Outsourcing is the process of moving tasks, operations, processes, or roles to an external workforce, by contracting with a third-party over an agreed period of time.

There’s a lot of stigma around the use of outsourcing as a method and that’s because it’s largely a very controversial solution for business change. In the eyes of a member of staff or a customer it can be a cause for concern, particularly if the outlook is uncertain as a result of it. If we look at outsourcing from a company’s perspective, it’s typically seen as a way of seeking improvement, efficiencies, scalability and reducing overheads, so it can be positive, right? Working in Wealth, and having been impacted by outsourcing, from an operational and implementation project perspective I can understand the arguments for and against.

I’ve had the opportunity to work on multiple outsourcing programmes, all seemingly different in their approach yet all have similar objectives. Typically strategic, whether aligned to a wider cost saving drive, a period of growth and scaling or even as a course of mitigating risks. I have seen how an outsourcing project can be delivered on time, on budget with minimal impact on staff and operations. In stark contrast to this, I have seen a year-long delivery go on for excess of 5+ years. It begs the question of how outsourcing can so easily go wrong, sometimes very publicly, and what do companies need to consider ensuring they get it right, protect their staff, customers, and reputation?

Why outsourcing?

A company’s objective must answer some basic questions: What is the purpose of this and what will the company achieve from making the changes?

Whether responding to changes or challenges seen in the Wealth industry, or helping realise internal aspirations, objectives for outsourcing include:

  • Reduction in operating costs
  • Improvement process efficiency and accuracy
  • Scalability and growth
  • To help with future transformation
  • Reduce or mitigate risk
  • To deal with volatility in processing volumes
  • To focus attention on other areas
  • Capacity creation

A company will seek to meet objectives, but at the same time it’s essential that speed of development, delivery, specialist skills and a flexible approach is adopted to ensure a successful transition.

What can go wrong?

From experience, outsourcing arrangements can take a considerable amount of time to fail, which can be particularly problematic from a reputational perspective if it plays out in the public domain. Before the consideration of third-party companies running parts of your operations or managing systems, it’s vital to consider the risks – and there can be many…

Outsourcing naturally brings risks, which if not addressed from the outset can easily become issues impacting operations, reputation, and lead to rising costs. From my experience, consideration needs to be given to the following risks when outsourcing:

  • Communication breakdown – This can easily become a serious problem and includes the absence of face-to-face meetings, language barriers, work culture differences and differences in time-zones. Breakdown in communication can quickly lead to unjustified expectations, project disputes and ultimately relationship failure.
  • Inadequate quality – Customers are at the heart of any business and a poor-quality service is extremely problematic. This can be a product of inexperienced staff at the outsourcing firm, unexpected volumes, or a direct result of choosing an outsourcing on the basis of pricing alone.
  • Unforeseen or hidden costs – A primary reason for outsourcing may be to reduce costs and overheads. Unforeseen and hidden costs can easily erode cost-saving benefits. These can be costs associated with future development, missed requirements and potential redress due to customers due to poor service – linked to point 2 above (ref: Inadequate quality). Although not all costs can be factored in from the outset it’s important to ensure that requirements are thorough, due diligence on potential vendors is rigorous and future proofing should be at the forefront of discussion.

Whilst this list isn’t by any means exhaustive, it calls out the key areas most likely to attribute to the failure of outsourcing.

So how can we avoid these pitfalls? Carrying out an outsourcing activity requires the right resources, time, vision, and buy-in from senior stakeholders.

It is also important to follow the key principles when negotiating your way through finding a suitable outsourcer, to help better protect your company, customers and ensure the outsourcing initiative is given the best possible chance to succeed.

  • Due diligence – Conduct suitable due diligence when selecting an appropriate service provider and in monitoring its ongoing performance
  • Contracts – A contract between your company and the outsourcer is the critical element underpinning the relationship. Contractual provisions can reduce the risks of non-performance or aid the resolution of disagreements about the scope, nature, and quality of the service. It is also important that any exit strategy is incorporated in contractual arrangements
  • Procedures and control – Appropriate steps should be taken to ensure both your company and the outsourcer have established procedures and controls to protect any proprietary and client-related information and software and to ensure a continuity of service. This should include a plan for disaster recovery, factoring in periodic testing
  • Confidentiality – Appropriate steps should be taken to ensure that your chosen outsourcer protects confidential information and data related to your company and its clients from deliberate or accidental unauthorised disclosure to third parties
  • Risk management – Ensure your company are aware of the risks posed, and can manage them effectively, where there is a dependency on a single third-party provider for critical outsourced tasks. As part of ongoing risk management, the importance of an oversight function is critical to ensuring rigour around contracts, expectation management, relationship management and issue resolution
  • Information requests and performance data – Appropriate steps should be taken to ensure that regulators, auditors, and your company are able to obtain information for outsourced tasks relevant to contractual compliance and/or regulatory oversight including access to the data, IT systems, premises, and personnel of service

We think that outsourcing initiatives must be thorough in their consideration and provide value for both you and the customer. This means identifying suitable solutions internally and with providers externally, in a quick and efficient manner.

Here at Simplify Consulting, we have been continuously evolving our toolsets to enable us to compare and contrast Wealth based technology and outsources administration providers. Our capability model enables us to assess solutions for Wealth businesses, identifying their strengths, weaknesses, and overall footprint to help our clients select the best solutions to meet their business strategy.

Get in touch today and we can show you how the depth and breadth of our model across Wealth capabilities can help you identify the best solution to take your business to the next level.

Chris Lamb

Wealth Consultant