Financial services providers are looking for better ways to manage their customer operations, with outsourcing on the list of options. This was the topic for discussion at a recent round table organised by The Banker and sponsored by Transcom Worldwide, a provider of outsourced business processes

The Panel

Michael Imeson - Round table chairman, and contributing editor, The Banker

Alex Bannister - Head of customer management, Nationwide Building Society

James de Watteville - Chief information officer, RSA

Graham Flower - Head of customer management, HSBC Bank

Raymond Pettitt - Operations director, direct channels, retail banking, Barclays

Mike Purvis - Managing director (UK), Transcom Worldwide

Richard Twigg - Group finance director, Skipton Building Society

Phil Vaughan - Chief operating officer, Coventry Building Society

The financial crisis has left financial services organisations under pressure to find cost savings, nowhere more so than in customer management. Added to this is a need to restore damaged customer confidence and, ultimately, improve customer service. Balancing these priorities - cutting costs without negatively affecting the customer - presents a challenge.

Over the years, many firms have outsourced customer management to reduce costs, taking advantage of the economies of scale that dedicated customer management specialists can offer. Michael Imeson, round table chairman and The Banker's contributing editor, started by asking whether there was still an appetite for outsourcing and if there was more that it could achieve.

Mike Purvis, managing director (UK) of Transcom, said he believed outsourced service providers (OSPs) had an important role to play in helping organisations control costs and improve service. "For us, it's about matching the cost of serving the customer to the business value that customer represents," he said. "That means understanding customer value then designing the service proposition and the operational processes in line with that understanding. A good outsourcer will encourage its clients to measure its contribution by how well it does this. It's a more complex supplier/client relationship that calls for greater trust."

Graham Flower, head of customer management at HSBC, agreed: "To me, outsourcing has come full circle from the early days of just trying to cut costs to being a much more sophisticated relationship. Historically, HSBC went down the outsourcing route based on cost reduction. We did that through the 1990s and into the beginning of this century, picking up ill-defined processes within our branches and dropping them into another country. We did it without any form of re-engineering and benefited from cost savings. Now, the main reason for outsourcing is less to do with saving money, and more to do with allowing someone else to perform what is not HSBC's core competency."

Mr Purvis said banks should outsource to create an outcome, not simply to offload a process. "What does that outcome need to be?" he asked. "It shouldn't simply be to reduce average handling time or improve productivity. It should be to achieve the things that concern the organisation at board level - lower cost, better revenue per customer, increased retention and so on; things that actually make a difference to business performance. The challenge is to find an outsourcer sophisticated enough to deliver that - to recognise what the customer experience needs to be to create the desired business outcomes."

"That's absolutely spot-on," concurred Raymond Pettitt, operations director, direct channels, retail banking, at Barclays. "A few years ago we outsourced the entire mortgage process business, with nobody at Barclays really owning the process or the customer experience. Two years ago, we brought it all back in house. We then outsourced just parts of the process, so that we now own the process and the customer experience. If there are parts of a process that we can optimise through outsourcing, automation or simplification, that is what we do."

Finding the right provider

Alex Bannister, head of customer management at Nationwide, said that one of the key drivers leading the company to outsource is capacity management. "Finding an office and putting in lots of people, desks and computers to expand capacity in a short time frame can be costly to do.

"We try as best we can to treat outsource providers as if they are captive companies, which is quite difficult, given that it is a commercial contract. You need to choose a supplier who shares your ethos and will invest in the relationship with your customers."

James de Watteville, chief information officer at insurer RSA, said: "If you have a real capability in supplier selection and management, and you can identify people whose sweet spot is the delivery of a certain type of service then, generally speaking, you should outsource. If I were building a greenfield general insurance company, no way would I have everything in house. I would appoint a small team of people who were fantastic at contract relationship and supplier/commercial contract management, and let them pick the right providers."

Phil Vaughan, chief operating officer at Coventry Building Society, said his organisation did not outsource many processes, but did outsource products such as insurance. "We think we have more control and can be more nimble if we do things ourselves," he said. "With an outsource provider it can take longer to adjust to market changes."

Skipton Building Society similarly runs most of its own processes, though it outsources insurance to Aviva. However, the building society is itself an OSP of systems and processes to mortgage lenders, through its Homeloan Management Limited subsidiary. "We therefore see outsourcing from the provider's side," said group finance director Richard Twigg. "With any outsourcing contract you need to invest in the relationship. Some customers will outsource the entire cradle-to-grave mortgage operation; others will typically pick the bit in the middle between offer and arrears."

New models for outsourcing

Mr Purvis also pointed to examples of new outsourced contracting models designed to reduce the client's asset cost burden as well as provide operational improvements.

He explained how these so-called "leverage deals" - in which the outsourced service provider takes over not just the customer management activities currently done in house but also the staff responsible for them, the premises in which they are housed and the infrastructure on which they depend - can benefit financial services organisations.

"First, the client is paid a fair market value for its fixed assets and its long-term asset costs are relieved," said Mr Purvis. "Also, because the outsourcer commits not just to take over but 'transform' the adopted operation, the client will get ongoing operating cost reduction on an agreed glide path that respects the customer experience."

HSBC's Mr Flower reinforced the importance of the latter: "These are now more sophisticated deals. In the past, these were decisions that were driven by a single imperative to cut costs. We are now more sophisticated and parts of the business that own the customer interaction are defining the template."

Cost cutting

There was agreement around the table that cost cutting - while obligatory in this economic climate - could not be allowed to become the only driving force behind outsourcing decisions.

Nationwide's Mr Bannister said cost cutting was not the main focus for him. His priorities now are to integrate the three smaller building societies that Nationwide has recently acquired, and ensure customer-engaged staff use their time more effectively.

"We have something like 900 branches but, with all of the mergers, we have up to 15 million customers," he said. "There is no real scope for wholesale cost cutting of frontline staff. What there is scope for is redeploying their time and their resources in a more effective way."

Coventry's Mr Vaughan said: "If you cut costs too much you impact customer service - if not today, certainly tomorrow. Instead, you must redouble efforts to get your processes right, removing the ones that don't work. Then you have a fighting chance of improving customer service.

"We used to have different service levels for all our processes. Twelve months ago we changed that to just one service level for all processes. All teams now have one galvanising goal. It has reduced their workload because there's no need to manage backlogs or diarise tasks," he added.

For Barclays' Mr Pettitt, however, cost cutting is a key priority. "The big question is 'How to cut costs?'," he said. "You can reduce costs, but how can you optimise costs to remain stable and create more growth in the next 12 to 18 months? Our focus is around the multi-channel customer - giving them the choice of fantastic channels that are integrated as much as possible."

Mr Flower of HSBC said he looked at operational costs as an "investment in customer contact". When making such an investment you must deliver the right levels of service to the customer, "without over or under-servicing them, which is difficult", he said.

Giving customers choice

RSA's Mr de Watteville said that the focus of his organisation was to give people a choice of channels and encourage them to serve themselves. "MORE TH>N is our brand on the web and people are quite happy to buy its policies through this route," he said. "If they have more complex needs they tend to want the human touch. We are, therefore, investing in all sorts of channel-agnostic technology to enable people to be far more self-serving. We reap significant cost savings if people self-serve."

Skipton's Mr Twigg thought that with balance sheets static or falling, there was a re-emphasis on the need to cut costs, but this needed to be done without jeopardising face-to-face contact in branches. "We just need to utilise staff in branches better," he said. "We do not have the footfall of a transactional bank, so we need to really make sure that every customer opportunity is maximised.

The discussion then moved on to other issues, including managing normally good customers who have become 'delinquent debtors' in the recession; balancing the need to retain existing customers while winning new ones; and establishing customer strategies to take advantage of the economic upturn when it comes.

New trends in outsourcing - the leveraged deal

The outsourced service provider (OSP) acquires property assets - either buying building/s or taking over lease/s - paying market value to do so, plus other fixed assets.

The OSP runs operations in 'steady state' for a period of time (usually six to 12 months) to ensure stability, service continuity and efficient transfer of responsibility.

The OSP begins agreed transformational programme to deliver a glide path of cost reduction and performance improvement.

Immediate gain:

- Cash injection from sale of assets.

- Transfer of the asset base to the OSP eliminates ongoing asset management cost.

- Immediate head-count reduction improves revenue per head performance.

Long-term gain:

- Ongoing operational cost certainty - service provision based on a per-minute, seat or transaction arrangement.

- A contractually committed cost reduction programme that reduces operational cost over a three to five-year period.

- Reduced redundancy costs since the OSP will seek alternative work for staff no longer required.

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