Now for 'lift-ups'
It has become something of a New Year tradition to lament the failure of the preceding year’s outsourcing ‘boom’, so vigorously trumpeted scant months earlier, to have amounted to very much at all. Thus, having spent much of the past year talking up the (latest) new dawn of outsourcing, heralded by a rash of large ‘lift out’ deals – that by now overly familiar roster encompassing JPMorgan Investment Management, PIMCO, Scottish Widows Investment Partnership and Schroders Investment Management – industry observers have more recently been decrying the dearth of new mega-deals and even, whisper it, the death of outsourcing.
Well, so much for learning from the lessons of history: outsourcing is dead, long live outsourcing. Enthusiasm for lift outs (whereby a firm’s entire middle and back office infrastructure is handed over to a third party provider) may have ebbed away – there are only so many firms able to countenance the sheer complexity of such mammoth, ‘Big Bang’ style arrangements – but the reasons to outsource remain as valid as ever. After all, the erosion of margins and the need for greater efficiencies in the face of asphyxiated markets and the inexorable drive to globalisation and retailisation has left institutions desperate to jettison those fixed costs so blithely accreted during boom times past.
Over the past 12 months outsourcing, both in terms of concept and expectations, has evolved somewhat. On the one hand, there is growing recognition that outsourcing must be about more than merely the cost containment and reduction and a desire to refocus on core competencies. As a result, there is now a determination to move beyond the confines of the traditional client/supplier relationship and instead forge a true partnership between the outsourcee and their provider in order to transform critical processes and leverage new capabilities, transformational outsourcing.
Rather than simply tweaking an existing operating model by transplanting existing business processes across to a third-party, with transformational outsourcing two institutions come together to forge a new way of doing business though joint investment and innovation– what Paul Stillabower, managing director at RBC Global Services in London, recently summed up as ‘a lift up rather than a lift out’.
At the same time, the concept of modular outsourcing – long championed in particular by Brown Brothers Harriman (and, equally, long derided by the lift-out merchants) – has now started to gain real traction in the market. By adopting a more customised approach to tackle individual ‘pain points’ within an institution, runs the argument, inefficiencies can be more readily eliminated; at the same time, that institution can better manage the risk inherent in any outsourcing deal.
This incremental approach also militates against the ‘balloon’ effect that so often afflicts transition costs within outsourcing deals. Even more importantly, more narrowly focused outsourcing arrangements promise faster payback – and in today’s bleak economic climate, institutions are no longer prepared to wait the two to five years it is typically expected take for the benefits of a ‘lift-out’ deal to become manifest.
Europe, with the exception of Luxembourg and Dublin, remains significantly behind the curve as regards outsourcing. That said, while the continental universal banking model, predicated on an internalisation of business lines, has in the past hardly presented a hospitable environment wherein the concept might take root, the consolidation that is set to sweep the region in the next couple of years is expected to turn the tide in favour of such arrangements.
Meanwhile, in the UK the emergence of stakeholder products, and the wider, concomitant shift in the way in which retail savings vehicles are manufactured, distributed and regulated, is expected to persuade an increasing number of organisations to give more serious thought to outsourcing.
In recommending the inauguration of a new suite of “simple and comprehensible” products – encompassing a mutual or unit-linked life fund, a pension and a with-profits product – that would offer enhanced transparency and accessibility to retail investors, the UK government sponsored Sandler Review advocated the adoption of a 1% ceiling on charges; this would be in line with existing products such as stakeholder pensions and CAT ISAs.
A survey of 40 leading market participants conducted late last year by BNY European Fund Services (BNY EFS) found that 45% of all respondents, and a significant majority of life companies, agreed that this 1% cap made it more likely that they would review the long-term economics of managing their operations in-house.
“For the market to take advantage of stakeholder products, there is one key message that emerges from this research: cost control will be the key to sustained success,” BNY EFS concludes. Along with the cost/benefit ratios of different distribution channels, the ability to manage back-office and administrative costs will be critical, it adds: “To prosper in the 1% world, efficient scalable operations will be of paramount importance, and the option of outsourcing non-core operations such as administration is likely to become more prevalent.”