October 2010

OUTSOURCE CONTRACT RENEGOTIATION: another missed opportunity?

Jim_connorOutsource renegotiation is a door to a transformational opportunity. It provides means and motivation to assess critically how things could be done better, argues Jim Connor of Navigant As investment operations outsourcing enters its next phase, a ‘school report’ assessing its contribution to industry thus far might well read: ‘could do better’. As the deals struck over the last decade pass through contractual breakpoints, and clients contemplate switching, there is little evidence of firms seeking to take outsourcing to the next level.

Outsourcing is now widely recognised as having delivered on the promise of financial benefits: consensus of surveys about outsourcing conclude clients are satisfied with the level of cost savings achieved, a more variable cost base, and increased transparency in the services provided.  There is also evidence that clients are neutral/positive about the services they receive, though outsource relationships are not without their problems: escalations are common and terminations and cancelations are real considerations. Success then?

Dig a bit deeper and it is clear many executives choosing to outsource were expecting more. The ‘more’ turns out to be non-financial benefits; some of the things that may have got the headlines in the business case  – innovation and transformation benefits – but in practice have received little attention.

Dig further still and it becomes clear why.  The industry has been on a journey: in the early deals there was only a vague understanding of operations post-outsourcing and almost no solid consideration of how outsourcing could make a strategic difference. Clients knew not to outsource a problem – transfer a dysfunctional operation to a service provider in the hope it would get fixed. But most clients did not take that same thinking further: outsourcing could be a catalyst for business reengineering but not an automatic assurance of it.

The could-do-better verdict must signal that firms are thinking more strategically about the role of outsourcing? Or not. Witness the most frequent announcements: that of clients resigning with the incumbent provider with only modest changes to the original deal.  Moreover, the path to resigning has been paved by a strategic review; the motivation of which, in too many cases, is financially driven:  benchmarking or retendering aimed at extracting an improved rate card. An outcome that is, at best, another missed opportunity.

The industry mindset needs to change gears from commodity sourcing to strategic partnership. In an ever more competitive world, especially one which is increasingly global and, post-crisis, in which innovation will be an important plank in a successful business model, clients need to ask how to fully take advantage of their outsourcing relationships.

Outsource renegotiation is a door to a transformational opportunity. It provides the means and motivation for client and service provider to critically assess how things could be done better. Not just improving the original deal but creating a roadmap to make a step-change in the business model: reaching important markets, filling important product gaps, responding to new opportunities more quickly, servicing key clients better. For mid-tier firms, the outsourcing challenge is levelling the playing field with the tier-one names. For larger, more complex organisations, the outsourcing challenge is creating competitive advantage.

In common with business transformation, there are four key aspects to get right. The activities generally associated with contract renegotiation are only one (and the last) of these aspects.
  • Business goals: Setting the new outsourcing challenge. The examples above illustrate the types of considerations clients should be thinking through in framing how to meaningfully move the business forward.
  • Outsourcing strategy:  Meeting the new outsourcing challenge. A jointly (client and service provider) thought-through blueprint of how the business goal will be achieved and what’s involved in achieving it. Conceiving different approaches, weighing up their relative merits, understanding the capabilities needed and how they will be provided are the meat of the blueprinting work. A sound business case and robust risk management ensure the blueprint is commercially grounded.
  • Operating model: Making the outsourcing solution real by translating the blueprint into a deliverable service proposition (services, functional components, data). The aim here is sufficient detail for the client to perform due diligence and the service provider to frame the commercials.
  • Commercial framework: Translating the operating model and blueprint principles into the recognised outsource agreement collateral – contract, service level agreement, rate card, transition plan.
Having lived with outsourcing, some client executives realise they should (and could) have wanted more. The business challenges that lie ahead for investment managers make this more of a business imperative. It is also the service provider’s opportunity to move the outsourcing relationship to one of strategic partnership.  Y2K was the defining event that put Indian ITO on the map; the financial crisis could be the service providers’ defining event. Contract renegotiations can be the catalyst but only if the aim is high.

• Jim Connor is a director at Navigant Consulting

©2010 funds europe   

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