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Not only are new countries competing with more traditional destinations to host offshore outsourcing services (see Fig. 4), suppliers are now taking on ever more complex functions. In turn, this enables companies to gain more from outsourcing. Prominent players in the financial services sector are looking towards outsourcing for other reasons than just cost reduction.
Much of the recent focus of cost-cutting using outsourcing has been on moving call centre jobs offshore. We believe outsourcing of this nature can only generate short to medium term savings. Long-term, sustainable cost (and revenue) benefits will be generated by outsourcing complex and higher value activities.
Examples of this are already evident. Friends Provident has set up a facility in India to process selected new business applications from its IFAs. In addition to its claims handling process, a UK general insurer has moved some of its customer and product pricing analysis functions offshore – the former is set to achieve 45% cost savings, the latter 70%.
Crucially though, outsourcing in the future will not only be about reducing cost. It will also:
- Enable product development within a low margin environment. As margin pressure increases through more regulation (e.g. Sandler) and greater competition, offshore outsourcing will allow firms to manufacture products within the tight constraints of the market. We see no reason why underwriters based in a remote location, with UK market and actuarial knowledge, can’t develop and price financial products to be sold here.
- Provide opportunities to generate revenues. Already a UK financial services company with an offshore capability has extended services, previously limited to high net worth clients, to customers with lower account balances. It is now able to target new customer segments and generate new revenue streams.
- Release retail financial services companies from unprofitable customers. Companies can outsource, or partner in, the management of unprofitable customer segments to organisations better suited to serving them – for example a utility or a retailer. This reduces the cost of serving these customers and provides a socially acceptable way of exiting the relationships. The outsourcer/ partner, on the other hand, is likely to be skilled in marketing low margin products to the mass market and may achieve economies of scale with other billing and processing type relationships with these customers.
- Free up capital for insurance companies. An emerging trend is for outsourcers to team up with providers of capital. An example of this is the relationship between Swiss Re, the re-insurer, and Computer Sciences Corporation, an outsourcing services provider. Swiss Re has set up a subsidiary, Admin Re, to acquire and / or reinsure closed blocks of in-force life and health insurance businesses. Admin Re assumes the responsibility of administering the policies which it does in partnership with CSC.
- Enable companies to transform their businesses. Access to expertise and the flexibility that comes with outsourcing provides a good opportunity to re-engineer processes and improve efficiency. Friends Provident’s facility in India, for example, has enabled the company to redesign some of its administration processes and drive out costs.
Outsourcing can and will provide a real advantage for financial services companies. To capture the full benefit in the long term though, organisations must broaden their outsourcing perspective to incorporate revenue generation, profit optimisation, capital provision and business transformation. Cost reduction is just the tip of the iceberg.
Chris Molloy is a Partner at Credo.
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