This is set to top £7bn by 2005. Key players across the sector have already taken the plunge. It is surprising, therefore, that many in the industry seem to be bucking this trend.

Outsourcing is of benefit to the provision of financial services. In industries facing new regulation, margin and capital constraints, falling equity markets and increased competition, it is sensible for companies to outsource proc-ess-heavy, non-core opera­tions that can be done more cheaply elsewhere (see Fig. 1 for the role outsourcing plays in the insurance value chain.)

Banks have successfully outsourced elements of their customer service operations offshore. Lloyds and HSBC have both taken significant call centre functions offshore in the last year. Elsewhere in fi­nancial services, closed funds and compliance reviews (both administrative headaches) are outsourcing growth areas.

Despite the benefits, there are as many reasons given in the marketplace not to outsource as there are in favour (see Fig. 2). Primary concerns centre on loss of control and lack of trust in suppliers.

So why the poles of opin­ion? From our analysis of the industry the following points stand out:

• Some sectors have been slower to adopt outsourcing than others. Insurers are naturally conservative and reluctant to acknowledge their past wasteful expenditure on developing multiple proprietary IT systems and product platforms
• The size of firm dictates the main benefits of outsourcing. Smaller firms gain from access to resources and competencies not available in-house. Larger firms have greater volume in their processes thereby benefiting from scale economies.
• What's core is unclear. Often the debate is not about whether to outsource non-core functions, but in deciding what those functions are. the insurance industry is undecided on the claims process: many firms believe it forms part of their competitive advantage; others see themselves as underwriters and nothing else.
• Some supposedly "anti-outsourcing" companies outsource to themselves (captive outsourcing). Churchill, for example, transferred part of its operations to India in the late 1990s. Although not strictly "outsourcing" per se, taking operations offshore whilst retaining corporate control is a pretty near thing. hybrids and partnership arrangements blur the ownership distinction even more.

These factors explain the varying views in the marketplace but they do not justify them. Outsourcing is inevitable in this industry. It enables a greater focus on efficiency, either by providing a service more efficiently or simply by acting as a benchmark for internal processes and a driver for lower costs.

Those companies unwilling to accept this will pay the price. If this unwillingness stems from fear of the unknown, it is surmountable; if it is mere stubbornness, it is inexcusable.

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Articles from this issue

• Outsourcing in financial services
• The unspoken rules
• The outsourcing iceberg

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