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Business Process Outsourcing - Some Practical Considerations

Christian Wells

Carne Global Financial Services

21 July 2008

A Business Process Outsourcing for a wealth manager is one of the most radical and far reaching changes  that a bank can undertake; every area of the business will be affected, and if the outsource is not properly conceived the business may be damaged and team spirit harmed.

Outsourcing is often sold on the ticket of cost reductions, and although this is a cornerstone premise, simple cost savings do not tell the full story. The first consideration is that outsourcing is not a short term solution. A typical outsourcing project will take a minimum of 6-9 months to implement and the contract will be for 3-5 years minimum. The break-even point will normally come towards the end of the contract. Costs are loaded into the start of the project and will include the conversion costs from legacy systems, bespoke development and staff severance costs.

Therefore an organisation must be fully committed; if a bank is either acquired or makes an acquisition during the outsource period then another level of complexity is added to the equation, with the possibility of a costly contract termination.

One of the keys to a successful outsource is proper upfront analysis, both in the selection and due diligence of a provider, and the subsequent business analysis, service level agreement definition and new business workflows.

This process typically starts with the product and service catalogue. A key to the pricing negotiations are volumes, both existing and anticipated. An outsource provider will use different products as the levers to determine pricing, a reduction in the costs for securities trade may be offset by higher pricing for a structured product transaction, so a wealth manager should try to anticipate where it expects future business volumes to be.

Services are also important. If a bank makes a full outsource then core service issues such as mailing must be considered “ how will an outsourcer deal with hand-addressed envelopes or hold mail clients? Are the necessary statement periodicities available? Are the valuation asset classifications in line with what clients expect? Once the fundamentals have been agreed, and a pricing structure budgeted and agreed on then the detail work can commence.

The Service Level Agreement is a key piece in defining how the bank and outsource provider will work together. The SLA determines normal working practices, such as hours of operation, escalation levels, penalty fees and exception handling. It is critical than no issues are allowed to fall through the cracks or are ambiguous, otherwise the first time that a settlement failure occurs there may be unpleasant consequences.

Following the SLA are the internal processes for the bank, and, vitally, definition of the middle office function. The middle office will typically manage the relationship and act as the conduit between the bank and the BPO provider. The middle office must fully understand the processes and handle the day-to-day relationship and issues such as static data definitions, SLA monitoring and ensuring that the functions that remain within the bank operate correctly. A BPO provider may provide the mechanics for issues such as regulatory reporting and anti-money laundering surveillance, but it is the responsibility of the bank to ensure that submitted reports are correct and in order.

Underpinning an outsource is the BPO provider's systems. Few outsource deals do not include a systems migration (the exception being a "lift-out" where an organisation takes over functions in an "as is" state). For most banks a migration of core systems is one of the most significant changes it can make. For an outsource this normally comes with the additional constrain of having to fit onto an existing and already configured platform. This may mean needing to revise fee structures and adjust data to fit. Client account numbers may change, a seeming triviality unless you consider the significance that some Asian clients attach to "lucky numbers". In a private bank personalised account numbers are akin to personalised car number plates!

The major impact on an outsourcing bank is the staffing requirements. This is the most sensitive and delicate outcome of an outsource, and may threaten day-to-day business operations. Unlike their counterparts in the investment banking world, wealth management back offices and IT departments are normally seen as very stable employers, with an outsourcing being the worst possible scenario.

Unless a BPO provider agrees to take over staff ("change of shirts") and assuming that the staff agree to transfer, job losses will occur. Because of the extended nature of an outsource migration people may leave of their own accord, including staff identified for retention, and there is a significant risk that if the project overruns, lock-in periods may have expired. The very staff who may be replaced are vital to the conversion process. It is prudent to assume that key people will leave and consider the use of experienced third parties for activities such an data conversion, process definition and testing.

It is vital to work out the new organisation before the outsource occurs, to identify key staff and be prepared to retain more staff than might appear necessary. A mistake with an outsource is to assume that on completion none of the back office and IT staff will be required. This is where properly defined business processes are essential and a staffing plan to ensure that a bank does not cut too deep, too early.

Once the switch over to the outsource provider has happened the bedding in process can start. As with any long term relationship  the first few months are ones of understanding and refinement. Business disruption is mitigated by adequate testing of systems and processes. Well defined operational workflows are vital, as is the interaction of staff from both the outsourcer and the outsourced. Processes can be tweaked and in the initial weeks daily contact and reviews are necessary.

An outsourced bank may find that for the first time the back and front offices are in different physical locations, even different cities. No longer is a private banker able to wander down to operations to enquire about a cash transfer, failed trade, mis-priced security or the status of a hedge fund subscription. The middle office will probably find itself working with systems with which it is unfamiliar, and the look and feel of client statements may well have changed. It is critical that key staff are as familiar as possible with an outsourcer's practices and systems.

Outsourcing usually makes sense if it is done relatively quickly, but there is a fine balance between allowing adequate time for the transition and rushing in a solution and then having to deal with the consequences.

For some wealth managers the whole subject of outsourcing remains anathema, for others it may be considered, and a few participants have actually taken the plunge. Shrinking margins, expanding business volumes, new and more diversified product offerings and front office focus means that outsourcing will be high on the agenda as a possible solution. As new providers emerge outsourcing is likely to become more competitive and increasingly commoditised.

For a wealth manager outsourcing is business process reengineering taken to the extreme. The success of an outsource is directly proportional to the level of understanding and commitment given to the project.

When executed properly outsourcing of business processes and systems can reap real rewards and be a positive driver to growth and expansion. If handled badly or without sufficient analysis and understanding an outsource may seriously damage business, and end with recriminations and distrust.

As in any marriage there will normally be an initial honeymoon period, ups and downs, a time of learning to live with each other, and hopefully a fruitful and lasting relationship.