Consider the Source

Captive Sales Continue with UBS Sale to Cognizant

By: Brian Smith, Partner & Managing Director, Financial Services, TPI

Today’s news that UBS has sold its captive to Cognizant is the continuation of a trend – following captive sales by Aviva to WNS in 2008, Citigroup to Wipro earlier this year, and AIG to HP-owned MphasiS in August. It’s clear that the idea that offshore services can only be provided from within a captive wholly owned structure is dead – certainly for IT services, and probably for most BPO services. 

One of the big challenges with this type of transaction is that an internal organization suddenly becomes a third party – and that comes with associated management challenges that are often missed in the heat of executing the transaction. It’s a big change, but often slowly executed – in essence nothing changes on day one - but as the buyer seeks to leverage its investment, conflicts with the former parent can emerge. We therefore recommend paying a lot of attention to governance, and implementing a strong approach to governance from inception.

We anticipate that the trend of captive monetization will continue, and that the capabilities of the captives, once commercialized, will increase the maturity of the overall market – particularly in terms of domain expertise.

Outsourcing Observations on Insurance

By: Paul Reynolds, Director and Chief Research Officer, TPI Momentum

Having just completed a detailed review of outsourcing activity in 26 different vertical industry groups, I want to share some interesting findings from my research. The Insurance vertical sector has been hard hit by the economic issues of the last year, so I will share my observations on this industry segment first.

A quick look at the companies in the Forbes® Global 2000 reveals that there are more than 100 companies in the Insurance vertical sector, of which just less than half have an active outsourcing contract with a total contract value (TCV) of $25 million or more, according to TPI Research. As a group, these companies have increased their spending on outsourcing in each of the last 13 years, reaching an all time high of nearly $5 billion in annualized contract value in 2008. Compared to other industry groups, however, the typical insurance company spends about $10 million less per year than the overall market average, indicating that this vertical may be well-positioned for increased spending in the future.

 

Companies in this vertical sector have been somewhat slow to the BPO party, though TPI has recently observed increased attention being given to processes that can be offshored due to board pressure to reduce costs. Companies are also considering onshore options; especially those have taken TARP funding. This shift may benefit the US-based multinational service providers, who can market their US-based delivery centers.

To sum up, the Insurance vertical sector is a large market that already spends significant dollars on outsourcing. TPI sees opportunities for increased spending among companies that already source and expects more Insurance companies to adopt outsourcing during 2009, especially those positioned in the mid-market.

I’d be very interested to hear your thoughts on outsourcing in the Insurance vertical sector.

Source: TPI Momentum Q109 Vertical Industries Report
For more information visit: http://www.tpi.net/pdf/resources/TPI-Momentum-Market-Trends-Insights-1Q09-Verticals-Summary.pdf

Accounting Considerations in Sourcing Environments: Compliance and Controls

By: John Klee, Senior Advisor, TPI

One of the most critical points in an outsourcing environment is often one of the least addressed.  U.S. public companies receiving outsourced services have statutory requirements to substantiate that proper controls are in place to assure the integrity of data, systems, etc.  Additionally, there are requirements for a firm’s external auditors to report on the reliability of a company’s management assertions regarding these internal controls.  Both clients and service providers need to understand these requirements and it is best to address them during negotiations rather than after services begin.

Why is this issue being discussed in this entry?  As noted, it is always better to address issues upfront in negotiations than after the contract has been signed.  Part of a client strategy should be to have the best compliance and controls built into the contract requirements.  This exhibits foresight and evidence to auditors conducting reviews and positions both clients and providers with built-in controls, which is far easier accomplished beforehand than attempting to build in these requirements once delivery has begun. 

The three main regulatory or organization issuances that define and standardize these requirements - The Sarbanes-Oxley Act of 2002, SAS70 (AICPA Statement on Auditing Standards – Issued 1992), and COSO (1992 Committee of Sponsoring Organizations Internal Control - Integrated Framework). The crux of these regulations and standards are to certify and assert that public disclosures are truthful and reliable and  management is satisfied that they have taken the appropriate steps to ensure that the processes and controls in developing this data are consistent so that stakeholders can rely on it.  Additionally, they can provide transparency into financial statements, offer companies a framework and guidance in the design, implementation and test of control mechanisms, and offer a common ground in which clients and service providers can work from.

Compliance and control is important since it offers assurances to investors and more often than not, it is the law. 

Points and Reminders:
• Clients and service providers need their accounting experts to sign off on any accounting treatments.
• Every contract can be different; slight nuances to contract language can alter accounting treatments.
• Recognizing and addressing these issues upfront, in the client’s sourcing strategy, improves their RFP and negotiation position. 
• Everyone benefits from a clearly defined strategy.

And one last parting thought, “It’s an Accounting Issue.  No, it’s a Contract Issue.” 

Contact Center Outsourcing Consolidation- Where Are the Benefits?

By: Mike McMenamin, Associate Partner & Director, Contact Center Services, TPI

  In the past 3-5 years contact center outsourcing, a $60 billion market, has experienced significant consolidation. Here is a timeline of how the consolidation progressed:

1. Stage 1: (10 -15 years ago) -  Large buyers of contact center outsourcing services, i.e. Fortune 500 firms with more than 500 agents (many with more than 1,000), initially outsourced for cost savings and to reduce large employee populations of agents; moved work out to one or two service providers.

2. Stage 2: (5-10 years ago) - These same buyers realized that using multiple service providers created ongoing price and performance competition; workload was split between multiple service providers (sometimes as many as 10 based on their size).

3. Stage 3: (3-5 years ago) – As a significant portion of the work portfolio has migrated offshore and all major providers have established a global footprint of some kind, buyers have begun to consolidate their stables of multiple service providers.   They see and realize the benefits (i.e. knowledge transfer, global standard processes / tools / technology, improved global account management) of moving toward fewer and usually larger, more capable service providers. 

In this market, the Tier-1 service providers have been the beneficiaries of this move towards consolidation on large accounts.  The large telecommunications companies (Sprint, AT&T, and Verizon) have consolidated and now rely on two to three major providers, as opposed to 10 different firms in the past.  Firms like GM and HP (with > 5,000 agents) have also consolidated using a smaller number of service providers.  This allows the buyers to move their workload around the globe (onshore, offshore, nearshore) with a single service provider as their markets, demand, and business priorities change from year to year.

Tips for Making IT Service Management & Governance (SM&G) Work

By Andrea Spiegelhoff, Director & Head, SM&G Competency, EMEA, TPI 

If you are planning to establish, re-design or improve your IT service management and governance (SM&G) operations, here are five key considerations for making it function most effectively:

1.  Align the organisation to the business environment. IT organisations have become more sophisticated in managing their service providers; but on the other hand, effective service provider management is tied inextricably to the buy-in and cooperation of the business. To this end, establish IT operations with one face to the customer and service provider. Today’s sourcing models provide end-to-end services from multiple internal and external service providers, covering an integrated service catalogue, demand management, chargeback, etc.

2.  Plan for change. SM&G organisations should be as flexible as the businesses they serve. Create yours in a flexible way from the outset so that it can keep pace with change in the overall enterprise. Because organisations often have difficulty initiating change, use an impartial third party to provide insight and methodology for issue identification and remediation. Apply change management practices throughout the sourcing life cycle to make the necessary adjustments in philosophy and business execution to institutionalise the needed changes and enable effective SM&G. The mantra is “communicate, communicate, communicate!”            

3.  Find the right balance between centralised and local IT decision making. Take a close look at the drivers for centralisation versus decentralisation. The balance of decision-making power between centralised and local IT functions will have a major impact on the sizing — and therefore the cost — of the SM&G organisation. Most organisations have experienced organic growth in their SM&G function as the services matured, with attendant cost ramifications. External benchmarks can provide a useful tool to help evaluate the sizing of the SM&G organisation against market best practices.

4.  Retain the right skills within your organisation. An organisation is only as good as its people. Even if you are confident that your employees have the right skills to deliver excellence, continuously benchmark these skills by asking these questions:

  1. What are the considerations, skills and capabilities necessary for effective SM&G?

  2. How can we assess available resource capability and skills?

  3. What can we do to maintain these skills in the long run?

At each stage in the life cycle, the issues to be managed are different, and that often drives an evolutionary approach to organisation, sizing and required skills.

5.  Create transparency in value creation and costs. Implement a central “gateway” process for all IT expenditures and projects to give a clearer view of customer demand and to help control decisions and costs across IT. Alongside this, establish a formal SM&G operating model and processes. These approaches will help to realise value and reduce any strife and conflict in the service provider and internal customer relationship.

The establishment of a strong and supported SM&G operating model will bring the organisational capability to its highest level. Interested in establishing IT SM&G operations or improving the process you have? TPI’s SM&G specialists can help you achieve your organisational goals through objective advice, knowledge of your industry and experience with SM&G arrangements from simple to complex.
Contact us today to learn more.

Read TPI’s new research report on SM&G in Europe.

Top 5 Actions to Heighten the Strategic Impact of Your Procurement Organization

By Bill Huber, Director, CPO Services, TPI

During tough economic times, procurement is often called upon to “win” price and payment term concessions from suppliers and service providers in order to boost the bottom line. While there is no question that part of procurement’s role is to ensure that a company is paying the best price, the “blunt instrument” approach tends to simply focus on supplier profit margins without doing anything to improve quality or drive innovation that ultimately, permanently removes real costs from the supply chain. 

                                                                                              

Here are five actions that you can take to raise the strategic impact of your procurement organization.

1. Define the target role for your procurement organization. Review your department objectives and formalize the role and results that you would like procurement to achieve for your company during tough economic times. Set strategic objectives in terms of innovation, quality, cost savings and customer service that the procurement organization will embrace as a response to recessionary times, and measure your progress toward those goals.

2. Segment your supply base. A formal tiering of your supply base, with best-practice supplier management processes for the top tier, can have a dramatic effect on the value that you derive from your most important suppliers. Set frequencies for reporting, monitoring, collaboration and financial reviews with each, and require that your most strategic suppliers bring a certain number of innovation suggestions to the table each period. Set a formal process whereby these suggestions will be vetted, with the best ideas submitted for review by an executive-level procurement governance team.

3. Realign your resources. Identify underutilized or misaligned resources, and shift roles to focus talent on your greatest areas of opportunity. Often individuals who have been focused on a particular commodity because of their expertise could bring a fresh perspective to other categories. People who make the greatest impact in their current areas can have an even greater effect on an entirely different category.   

4. Review processes and technology to identify roadblocks and underutilized capabilities. Processes can be slower and more cumbersome than they need to be. Stay on the lookout for procurement processes that were designed to address a past problem that is no longer relevant today. Also, organizations often have only partially deployed procurement technology solutions for lack of resources to support a more ambitious rollout. A second look can reveal underutilized technology that could be leveraged with a different support model to drive faster cost savings or improve visibility or user satisfaction.

5. Evaluate governance structures, and change if necessary. Good procurement governance should enable transparency and balanced decision making. In order for it to be effective, procurement governance must be designed to ensure that important decisions are made at the right level to balance risks with rewards, and to ensure a timely flow of information to the right levels of the organization.  

Implementation of these five actions could ultimately improve the effectiveness of your procurement organization by 3 to 5 percent or more, increasing your impact on the bottom line and transforming the role that procurement plays within your company.

TPI’s CPO Services experts can collaborate with you to assess your current procurement processes, then help you identify and implement strategies to improve quality, drive innovation and permanently remove real costs from the supply chain.

Contact us today to begin the dialogue.

Captives May Not Always Be What They Seem

By Brian Smith, Partner & Managing Director, FSO Services North America, TPI

Global organizations typically offshore a broad range of business processes. To optimize their resources, early adopters, particularly those in the financial services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called “captive centers.” In light of recent events in India (Satyam, Mumbai attacks) and the changes in economic priorities in their home markets, global companies have begun to rethink their sourcing strategy and review the mix of outsourced and captive solutions, and the onshore/offshore mix. Like Nick Heath’s article, Banks: Offshoring, Not Outsourcing (BusinessWeek Online) explains, Satyam and regulatory scrutiny has made many institutions wary of the risks associated with trusting third parties with information.

While it may seem like a good idea to revert to relying on captives, there are various other structures that can mitigate risk without the capital expense. Since many captives often do not attain critical mass, they eventually lack the efficiency that parent entities want and become a liability instead of an asset. Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties after a company either invests in revitalizing the captive and later sells the business to a third party after the captive atrophies beyond repair. A minority of captives or “best-in-class” captives, however, can attain cost performance gains better than those of the third-party service providers.

Alternatively, parent companies are increasingly evolving toward a balanced hybrid captive model, retaining strategic core employees while the commodity work is spun off to third parties. A hybrid captive model offers the following benefits:

• Leverages the captive’s premises improving its efficiency ratio
• Makes better use of fixed overhead
• Can be perceived as reducing risk
• Lowers the cost of third-party resources, since the service provider does not need to provide infrastructure, secured space, and other resources that the captive possesses.

The hybrid captive concept has emerged as a means of structuring a relationship that gives the buyer of services a significant degree of transparency and management oversight over operations carried out offshore by a service provider.

Increasingly, as firms move to second-generation offshoring, it is necessary to look beyond labor arbitrage as a means to increase capability and variable capacity that helps achieve previously unattainable value. Evaluating your organization’s strengths and analyzing which approaches can help optimize your offshoring strategy can unlock value not previously seen in previous or current labor arbitrage experiences.

Sharing the Pain

Today's blog comes from Peter Allen, Partner and Managing Director, TPI.

I spent last week in India, meeting with leaders of several prominent India-based IT/BPO services companies.  I also met with a few reporters.  You can only imagine the number of times the same question was asked:  What’s the likely impact of the U.S. financial services crisis on the IT/BPO ecosystem in India?

Financial services firms have been among the most prolific employers of the India technical populace.  While their loss to bankruptcies and acquisition over the recent weeks doesn’t directly translate into job impact in India, the fact of the matter is that pain will be shared across the globe.

Without any specific attribution, I will tell you that there is a decidedly alarmed tone among the corporate leadership in India.  Forget about particular client relationships, such as amounts owed by Lehman Brothers to its service providers.  Rather, the concern is as much social as it is corporate.

Waves of Change

Today's blog comes from Peter Allen, Partner and Managing Director, TPI. 

Keep an eye out for the ripples of activity in the insurance processing segment. There has been big movement by big players.

Last year, Prudential UK completed a large deal with Captiva, a real game-changer for managed service offerings for the insurance market.  Then, this year, along comes the Aviva-WNS deal - another big move foreshadowing some major market changes.

Large insurance organizations are looking to restructure their operations to improve their cost models, achieve more flexible capacity, and enhance their analytical capabilities. The insurance processing industry is saddled with a heavy legacy burden and the investments required to modernize and transform are daunting. 

Alas, that’s where the outsourcing industry comes into the picture, providing a leveraged investment approach for new capabilities and flexible capacity.

Over the past several years, insurance companies have increasingly leveraged offshore delivery, whether captive or outsourced, to reduce cost, increase efficiencies, and transform processes.  It’s the applications-support functions that are largely being supported offshore for both corporations and individuals. They include general insurance, healthcare, life and pensions, and property and casualty.

But very few insurance companies have aggressively moved key components of their operations offshore, and that gives rise to a rather attractive market opportunity. 

The Prudential UK and Aviva moves have paved the way for some increased market activity among the insurance segment. Question is: How long before the ripple effect turns into waves of change?