Range of business process outsourcing options continues to evolve
By Kevin Paterson
October 2004
The life and pensions business process outsourcing (BPO) sector continues to evolve with some fundamental shifts in the propositions on offer and the range of options open to potential BPO clients.
Although the level of activity in the market has continued, our research indicates that less than half of those life and pensions organisations considering BPO are actually signing a deal. (See Figure 1 below). One of the reasons given is that the BPO propositions are simply not compelling enough.
Figure 1
The BPO service providers are responding by providing a greater level of flexibility and choice. Some of the increasingly available options available include the following:
Guaranteed cost savings
The BPO service provider becomes the risk carrier. The service provider will commit to the provision of a guaranteed cost saving from inception for the term of the contract.
Migration not a prerequisite
A number of the BPO providers are looking at more creative operating models that are less dependent on initial migration. The result is that migrations are likely to be phased over a longer period of time or in the case of smaller books of business or where the economics don't make sense, migration will not be an option.
Migration and the associated costs, effort and risks have been a significant factor where organisations have decided against BPO.
On/Offshore mix
The onshore BPO providers offer existing and prospective clients the option to combine onshore and offshore processing. The provider is responsible for selection of the offshore partner and assumes the risks and responsibility of ensuring that the offshore service meets with SLAs, compliance requirements etc.
The expected cost savings through wage arbitrage and proposed process efficiency gains are shared with the client.
Processing factories
A number of the providers (and particularly some of the new entrants) are proposing to establish 'processing factories' – this will require high volumes of standardised processes to drive out economies of scale. This model assumes that processing for different parts of the financial services sector, for example banks, retail investment and life and pensions companies can be standardised to maximise the opportunity to drive out economies of scale.
The increasing number of options is a welcome development, however, it raises new issues and implications which prospective clients need to carefully assess.
This evolution is also starting the process of commoditisation within the BPO sector where it will become more difficult to differentiate between the various service offerings – which will lead to a disproportionate focus on price – and that could be dangerous!