The key issues through which an outsourcing
decision is likely to be justified are:
- Speed to market - and risk: For a new player,
such a course will be faster than building an in-house capability.
The outsourcing route will avoid the risks that exist in the areas
of skills needs, costs and timescales.
- Economies of scale: The service provider may build in a minimum
fee to ensure that they cover fixed overheads. Nevertheless, the
very high volumes that the major service providers usually run
through their businesses open up the potential for consequent
economies of scale.
- Reduced capital commitment: Costs avoided by outsourcing can be
expensive and complex undertakings such as the operational premises
and any supporting computer infrastructure.
Overall, the costs, complexity, resources,
timescale and risks involved in creating a new operational
capability are such that few players have difficulty in justifying
an approach based on outsourcing. However, players will be wise to
ensure that they have negotiated the ability to bring the operation
in-house in due course and without any disruption to their
developing business.
Part 1 of this report
assesses the issues involved in choosing the preferred supplier and
presents a number of the template documents that should be used to
shape discussions from the outset.
Part 2 uses a sequence of case studies
supplemented with original data to look at the practical challenges
involved in outsourcing core card functions.
Part 1of this report assesses the issues
involved in choosing the preferred supplier and presents a number
of the template documents that should be used to shape discussions
from the outset.
Contracts and service level agreements
The draft contract: Whilst all
organisations will usually and rightly subject contracts to
rigourous scrutiny, the underlying relationship will only actually
work if it is based on trust- and this philosophy should set the
tone for negotiations.
Key finding: Care should be
taken to ensure that the term of the contract does not constitute
an inhibiting factor, should there be a later need for a material
change in the strategy of the client organisation.
Costs and pricing: The pricing tariff
of the service provider is a complex proposition. Once the
transaction profiles and volume figures are agreed, the resultant
projected costs from the service provider offer the best possible
basis for taking a short and medium term view of the financial
implications. This is clearly an area where the client will wish to
minimise any threat of premium pricing that may result from
under-performance in the scheme.
Key findings:
1. The service levels compare with those already
applying in other services run in-house by the client
organisation.
2. Establishing effective sanctions for any shortfall against
these standards, and the basis on which it will be enforced.
3. Ensuring that there is an effective escalation procedure for
either unresolved issues and complaints, and a periodic review
where minor matters can be resolved collectively.
4. It is also critical to ensure that the service provider has
effective plans to recover from a partial or total disaster.
5. Recent years have seen significant changes and churn in the
relationships between clients and their service provider partners.
Therefore, premature termination of the contract should be
considered an issue within contractual negotiations wherever
possible.
Managing the Service Provider
The contract established with the service
provider- including service level agreement (and a schedule of
sanctions in case of need) - will form the basis of the working
relationship.
Key findings:
In order to make the arrangement a success, a
client will need a careful understanding of:
- Operational performance by function- compared
to the agreed service levels
- The incidence, source and implications of
sanction invoking service level failure
- Ongoing contingency planning exercises
- Ongoing development projects e.g. new
software and process redesign.
- The negotiation and agreement of proposed
variances to contracts or service level agreements. Wherever
possible, all the foreseeable requirements of the client should be
specified at the outset. These can be included within the
contractual negotiations, where the greatest leverage can be
achieved on any associated costs. However, new facilities requested
at a later date may prove to require no less time to launch, and
could prove proportionately more expensive.
- Disaggregation: Many new players have used
outsourcing as a rapid route to market. However, the circumstances
of the client organisation might change. While a service provider
will usually be happy to contemplate undertaking more work, it is
advisable to ensure that the contractual arrangements also allow
for parts of the operation to be taken back in-house at a later
date. Factors to be considered here include unduly heavy cost
penalties, the time scale in which the service provider will
undertake any systems or telecommunications changes that might be
required to achieve the switch, and the continuation of goodwill
through and after the completion of the change. Attention must also
be paid to provisions that will protect the business and
information systems up to and through the transition. These are
issues that are worth incorporating within the initial contractual
arrangements, wherever possible, in order to avoid difficulties and
possible acrimony at a later date.
- Chemistry! The working relationship between a
client and their service provider must be close if it is to work to
best effect. Positive chemistry between the two parties from the
outset is a huge advantage. The development of empathy between the
client’s team and the staff of their service provider will
frequently yield many soft benefits. These can include: a better
attitude towards the customers of the client organisation, a
genuine interest in looking for small-step improvements, and a
greater willingness to use sensible discretion to pre-empt possible
difficulties.
A particular problem that has plagued
outsourcing projects in the card industry is over-optimism,
resulting in:
- Over resourcing on the part of the service provider
- The possible triggering of premium cost levels put in place by
the service provider to protect itself from any shortfall in
volumes
- The further undermining of the profitability of a scheme that
is already experiencing a shortfall in expectations.
Part 2 of this report uses a
sequence of case studies supplemented with original data to look at
the practical challenges involved in outsourcing core card
functions, including:
- Collections
- Customer Services
- Loyalty Programmes
- Marketing
- Payment Processing
- Technology and back end processes
A particular focus of this section is on the
outsourcing of call centres. More than one senior industry officer
took the view that if the focus and effort that goes into
outsourcing an operation were applied to the improvement of its
existing status, the gains that would arise from the outsource
operation may well be marginal or disappear.
There is also an issue of principle that may
need to be taken into account in formulating a location strategy
for an institution’s call centres. Research conducted in Australia
and the United Kingdom, for the ANZ Bank and Nationwide Building
Society respectively, has revealed genuine consumer concern about
off shoring, which is seen as exporting jobs. Both organisations
have worked hard to develop strong brands and well differentiated
positions within their domestic markets, and both took account of
this in committing to retain their call centres on home shores.
Findings:
Costs: Given the ability of a
supplier to provide the required level of call centre support, the
initial consideration must be that of cost. As the market becomes
increasingly competitive, and margins are challenged, the cost
effectiveness of the operational platform becomes even more
critical. Application processing is an example of a limited number
of areas where card issuers elect to incur more costs in pursuit of
a better decision, or where (for example) recent money laundering
regulations have imposed more costly procedures. Otherwise, from
the outset, it is critical to establish a cost sensitive regime.
Recent critics of the trend towards off shoring have pointed to
inflating salary costs within the markets to which many
institutions are moving their operation. The whole basis on which
the charges levied by the service provider may inflate is an issue
to be dealt with as part of the contractual negotiations.
Service levels: As stated above,
there is a need to decide on the required service levels that are
required in each part of the business. And these may vary according
to the type of product that is to be handled. This is a key part of
the process of shaping the contract, tariff and service level
agreements. For example, the understanding of call centre staff
operating offshore must at least meet that of workers in the home
market.
Business plan volume projections:
Established players outsourcing an existing operation should have a
reliable base of information and projections from which o build
estimates of the capacity that will be needed. In the case of new
players, many business plans are often over optimistic in
projecting the number of applications that will be received, the
consequent growth of the account base, and the resultant demands on
the call centre. This situation can be exacerbated by a business
plan that has its origins in an early feasibility study- when the
prospective client’s knowledge of the market potential and likely
customer activity levels was less well developed.
Conclusion
Outsourcing ‘cards’ activity is a well
established discipline, and a wide range of options and suppliers
are open to any organisation taking this route. This report sets
out the critical successful factors involved in creating a
framework that will provide the basis of a long-term, mutually
beneficial partnership between the parties.
Introduction
Definition of outsourcing
Approaches to outsourcing
Reasons for third party use
Client position in vendor relations
Chapter 1 Key Vendor Selection Steps
Needs definition
References
Market Review
Operational capability
Pricing
Agreement content
Chapter 2 Selection and Ongoing Relationship
Considerations
Current and potential capabilities
Quality of staff
Training
Adherence to documented processes
Management and supervisory quality and practices
Surveys
Onsite observations
Controls
Technical support
Physical environment
MIS
Disaster planning
Chapter 3 The Request for Proposal
The purpose of the RFP
Typical use in the card business
Constructing the RFP
Typical issues with the RFP
After receiving the proposal
The comparisons
Follow-up
Shortlist
Negotiation
The decision
Chapter 4 Outsourcing Agreement
General purpose and tone
Standards of performance
Measurement definition and review period
Major, minor violations and penalties
Standards, major and minor
Quantification of quality
Issue resolution
Pricing options
Duration Bring it back
Chapter 5 Best Practice in Vendor
Management
General
Onsite representation
Information availability
The relationship
Chapter 6 Technology
Dimension of potential outsourcing
Development, maintenance, "fixes", options, parameters,
releases
Operations
Selection and ongoing considerations
Chapter 7 Customer Service and Call Centre
Dimension of potential outsourcing
Telephone outsourcing
Correspondence
Selection and ongoing relationship considerations
CASE STUDY- FIRST SOURCE SOLUTIONS LIMITED
Call centres operations in credit cad issuing
The principles and practice of outsourcing
Chapter 8 Credit Cycle
New accounts
Risk policy
Collections
Credit administration
Fraud
Selection and ongoing relationship considerations
Chapter 9 Operations
Payment processing
Charge processing
Interchange
Charge-backs
Accounting
Mail
Card production
Selection and ongoing card production
Chapter 10 Collections
Using third party services
Basics of External Collections Management
Pre-Charge-Off Third-party Assignment
Chapter 11 Sales
Card sales
Merchant sales
Merchant network administration
Special selling
Sales administration and support
Service post-sale
Chapter 12 Cards Marketing and Loyalty
Programmes
Card promotional campaigns
Expanded take one
Advertising
Retention
Communication plan
Internal spending lift, additional cards, special product sales,
balance transfers, cross-sell
The Loyalty Programmes
The outsource option- availability and capability of vendors and
suppliers
Outsourcing and retaining
Partnership and structures