint venture under independent management.

The outsourcing option is probably more difficult for the banking sector than it is for other sectors because it is always going to be more difficult to split the processes into convenient packages that can be distributed between different providers. Given this situation it is difficult to see anything other than an existing bank being able to offer complete BPO services to the industry. This leads to the fascinating idea that some existing banks might eventually reposition themselves as service providers.