Outsourcing: Impact on Working Capital
Oscar Wilde once said, “Most people are other people. Their thoughts are someone else’s opinions, their lives a mimicry, their passions a quotation.” Much the same could be said of many aspects of the modern corporation, as the practice of outsourcing penetrates ever deeper into the organisation. The notion of the ‘virtual corporation’, which does nothing itself except its ‘core competency’, was in fact invented in the 1990s by William Davidow and Michael Malone.1 However, the idea has been picked up by the major management consultancies over the last couple of years and has therefore had new life breathed into it.
At the same time, initial resistance by unions and politicians to the practice of off-shoring has largely subsided as the inevitability of globalisation in the pursuit of lower consumer prices and higher shareholder returns becomes evident to all. However, the spotlight on business processes that are farmed out to a third party in a distant land has given rise to important debates over quality, customer service standards and data protection concerns. This, in turn, has led to outsourcing arrangements that use a combination of onshore and offshore providers to obtain cost economies whilst not incurring an escalation in political risk or legal exposure.
Managing the cost of the increasing burden of regulatory compliance is also exercising many business minds, and the obvious economies of passing business processes to an expert third party is attracting a growing number of organisations to the outsourcing option. The management of documentation and records plays a critical role in regulatory compliance. Nowadays, the inexorable march of legislation and regulation means that everything needs to be recorded and kept if organisations are not to fall foul of the law. And not only do more documents need to be stored and categorised in order to prove compliance, but increasing numbers of documents are also being generated.
Various factors are causing an escalation in document production and distribution within European businesses. E-mail applications are estimated by several research organisations to increase document volumes by anywhere up to 40% in a typical company. The daily volume of e-mail in America already exceeds that delivered by the US Postal Service, and European equivalents are hard on the heels of this US phenomenon.
Keeping documents, and providing easy access to them (without breaking the bank) is not just a matter of conforming to legislation and regulation. A myriad of studies point to business efficiency and effectiveness improvements that are possible from better document management. Knowledge workers spend 50% of their time searching for information, leaving only the remaining 50% to actually use what they have found (source: Reuters). Of a total of eight hours wasted per week in paper document management, we spend one hour finding documents, one hour having difficulty sharing documents, one hour in distribution/storage, and half an hour in archiving and retrieval (source: Gartner).
It is interesting, therefore, that a study from Pitney Bowes tells us that only 38% of larger European corporates have an effective document management strategy in place. Document management is fundamental to modern customer relationship management (CRM) and marketing success. For example, if relevant documents can be rapidly accessed in the call centre, then not only do customer service costs fall, but standards also improve. If a company wants to offer, say, a 24-hour, seven-days-a-week customer service line, then continuity of document and data retrieval is paramount for efficient and effective answering of customer queries. If this breaks down, then it actively undermines the customer’s perception of CRM quality. At the same time, however, it is often quite uneconomic for the company to invest in large-scale supporting document systems. For this reason, the system service provision is often outsourced to a third party that has the scale of operations to deliver such failsafe back-up at an economic cost.
This study also tells us that financial services organisations have the highest implementation of effective document management strategies, because they are highly regulated industries. Public sector organisations have the lowest levels of effective document management strategy implementation, raising concerns about meeting citizen service standards and compliance with legislation such as Freedom of Information. Document management technology and outsourced services are expected to grow rapidly over the next decade, as it becomes recognised as a fundamental component of business success.
One of the major benefits an organisation gains from outsourcing – whether onshore or offshore – is to free up working capital that would otherwise be tied up in the equipment, buildings or other facilities.
Our research project therefore aimed to put metrics on the amount of capital that different UK business and government sectors could free up by outsourcing their document archiving, management and retrieval. The sums are calculated by using Anacomp’s conservative model of working capital freed through document outsourcing. This model is based on comparative statistics on savings from the outsourcing of a total of 105 billion documents across a representative cross-section of the sectors studied. Only larger organisations were studied – defined as a business with more than 250 employees or turning over more than €50m. Larger companies are the prime (although by no means the only) candidates to benefit from outsourcing their document capture, management delivery and preservation.
Taken all together, these companies could be freeing up over £13bn over a five-year period – the typical life of an outsourcing contract. At some £2.6bn every year, this represents around one fifth of one per cent of GDP – simply through outsourcing a single business process.
Let us briefly examine the two sectors that have the most to gain from outsourcing this particular business process – banking and retail. The banking sector has a savings potential of over £580m per year – that’s annual savings per organisation of £3.97m. Despite their high standards of document management generally, it is the UK’s banks that would benefit most from the document management outsourcing process. This sector carries perhaps the greatest burden of regulatory compliance of all sectors studied, a burden that is increasing with the implementation of Sarbanes-Oxley (most are listed in the US), IFRS, anti-money laundering rules, the reporting requirements of Basel II, and a host of other FSA regulations around mortgage and other products. The wide range of products provided in retail banking makes for more complex document archives, all of which need to be easily accessible to provide competitive levels of customer service. And customer service is an increasingly important issue – witness the retail banks that have either off-shored their call centres only to bring them back home for a domestic third party to handle, or those who have made a virtue of saying that they will not offshore any ‘customer-facing’ business processes.
Our research shows the retail sector as having a savings potential of £340m per year – equating to annual savings per organisation of £773,000. In this sector, just-in-time stock management and delivery is very much a topical area for new systems implementation. In retail, also, there are an escalating number of loyalty schemes in operation – statistics from TotalDM show this has doubled over the last decade – a phenomenon that is creating a further document proliferation. It is often mistakenly thought that retailers do not have a great deal of personalised (and therefore data and document driven) contact with customers outside of the shop floor. This is not the case. Figures from the Direct Mail Information Service reveal that retailers now send as much direct mail as the insurance industry. And a huge proportion of retail brands now have successful and substantial e-commerce ventures, where again document management plays a critical role in the warehousing, supply management and customer service processes.
It is worth looking at the balance between onshore and offshore outsourcing of document management, as this has been a major evolution of the outsourcing model in recent years. Off-shoring is growing inexorably. Forrester has increased its estimate of how many US services jobs will go offshore in the near term. The analyst believes that 3.3 million US jobs will move to lower cost economies by 2015. The risk associated with such initiatives is also well recognised. Back in 2003, the Federal Deposit Insurance Corporation was publishing advice such as a white paper entitled ‘Cross-Border Outsourcing and Risk Management for Banks’ which outlines the risk management challenges banks face when information technology and business processes are outsourced to offshore locations.
Business process outsourcing (BPO) occupies a significant IT services growth sector – although opinions on exactly how significant it is vary widely. In Europe, Gartner estimates current BPO spend to be around €19bn, predicted to grow to about €25bn by 2007. Examples of business functions where BPO has a strong foothold include customer service enquiry management, insurance application and claim processing, payroll and employee benefits management and finance and accounting back office processing.
BPO and document outsourcing should not, however, be confused. Contracting out a document archive is not BPO. Outsourcing securities trade processing or employee benefits management is BPO. However, the flow of documents within an outsourced business process is critical to it delivering quality and risk management to the client organisation, and commercially viable cost management for the BPO provider.
In fact, the twin benefits of outsourcing a whole business process, but retaining transparency and control, is the essence of successful BPO. Reporting transparency allows the BPO supplier to audit and justify, without any argument, its service quality and fees; whereas management transparency allows expert managers on the client side to exercise and demonstrate real control of the outsourced process. Where BPO steps into the realm of any financial or accounting processes, such as banking or investment services, then this combination of transparency and control is essential to meeting corporate governance strictures (such as Sarbanes-Oxley for US-listed companies and the forthcoming EU Auditing Directive for European quoted firms). It is also critical to containing data protection risk over personal information, as well as the risk of commercially sensitive information ‘leaking’ out of the process.
That information security is a clear and present danger has recently been exemplified through the tabloid furore about personal records being sold by unscrupulous staff in an offshore BPO centre. The furore was absolutely justified, but is not representative of the offshore BPO industry as a whole. In fact, sensitive data and documents are nowadays being secured through an onshore/offshore hybrid.
As information becomes a more prized – and litigious – business asset, document management is occupying increasing amounts of time and resources in many large UK companies. So it is logical that document-related business processes are becoming the focus of today’s successful outsourcing projects. If outsourcing is handled properly, our research shows that the larger UK firms could release vast amounts of working capital over the next five years. In many cases, outsourcing document processes will be critical to underpin wider ‘hybrid’ outsourcing projects that balance the benefits of on and offshore – giving the customer the best of both worlds.
1 ‘The Virtual Corporation: Structuring and Revitalizing the Corporation for the 21st Century’, William H. Davidow and Michael S. Malone (HarperBusiness, 1993).