Elix-IRR Strategy, Change and Sourcing Blog
In this section, you will be able to read articles and watch interviews with industry leaders talking about important topics in their business. We will post interviews with clients, Elix-IRR experts, alliance partners and other leading players in industry and commerce
Offshoring, enemy of the state.
Posted 20 February 2012
What does the anti-offshoring movement mean for the outsourcing industry and for your business?
At the mention of offshoring, many wrinkle their nose in disapproval. This has long been the case, and understandably so, as the thought of laying off staff to send jobs elsewhere is widely considered a ruthless act only contemplated by the ‘bad guys’ in business.
With President Obama frequently slamming the outsourcing industry as a scourge on American jobs that must be brought to an end (much to voters’ delight) there is a serious threat of protectionist legislation coming down the pipeline that could have a huge impact on other economies built on ITO and BPO offerings.
The fact is that many businesses have outsourced during tough times as a means for survival through cost efficiency and offshore resources provide an extremely compelling proposition. Whether offshoring has really caused as much economic decline through job loss as other arguably more dubious business dealings over the past decade is not a debate we will go into here – nonetheless the backlash has arrived and the impact on the industry is already being felt.
Businesses have a number of options for developing a sourcing strategy that avoids offshoring IT and business processing services but ensures costs and risk are minimised while quality services are delivered.
Keep it out but closer to home…
Many of the bigger Indian players are responding by focussing on developing a more ‘global footprint’, creating jobs in near shore locations that offer a more palatable kind of labour arbitrage. This is happening in both the US and across Europe. It remains to be seen if their service excellence can tempt clients to buy their services onshore at what will surely be a higher price tag than previously.
American service providers have a real opportunity to take advantage of government support and capitalise on their ‘home grown’ credentials. However, skill shortages will need to be addressed; investment in education programmes and a drive to encourage people to choose a career in technology or business processing services have a part to play in ensuring the viability of near shore operations that can really compete with offshore resources.
Bring it in…
Exiting from an outsourced contract and re-establishing in-house services requires careful management and negotiation. The legal and practical complexities, as well as the cost implications, of this kind of transition must be well understood and a clear roadmap drawn up to ensure success. Internal service delivery functions should be set up as a ‘synthetic company’ within the wider organisation to ensure that a service mind-set is maintained and a focus on cost management and high performance is instilled.
Share the solution…
Teaming up with another organisation in your industry to develop a shared service utility could be an option for some of the more commoditised or repeatable processing services that might previously have been candidates for offshoring. Established service providers may partner in such a joint venture and can provide the capital and skilled resources required to get it off the ground.
Don’t forget the other sourcing levers…
In all of this, it is important to remember that classic labour arbitrage is no longer the only ‘sourcing lever’ available to ensure good value, efficient service provision. Process efficiencies, demand management, standardisation and even commercialisation of assets are all opportunities that exist beyond sending jobs offshore and should form part of every business’ sourcing strategy.
As America leads the way on ‘bringing jobs home’ we can expect to see many organisations considering the above approaches and it will be interesting to see how many will really pull the plug on the offshore operations that currently support their business. Which other geographies will follow suit? Watch this space…
Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed
US President Barack Obama,
State of the Union Speech, 24th Jan 2012
About the author
Rachael Dawson has been recently promoted to Manager at Elix-IRR as a result of some consistently outstanding performances and insights with our clients. She has experience ranging from procurement led savings and cash generation projects to strategy and target operating models for the most senior executives. She has worked in both the public and private sector and has most recently spent her time on two strategy projects with banks who were actively looking to build target operating models and sourcing strategies that protected jobs in their national markets while leveraging all the other benefits from sourcing/shared services. This included looking at creating opportunities to commercialize assets on behalf our clients.
Rachael is also Elix-IRR’s vendor relationship manager. In this role she has created relationships that allow her to ‘cut through’ to the real issue when establishing solutions that work. She is constantly seeking to find win-win solutions for both clients and their partners/suppliers as this is ultimately what determines the success or failure of shared services or outsourcing.
“Banking Reform” – Obstacle or Opportunity?
Posted 23 January 2012
‘Ring-fencing’ of Retail Banks from Investment Banks, the need to strengthen a Bank’s loss-absorbing capabilities, and increasing competition in the industry to improve overall stability are the key outcomes of the ‘Vickers Report’. Legislation is to be passed within current Parliament (before Spring 2014), with final implementation to be delivered by 2019. Changes to the Financial Services industry are imminent.
On first pass, the ‘Vickers Report’ will make many Executives nervous as to the cost implications, as change more often than not means investment. However, we strongly believe it is an opportunity for Banks to redesign and reengineer their Operating Models when responding to the upcoming legislation. Those that move first will gain the most advantage.
The implications for Banks will be both structural and operational in nature, with RBS already announcing the divestiture of some elements of their investment banking business. Core to the implications will be the need for Banks to have a robust Operating Model in place. Elix-IRR specialise in working with Banks to design Target Operating Models across back-office support services, and aligning the support strategy to that of the Business – after all, Banks cannot excel in today’s economy without world-class support services (whether internal or bought from third parties). Creating an Operating Model that enables this involves analysing the processing and technology landscapes across the back-office and consolidating, standardising and migrating processes/technology to leverage economies of scale across the Bank. At the same time, transforming governance, organisational design, and service management to align with the Target Operating Model will allow a Bank’s support functions to both empower the business and significantly improve operating margins.
The sourcing answer to realise this can be threefold – internally, with a partner(s), or a combination. Each brings advantages and disadvantages in terms of capability, speed and business case, such that the sourcing solution to achieve the Target Operating Model is probably the single most important decision Banks have to make.
Rather than reacting to the legislation, why not proactively prepare for it. Use the Vickers Report as an opportunity to move away from viewing support as simple line items of cost, and far more towards seeing support as a strategic enabler to your front-office.
About the author
Graham Busby is a Partner at Elix-IRR, experienced in working with clients to develop their sourcing strategies from initial vision through to implementation. His expertise in creating transformational propositions for his clients, which are focussed not only on cost-savings but on empowering the front-line business, means that he is able to ensure Elix-IRR’s clients’ future business visions are not only achievable, but are fundamentally value-creating.
He specialises in creating target operating models aligned to industry trends and best practice and designs the optimal approach for his clients. His background consists of technology consulting, strategy consulting and outsourcing sales, giving him the perfect skill-set to offer clients in this advisory capacity.
Prior to Elix-IRR, Graham was a member of the Global Mega-Deal Team at Accenture, an 8-person team responsible for shaping and selling multi-functional outsourcing deals worth over $500m to clients in all industries and geographies. He has worked with multi-national companies such as Chrysler, AstraZeneca, Warner Music Group, British Airways and Johnson & Johnson. With each of these clients, Graham offered advice on best-in-class approaches to strategy, governance, operations, organisational design, management priorities and solution design.
He is a great believer in sourcing decisions not just being about cutting costs, but about adding real value to business processes. As such the vision, business case, roadmap and solution he designs with Elix-IRR’s clients reflect this approach.
What effect has the economic difficulties had on the National and Tier 2 banks?
Posted 6 November 2011
There are only two ways to make more profit, grow revenue or reduce costs. When revenues and markets shrink the inevitable focus is on cost. This is universally true across all industries and geographies.
During the boom times no one in banks thought about cost beyond the unit cost of acquisition. Bankers are smart so they won’t buy things that look expensive in isolation. They have also been able to ride out short term economic downturns by taking tactical cost reduction steps like the removal or contractors or using labor arbitrage sourcing solutions to India. Not this time. The downturn is more sustained and inflation in the traditional low cost locations means there is need for more ‘engineered solutions’.
The bigger players are still able to use their own scale, product diversity and global reach to ride this out.
However this is not so easy for the National or Tier 2 banks that have previously looked to expand internationally laying claims to ambitions such as ‘the emerging markets bank’. During this period they have built back office infrastructure for global operations that is too cumbersome, inflexible and costly for the national and regional revenue stream they now are forced to focus on. The business volume and profit does not warrant this level of expenditure. Often these banks are ‘pillars’ of their national banking infrastructure and hold positions of political standing that make job loses very difficult to accept.
The situation is compounded by true global players becoming more aggressive in their pursuit of market share by entering into local markets far more aggressively and with the benefit of scale. Examples include Santander in UK, Standard Chartered, Barclays and Citi in Africa and HSBC in USA (refer note). Inevitably these players also have more mature shared service and sourcing models as part of their global operating models where they as the service managers to their own scale.
The winners will be the ones who have a strategic end in mind, while focusing on short term opportunity that builds momentum to this strategic goal.
We see the winners acting strategically linking this business change to a whole new operating model and supporting sourcing strategy. They are targeting support infrastructure that is more ‘fit for purpose’ and can be flexed up or down more easily with changing volumes while avoiding unnecessary fixed costs.
These banks are seeing strategic sourcing and shared services as the key enabler of this vision rather than the tactical cost reduction solution outsourcing and offshoring usually gets directed at.
Traditional paradigms are being fundamentally challenged as follows:
- Operations is unique to banks and is too connected with the business to entertain shared service or sourcing strategies. Insurance companies tend to lead the way here but there is a material shift in Europe to Operations areas with 61% of all BPO in Financial Services being Industry specific (refer note);
- Technology is a core service upon which a bank is dependent to survive. While traditionally the large players have done large IT deals, most new transactions in the Financial Services sector in North America in 2010 were by regional/national banks and insurers, such as Fifth & Third and Hartford (refer note). Also a 3 of the top 10 North American transactions were mid size Canadian banks;
- HR in banks is so different to the service available in the market place from traditional 3rd party providers. The North American banks have tended to challenge this philosophy more readily where HR is the single biggest BPO area (46%) (refer note). The European mid tier have a real opportunity here where HR represents 1% of the market (refer note); and
- Operations processes for Retail, Corporate and Investment banking businesses are so different and shared services will not create any value.
This is providing a real opportunity for the mid tier innovators. For these leaders, gone is the short term focus on using outsourcing and offshoring as a unit cost reduction tool. We are seeing a greater focus on using these shared services and sourcing strategies with the following additional goals in mind:
- Process Efficiency within existing processing functions, also includes benefits from effective vendor service management (Lean and 6Sigma etc.)
- Additional volumes through consolidation of business and better demand management to reduce consumption
- Economies of scale and efficiency from creating standard processing across functions
- Leveraging internal assets as revenue streams – offering services to 3rd parties, JVs and spinoffs and leveraging assets of 3rd parties to gain scale economies and access to innovation without investment
This becomes particularly interesting when you consider that two major Indian banks have outsourcing parts of their operations to Indian outsourcers (State Bank of India and Central Bank of India) (refer note).
The mid tier innovators are looking at the problem enterprise wide. They are building enterprise architectures to establish a common understanding of what the bank is focused on. They are then spending time on operating models that define how these architectures will be delivered. The final step is to establish a shared service and sourcing strategy that delivers to these clearly articulated goals capturing full scope of opportunity identified above.
Apart from the obvious additional cost savings we are seeing the following additional benefits to banks that adopt this strategic approach:
- It brings together the support functions under one structure
- A focus on a synthetic company provides the necessary service mind set and opens options to commercialise these assets in the future;
- This service led change provides the platform to enable wider bank transformation
- Smaller players get the opportunity to have greater flexibility with scalable solutions to meet changing business needs
- The focus on a distinct entity creates the opportunity for a new culture and people proposition
Elix-IRR are currently working with two banks on such a journey. If you would like to find out more please contact us here.
Note: All figures are drawn from Elix-IRR Financial Services Outsourcing Trends Research report for 2012.
About the author:
Stephen Newton – Managing Partner of Elix-IRR Partners LLP.
Stephen is an internationally recognised specialist in transformational change, strategy and sourcing, with 20 years of experience.
He was recently a Managing Partner in Accenture, responsible for working with Boards to shape their global transformational agendas and lead salesperson in Accenture’s Global Mega-Deal Team.
Prior to this he was IBM’s executive/partner responsible for all transformational consulting and outsourcing in Financial Services, Europe – IBM’s largest client sector.
In 2011 Stephen was awarded an International Business Award ‘Distinguished Honoree’ for the Best New Company of the Year (http://www.stevieawards.com/pubs/iba/awards/408_2648_21072.cfm).
He has also been shortlisted by the NOA for running the Best Outsourcing Project (Financial Services Sector), together with the Best Outsourcing Advisory Award. (http://www.noa.co.uk/index.php/site/awards/).
PUBLICATIONS:
- “Managing Risks in Outsourcing” (co-authored with Ian Ferguson in Financier Worldwide, March 2010), “To RFP or not to RFP” (online White Paper 2010),
- “Financial Services Outsourcing Research 2011” and “Financial Services Outsourcing Research 2012” (expert opinion piece used to educate banks on the world of market trends in outsourcing);
- “Joint Ventures: Reality of Success & Failure” (October 2011).
- His university honours thesis “Skill requirements of IT Graduates” was published in the South African Information Systems Journal.
- He was recently quoted in the 2011 Outsourcing Yearbook regarding “Outsourcing 2.0” (p45 http://www.outsourcingyearbook.com/wp-content/uploads/2010/11/oy2011_02_01.pdf).
