Over the years it has been fascinating to watch the debate and drive for companies to outsource. All too often the key driver has been one of reducing ‘cost’ and even where people have said that they have considered ‘other factors’, this has often been to try and disguise the fact that they didn’t want to be seen to choose outsourcing just for cost savings.

In my own industry of IT, I have had my past non exec directors telling me that we could get the same development resource for the equivalent of a ‘headline grabbing’ £50 per day! My associated industry of Financial Services has been a major exponent of outsourcing for many years and I am sure that despite the claims of looking at the bigger picture’, they too have been focused [seduced] on the claimed cost savings – in their case, multiple millions!

From my own, albeit limited, experience of investigating outsourcing, I suggest that there are a number of other factors that should have been of greater priority. At the time I did my own evaluation, I framed the factors as the three ‘C’s – Competence, Capacity and Cost. These and the order of priority may and should sound obvious, but based on some of the past decisions; I am not convinced that they are. With hindsight, I would now add a few more ‘C’s – Culture and Consequence reinforced by Commonsense!

What is the potential ‘Competence’ that you are looking to outsource? I know organisations will say that they would never outsource areas that are their ‘core competencies’, but who decides on the distinction between core and non core? Even where there are ‘fringe’ activities, companies should be careful not to dismiss what competence is being delivered and the potential effect of change. Call centre outsourcing is one of those personal irritants for me and it is interesting to see that companies are bringing this back in-house/in-territory. Amongst the competencies that can be lost is the ability to ‘get context’, a failure to convey ‘empathy’ and even sympathy. This is not a judgement of being able to speak the language nor of race – indeed it has been said of we and America, that we are ‘two great nations divided by a common language’… The point is to not just think of the competence as being able to take a call and process an enquiry or query. ‘Dealing with people’ is more than a process, and a failure to do it well can damage the company beyond the headline savings on a spreadsheet used to justify the outsource decision.

An area of outsourcing that I have more sympathy with is that of pure predefined process handling [production line], where it is largely a mechanical series of tasks [workflow] with a limit on the need for inter personal skills or cultural contextual understanding. That having been said, before a decision to outsource is considered, a company should look at the processes it has in place to see whether these can be improved to be more effective and efficient (for example using Six Sigma or Lean). In the Financial Services industry a number of companies have literally outsourced ‘legacy’ processes at a cheaper price. Whilst there is a bottom line improvement, this is a short term gain in that the outsourced cost saving takes away the pressure to adapt and improve. It is often not in the interests of the recipient outsource organisation to improve these inefficient processes themselves because they have been paid to do things a certain way and/or on a per ‘seat basis’ [at a lower daily rate].

Ultimately, the assessment of what to do requires a truly objective approach and needs to model the outcomes and implications in the short and long term.

There seems to be increasing chat around Ecommerce circles about the potential effect of the newer breed of interactive web-based services that are generically referred to as Web 2.0. These services revolve, in the main, around community, user generated content closely coupled to the core purpose of the website.

Over the past couple of years there has been explosive use of social networking sites, eg Facebook, MySpace, Bebo, Digg, Twitter etc. that allow individuals to interact and create affinity clusters. The power of these affinity groups has started to be able to exert lobbying pressure on larger service organisations, even reversing adverse pricing decisions notably HSBC’s climbdown over hiking overdraft interest rates for students last year.

Some financial services providers have started to change their digital marketing strategies, with banner advertising campaigns aimed specifically at the social networking community and the launch of podcasts, blogs and other more user-focussed content.

What we haven’t really seen yet is the emerging Web 2.0 sites that are becoming more popular in the North American market and which, according to some comentators, is some 4 to 5 years ahead of the UK market. The US already is ahead in terms of the aggregator space, with services offered by a number of providers to provide a ‘one-stop shop’ for financial and wealth management, eg Wells Fargo, Yodlee etc.

There have been a number of providers creating community-based financial services provision, including Prosper, Mint and Zecco, to name a few, that have created user communities around a common interest – indeed, Prosper allows lenders to pitch for business at rates suggested by the user and to create virtual consortia to service a particular loan request.

Certainly, Web 2.0 is powerful – with the UK’s slightly slower adoption of Wealth Management and aggregation it’s one to watch – in my house, two out of three teenagers use Web 2.0 services a lot (too much, maybe), but it is clearly influential in their purchase decisions; they would turn to digital media as first choice – this is the generation to whom the more conventional-thinking provider must target.

The FSA Update that was issued in April 2008 in response to the feedback on DP07/01 has not been met with the public outpouring of negativity that occurred last year! This may be for a number of reasons, including a belief that it is the right approach, a number of people not having read it, a number not having considered its implications on themselves, some may be waiting for the ‘Feedback Statement’ in November [and subsequent proposals likely in the New Year] and a number may simply not believe that it will happen…

Those who haven’t read it, considered it and looked at the potential impact on their business model really ought to do so. Why… because this could be a ‘car crash’ for your business model.

Here are just a few questions to think about:

» What is your existing business model and does it deliver what you want in a way that you want?

» Will your existing model easily fit with the current FSA outline of how future distribution might work?
· If it does, how do you think that others will adapt to the new structure and what impact will that have on your business [‘the only constant these days is change!’]?
· Will it increase or decrease competition, will it affect your revenue and profitability, how will it affect your customer base and will there be any positive or negative brand implications?

» If your current model doesn’t fit, what will you do?
· Have you considered how you could change your business?
· Would a changed business model meet your strategic objectives, would it require major or minor change, does it fit your culture, would it be cost effective, how long would transition take?
· If you don’t agree with the possible changes to you business that you would have to make, how will you lobby changes to the FSA proposals?

» How will suppliers of services such as technology, Compliance and T&C have to adapt?
· Will the range and depth of advisory support coverage currently offered by POS systems and Wrap
· Will there need to be greater emphasis on research tools that provide qualitative as well as quantitative comparisons?
· Will there be a need to change back-office systems to deal with a wide range CAR combinations?
· How will technology be used to support the non advised ‘Assisted Sale’ approach?
· How can technology be used to help ensure that all parties act in a compliant manner and provide an auditable record of this in a cost effective way?

We have heard a number of views expressed from various parties in the industry and have been surprised at the lack of knowledge or degree of indifference. Even those who think that they are well placed to cope in a post RDR world may find that they are affected by how others do or don’t react – whether that be potential competitors or those that currently provide support to them! It is better to be forewarned and forearmed…