Head for the source


22 November 2010


Implementing a successful sourcing strategy involves many critical decisions. Whatever the drivers, making the right choices means asking basic questions about what an organisation wants to achieve in the medium term. Jim Banks speaks to John Knowles of Allianz Insurance about the advantages of the company’s own offshore operations.


Sourcing has been a pressing issue for organisations in the financial services sector for many years, given the potential for labour cost arbitrage and the efficiency that it promises. In the wake of the financial crisis, the industry has one eye firmly fixed on costs and the other on maintaining a competitive advantage through efficient service delivery. Yet the lessons of the past show that making the right choice about sourcing is not always straightforward.

For some, the key decision is the choice of service provider, but others warn that the most advantageous solution might derive from taking a step back and considering whether engaging a third party is really the right option, even if they can now deliver a far wider range of services than in the past.

"Sourcing has for some time been an important factor and remains so, if not more critical, because the economic pressures are stronger," says John Knowles, director IT and offshore operations for Allianz Insurance.

"There is greater pressure on margins, so cost-saving opportunities are more interesting, but also the range of services on offer from third parties offshore is more sophisticated. There are much broader opportunities than five years ago."

One of the largest insurers in the UK, Allianz has its own captive offshore operations, following an initiative in 2003 to organise the management of some IT infrastructure and selected business processes. It realised that it would be at a competitive disadvantage if it did not benefit from lower labour costs in India. By early 2011, there will be 1,000 staff in its service centre, and around 15% of the company's workforce will be based in India.

"Our captive operations give us greater assurance over local controls and what jurisdiction we can bring to bear," notes Knowles. "We have assurance that execution is what we want it to be. As a captive operation, it delivers lower medium-term cost and more flexibility. It has grown steadily over time, largely through natural turnover to ease the transformational change and make the process more manageable.

"It is a good middle ground between in-house operations and third-party service providers. It protects our intellectual property and gives us more confidence about data security," he adds.

Decisions, decisions

There are many reasons why an organisation might look to offshore operations, possibly with a third party, but cost is still the most powerful driver.

"Cost remains a critical issue. If competitors are sourcing to reduce cost, then you are at a disadvantage unless you can match that," says Knowles. "But there are other dimensions, such as improving service quality and increasing consolidation. What the customer will put up with does not get lower each year. Their demands are always rising."

The decisions that define a sourcing strategy, however, are not straightforward. There are many challenges to overcome and many issues to ponder, not least the security of an organisation's data.

"There are questions around data security that are being more deeply probed. Regulators want assurance that handing over a business process involves more than trusting that a third party will look after your data. After all, the bank retains responsibility for the data. You also have to consider that the scale and range of things service providers can offer is growing," says Knowles.

Given the rapid evolution of technology and the many changes taking place in the financial services market, issues such as the timescale of a sourcing deal are also of paramount importance. There are signs that companies are increasingly reducing the time horizon of deals, with agreements of three to five years becoming more common than ten-year deals. Nevertheless, sourcing with a third party should still be seen as a long-term commitment and, therefore, not one to be taken lightly. Knowles has some simple advice - start at the very beginning.

"The timescale commitment is very important," he remarks. "Companies often look at how to get into these sourcing arrangements, but unfortunately less time is spent on how to extricate themselves if they need to or if they find a better solution elsewhere. At the same time, it takes years to give the transformation time to pay back, and you don't want sourcing to demand attention all the time once an agreement is signed - you want it to be low touch.

"Successful sourcing needs upfront planning across the lifecycle. It cannot be viewed simply as a transaction. The starting point for us is our business objectives, usually in the medium term, of which sourcing is one component. You must ask whether it will address the specific problem you want to overcome."

Although business transformation and maintaining competitive advantage are just as important, cost reduction is still the prize that most easily catches the eye when considering a sourcing strategy. However, Knowles urges financial services institutions not to base sourcing decisions solely on price. While the lowest price may seem to offer the biggest cost reduction, the consideration of long-term value should be the most important consideration in the mind of anyone making a sourcing decision that will affect their organisation for years to come.

"Cost might even be the pre-eminent concern in some deals, but you still need security and reliability of supply," says Knowles. The final decision will depend on the business objective you have and the problem you want to solve. The key is to be clear about where the value is in the arrangement and how your supplier is delivering that value, so you can be happy about it and appreciate that it is not something you would want to be doing in-house. And you need to know that the price is one you will be willing to pay over the medium term."

Keep your options open

Attitudes among service providers and their customers have matured greatly over the years. A lot of valuable learning has taken place on both sides of the deal, including some lessons that were painful for client organisations. As a result, there is often better planning among potential customers, and greater willingness among suppliers to understand what their clients need.

"Supplier organisations are intelligent and tune their offerings to what the client is most interested in. There is more appreciation that these must be win/win deals. You need to look at the business context, define your strategy, the endgame, the objectives and the service levels you require to achieve them. Fortunately, there is more transparency and maturity in the market now," says Knowles.
Despite the greater maturity in the market, however, Knowles suspects that organisations may still often reach instinctively for solutions from a third-party provider, instead of considering other possibilities that might yield greater long-term value.

To have the best chance of making the right decisions, Knowles urges: "Consider all your options - in-house, captive and third party. Follow where the value is all the way down the chain."