Peter Abbott looks at the current interest in offshoring and asks whether is has a role in run-off
We hear a lot about offshoring at the moment and often in highly emotive language. But whether or not you perceive it as a major benefit or as a threat to the economic and social fabric of the UK, it is an issue that every responsible business manager involved in back office services needs, at least, to consider.
So what is offshoring and how does it relate to outsourcing? In the context of this article we will regard offshoring as the transfer of some or all back office functions to a location outside the UK. As such it has obvious similarities with outsourcing, indeed it has often been said that offshoring is outsourcing with greater risk and comparing one with the other can help us to understand both better.
Strategic or tactical?
Offshoring can be strategic, ie, it is intended to be permanent, or tactical, ie, it is perceived to be only temporary, and this choice will often be defined by your core business strategy. Here an important factor is whether offshoring is to be done by an in-house overseas facility or (more usually) an overseas third party administrator (TPA). While the largest companies may have overseas subsidiaries which they are keen to optimise (often as a way of gaining access to local insurance markets) and thus will actively encourage strategic offshoring from within its own business, for the majority of smaller entities which, I suspect, will encompass most of the run-off players, there is no such luxury and thus offshoring means using an overseas TPA to meet tactical requirements.
This is a completely different ball game. Because companies with in-house offshoring facilities have such a different business dynamic usually driven by a higher strategic purpose, we will concentrate on offshoring in a TPA environment and thus of a tactical nature.
When offshoring might be right
The business reasons and dos and do nots for offshoring (or outsourcing) are the same in a run-off environment as for ongoing business, so the main dos would be:
- to meet a critical timing need ie, to get something done more quickly than is possible with your own resources - this is often the single most pressing reason for using TPAs of any sort;
- to mitigate shortages in resource eg, people, process, premises, equipment, skills;
- to convert fixed costs to variable costs;
- to reduce risks at times of corporate change eg, mergers or re-structuring; and
- as a deliberate strategic experiment - responsible business managers need to consider, and occasionally test, every option.
And when it might not
The same basic rules that should govern the use of TPAs are equally true to offshoring for run-off, and thus the don'ts have even more relevance, so:
- do not off-shore what you do not understand yourself - if you do not understand it you will, quite literally, be an innocent abroad and be at the mercy of your TPA. It is possible you might not get taken for a ride, but the chances that you will are much greater;
- do not offshore to get rid of a problem - you will not and it will come back to haunt you bigger and uglier than you ever imagined;
- do not offshore solely to save money - you will probably fail. Your offshoring should be part of a wider strategy with objectives that meet more than just the cost element of your business requirements.
Here again, many of the risks associated with offshoring to a TPA are similar to those we encounter in outsourcing, plus some new ones:
- geographical location - a statement of the obvious perhaps, but overseas locations are different from the UK in legal environment, business ethics, political risk and climate stability;
- service quality - everyone talks a good game on service but preserving service quality whether it is to you as the primary customer or to your clients and, maintaining management control will be challenging;
- management information - the life-blood of any run-off operation and particularly so if you are offshoring work as a sub-contract;
- communication - language and time zone issues are the obvious ones, but maintaining data links and problem-solving can take up a lot of management time;
- redundancy costs - offshoring will always be a total redundancy situation in the UK with its associated costs and the potential damage to employee relations elsewhere in an organisation and the possible future loss of quality staff you wish to retain;
- reduction in flexibility - your offshoring arrangement will be governed by some form of contractual agreement which will limit your ability to change, add to or subtract from what you provide to your own customers - offshoring means that you are no longer in direct control of all your business processes.
Selection & control
You will want to give yourself the best chance of making the right choice of TPA and of ensuring you do not lose control of the relationship. The location will be dictated by both your need to have access to a large, skilled English-speaking workforce and time zones that complement the UK. Here India and parts of the Far East are emerging as the main front runners.
In reviewing potential TPAs you will consider not only their technical competence, financial stability, reputation and track record but also their ability to provide you with the management information you require (business system compatibility often proves to be the deciding factor in selecting a TPA).
You will review the TPA's own business activities and utilise any synergies while being aware of any possible conflicts of interest between the business you want them to manage and that of their other clients.
As it is unlikely you will be able to use an existing TPA as you might in the UK, you will need to consider whether to single-source (easier to set up and control and usually marginally cheaper) or have a number of offshore service providers which can be more difficult to establish but adds an element of competition and benchmarking into the procedure and reduces the risks associated with single-source relationships.
Whatever option you chose you will have to decide whether to select based on some local recommendation or to enter into a tender process. If you tender how do you do this? Are there local rules and how much management time will be taken up in the process?
Overall, selection of your TPA is a risky and involved process but you will need to put as much management time into this as you would to appointing direct staff or your offshoring arrangement will be flawed from the outset.
If offshoring to you means washing your hands of a problem as far as possible, it will fail.
To make your offshoring arrangement work and not fall foul of your contractual arrangement with your own clients you will need clear and unequivocal Key Performance Indicators (KPIs) to monitor and control performance.
Proper management control is essential but will be lost if you do not fully understand the business you are offshoring and have ready benchmarks and KPIs by which to measure it. As a starter, past in-house performance should be the minimum standard sought.
A better mousetrap?
If you represent the sort of company that has its own overseas back office capability then much of the obvious business risk associated with offshoring is mitigated and offshoring is no more onerous than transferring management control from one internal division to another.
Offshoring in these circumstances may even be objective-driven and will be seen as part of a wider corporate strategy benefiting the whole company.
In such circumstances offshoring may represent a better way to manage parts of your business where you have no long term business aspirations and where the requirement for high customer satisfaction may be less.
However, in run-off, this scenario is the exception rather than the rule and when you consider offshoring as a TPA exercise the potential pitfalls become all too obvious:
- simple lack of knowledge of overseas marketplaces;
- the likely need to rely almost completely on a local agent or facilitator to source and negotiate with local TPAs;
- the inevitability of problems and/or local resistance should you wish to repatriate the business as some later date;
- possible shortfall of UK market or specific business knowledge of overseas staff handling UK business;
- the difficulty of maintaining proper communication and management control and satisfying directors' legal obligations and increasingly onerous UK regulatory requirements.
Against this background, as with any business decision, if it suits your purpose and you have examined all the pros and cons then you should consider giving it a try, but in general terms offshoring in a run-off environment should be treated with considerable care and caution.
In most run-off situations it is easy to see why offshoring has been described as outsourcing with greater risk. Is Asia the new Essex in run-off? Not at the moment.
- Peter Abbot is a member of the Association of Run-Off Companies Executive Committee.