Component Outsourcing as a Strategic Enabler

August 3, 2011

Last month we published an article based on the research done by Horses for Sources (HfS) on the benefits firms have been realizing by outsourcing.  Recently I came across another interesting article, titled Outsourcing in Financial Services: From an Operational Advantage to a Strategic Enabler, published in Wall Street & Technology.  This article makes a compelling argument as to why it’s important that firms get more than just cost benefits from an outsourcing solution, which is well aligned to the research from HfS. 

To sum the article, it argues that firms should realize 3 benefits from an outsourcing arrangement:

  • Increased agility, including operational excellence based on an outsourcer’s experience and industry best practices
  • Risk mitigation, obtained by establishing controls as part of the outsourced operations and executed via SLAs with the outsourcing provider
  • Reduced costs, from both savings on staff and infrastructure

Throughout the article, the author states that the financial services industry has been lagging in outsourcing adoption, which is contrary to the industry’s leadership position as an adopter of technology.  The article proposes that this is partially because financial services firms are heavily regulated, that they are risk adverse or that only large firms were able to take advantage of the benefits of outsourcing.  While I agree that outsourcing provides substantial benefits beyond cost savings, I think that the asset management industry is not a laggard, but instead a beneficiary of a process refined by other industries. 

Now that the weather is getting warmer (in the Northern Hemisphere, that is) many people are escaping the heat by visiting pools and beaches.  Whenever I’m about to go swimming, I follow a routine.  First I stick my hand into the water to determine the general temperature.  Then I make a conscious choice whether I should dive in, or slowly submerge myself.  Regardless of the choice, I know that there will be some unpleasantness (cold) experienced before I acclimate to the water temperature – it’s just a trade-off between the severity vs. duration of cold. 

The article above portrays the outsourcing manager as a swimmer about to enter the water, and characterizes the outsourcing decision as a swan dive right into the frigid waters of Boston Harbor.  But at PORTIA, we advocate a more nuanced approach.  In March 2011, my colleague wrote an article about how to effectively engage in component outsourcing – you can find the blog here.    The crux of the article is that some industries (ex: durable goods) have already gone through the outsourcing lifecycle and learned that full-scale outsourcing can lead to a weakening of an industry’s core competencies.  Hence the concept of component outsourcing emerged as a means to ‘test the waters’ without taking unnecessary risk.

The key to component outsourcing is to work with an outsourcing vendor to develop clear ownership boundaries and put in place powerful operational controls.  Most firms start by outsourcing their hosting / facilities management, then start adding non-core processes until they have achieved the desired level of savings while still remaining in control of their operations.  This is like slowly walking into a pool via stairs – it’s a steady approach that focuses on risk mitigation as much as the actual outcome.  Our clients have excellent results with component outsourcing, and almost always find themselves increasing their use of PORTIA Outsourcing Services over time, once the benefits are proven.

Are you seeing an increase in component outsourcing?  If so, is this because it is a means to control risks while achieving the benefits of outsourcing?

–  Munther Haddad, Vice President of Implementation and Outsourcing Services

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