Outsourcing - Outside in

Rachel Gordon considers the value that consultants might add to brokers' operations and asks: can the costs be justified in a recession?

Today, almost every broker will be focused on ways to reduce costs and considering moves from reducing headcount to moving employees into more profitable roles. For outsourcing companies, some of their propositions are compelling right now. However, how do you decide if it is right for your firm, and how do you manage the process?

There is a strong business case for outsourcing and some brokers are involved already. Many intermediaries use an external compliance consultant because having a full-time regulatory expert in-house is often too costly. In addition, while some brokers have an in-house IT function, many more choose to outsource; with the growth of 24-hour quote-and-buy facilities, external hosting and troubleshooting makes sense in order to keep the business running smoothly.

Then there is the area that is pertinent to many regional, commercial lines-biased brokers, namely that they should outsource their personal lines. The alternative to this is selling the book of business, however, outsourcing may well appear a more palatable option because the tie with the client is not severed.

Beyond this, some of the functions that can be outsourced include: payroll; pensions and other employee benefits; finance - including bookkeeping; tax management and invoicing and sales (such as lead generation, marketing and public relations to specialist agencies). It is likely that many brokers are already outsourcing non-critical work such as cleaning and catering.

It is very easy to be beguiled by talk of potentially substantial savings, however, some experts say these materialise rarely. If an outsourcing contract is to work, brokers should take time, as much as months, to analyse their existing business thoroughly. Only if they know what they want can the right provider be found; this means knowing the exact roles that their employees are performing and what, if any, non-core functions could be outsourced.

Dizzy

Aash Patel, a senior consultant specialising in financial services at consultancy Winchester White, comments: "There is a lot of spin around outsourcing. A broker may be told, for example, it could save 20% off the bottom line. What it might not realise is that somebody will need to manage the relationship with the outsourcing company and that can be a big factor. You can't just let things run without being in contact or making checks. You need to know if (the consultant) is compliant and if it is doing things right."

Brokers should also have a formal tendering process. Patel adds: "You need a company to provide services that are going to be the right fit with your own. It sounds obvious but think hard about if you like the people; you may be working with them for several years so trust your instincts."

Although there are several companies that will take over personal lines business for brokers, Patel says that losing contact with clients, even if they are bringing in little or no revenue, must be thought through extremely carefully.

Meanwhile, Tim Rankin, managing director at WNS Assistance - a specialist claims company - agrees that brokers should deliberate hard before making any decisions. He says: "Brokers need to analyse which parts of the business are their crown jewels. Once they identify that, there may be areas they can outsource. Then, they should compile a wishlist and look to match the provider to that. There is also much to be said for talking to other brokers in the market about who they recommend."

Some brokers may have relationships with independent consultants or seek to bring one in to conduct an outsourcing feasibility study. However, Rankin warns: "Too many consultants have relationships with preferred suppliers and so I would question their independence. I think brokers are more than capable of making the decision themselves, provided they research the market and work out what the potential rewards would be."

Outsourcing personal lines is nothing new and it seems to go in and out of fashion but all the suppliers say that they are seeing renewed interest as a result of the state of the economy.

Priority

Supplier firms argue it could well be that a valuable member of staff is spending all or most of their working day managing fiddly personal lines business such as quotes, telephone and internet queries, mid-term adjustments and renewals, as well as claims. If the broker has more valuable commercial lines work, it could be that this employee should be transferred across.

One of the most established providers is Equity Insurance and its broker development manager Steve Young says that brokers are more interested than ever in ways to reduce their overheads. He comments: "A lot are thinking about it and are having a fresh look at their options. There is also more flexibility than ever before."

He believes there to be too many preconceived ideas around outsourcing. "I personally don't like the word. It suggests dumping your clients onto someone else. However, it could be providing them with better service and cover from specialists - and you still own that client. We are supplying expert policy administration services and this can fit well into many commercial-focused brokers' business plans."

Once again, Young emphasises that the broker should think long and hard before making a decision. "They should ask some hard questions and look at the advantages and disadvantages for their clients. It should go beyond just how long it takes to answer the phone; it should be about the retention track record and they should be prepared to give the names of other brokers as references. They should ask how the transfer will take place and how the outsourcing company will contact the customers."

Flexible

Young describes Equity's own outsourcing contract: "We don't tie our brokers in. Our agreement is open-ended, so if they think they have made a mistake then they can walk away. It is also fine if they want to hang onto their VIP motor clients and continue to service these themselves."

Young explains further that outsourcing will work only if the broker really knows its customers - and which of them are right to outsource. "It is possible that a broker will underestimate the amount of client loyalty they have. If a customer wants local service or face-to-face contact and hates dealing with call centres then they could cancel and simply go to another broker in town. Brokers know their clients. On the other hand, they may well appreciate being able to call a contact centre that is open seven days a week."

Clearly, brokers that want to outsource personal lines need to talk to providers and compare the deals on an individual basis; this will include whether or not they are tied in, the commission earned and service-level agreements.

In broad terms, there are going to be similarities, namely that while the broker may retain ownership, the outsourcing company will take regulatory responsibility. However, any new arrangement must be communicated to the Financial Services Authority, which provides guidance.

Geoff Carter, managing director at outsourcing company Fortis Insurance Solutions (formerly Outright), says that brokers have clear choices when it comes to personal lines. "They can sell their books, or it can be white-labeled, although there needs to be sufficient volume. This would mean calls are transferred to us and the service would be branded in the broker's name. In addition, we can act as a wholesaler and provide the broker with our technology, which is linked to our back office."

Carter adds that one critical factor for brokers when outsourcing is - unsurprisingly - the money: "They should be making savings from not having employees working on a non-core business area. In addition, they should be earning commission and a key question to ask is whether or not they also earn from the add-ons. Brokers tend to make more from these rather than the main premium and they include legal expenses, breakdown cover and premium finance. So, when agreeing terms, find out: are you taking a share of the total profit?"

Mutuality

Capita Insurance Services is one of the largest specialists in the outsourcing sector and its subsidiary, BDML, is one of the largest personal lines intermediaries in the UK. Managing director Mark Townsend comments: "Outsourcing can create significant cost savings but it is vital that both parties sign up to an agreed, objective set of performance indicators to ensure that the parties' expectations are consistent. All outsourcing arrangements will vary but a double-digit percentage saving remains realistic for those considering outsourcing elements of the business."

Townsend agrees that brokers should ask for references from a range of existing customers and, if possible, take the time to experience the quality of service offered. He adds "They should also establish what experience the provider has had in regulated environments, ascertain the financial stability and viability of the partner organisation and make sure the chemistry and personalities work, as effective outsourcing requires close teamwork."

He highlights that, as well as benefits for the business, outsourcing to a specialist organisation may also create development opportunities for employees to transfer to the new provider. This leads to legal issues under Transfer of Undertakings legislation, which exists to ensure that employees moving from one business to another are not short-changed, so negating the requirement for legal advice.

Even with the most innocuous outsourcing contract - for instance one in which a broker dips its toes in the water - sound legal advice is almost certainly going to be well worth the outlay, in particular on the terms in the contract and in being prepared for potential problems.

While personal lines may be one of the most obvious areas that a broker would want to outsource, Dave Chapman, UK sales manager at software house SSP, remarks that outsourcing IT is also popular through services such as the application service provider and the managed service provider.

In-house

ASP refers to the main broker software application being made available as a hosted service. Chapman states the disadvantage with this as brokers still being stuck with servers in their offices and having to manage third-party software, such as that from Microsoft. There is also no individual configuration. Chapman says that the MSP model offers more flexibility and that Microsoft products such as Word, Excel and e-mail are all hosted. "It is not uncommon for a broker to have a bill for around £30,000 for a basic IT upgrade. Going for a managed solution will be much better value, as well as taking away hassle."

He adds that outsourcing IT is similar to other areas, in that it frees up time: "Many brokers will have one person that is not primarily responsible for technology who could typically be spending around a third of their time sorting out problems. If IT is taken away from them, they can be directed towards more productive tasks. If they are paying an IT manager in-house then you are looking perhaps at a salary of around £30,000 to £40,000. Again, could that be spent better elsewhere?"

Chapman remarks that brokers should ask whether or not they would have a discrete server allocated to them that can be customised. He argues: "Brokers move to a single-user fee; they know what they are going to be paying and all they need is a web connection. If they wanted, they can work abroad from a holiday home knowing the IT is taken care of, including areas such as disaster recovery and anti-virus software."

Chapman says research suggests that a broker could make considerable savings - as much as 55% - on their costs both in terms of staff time and IT.

A further area that could be considered for outsourcing is payroll and other human resources functions such as pensions and employee benefits. While this may be appropriate only for larger brokers, if the right partner is found then it could mean the broker needs only a limited HR capability in-house.

Careful assessment

David O'Connor, marketing and commercial services director at business services organisation Ceridian, says that brokers should review their non-core functions as carefully as those that are central to their businesses: "They need to look at whether or not their existing systems are fit for purpose and that there are safeguards for data recovery. It could be that some firms are overstaffed. It all depends on whether or not they feel it is worth paying for essential upgrades or having another company do the work."

O'Connor points out that one of the benefits of using an outsourcer is that it has made major investment in IT and infrastructure: "You must be clear on what you want to achieve and you will also need skills in-house to manage the relationship; this means that expecting someone with limited experience to do this is not going to work. My other piece of advice would be to thoroughly check credentials and the provider's ability to deliver. As with so many other things, the cheapest may not be the best long term."

Outwardly, it may seem that outsourcing means walking away from a part of your business; this is not the case because you still retain a level of responsibility. This means setting up controls, conducting regular reviews and being prepared to call time on the deal if it does not work out. Consider the options carefully and do not rush into any partnerships without proper contracts in place.

The key to successful outsourcing: service-level agreements

A service-level agreement is the main contract with the outsourcing company that defines the service it must provide and the level of service to be delivered. It sets out responsibilities and priorities also.

Service-level agreements themselves are contractual obligations and are often built into a contract in the form of one or more clauses, or as an entire section. They can be used in any supplier contract where a business' ability to meet its customer requirements is dependent on the supplier. They are complex documents that should be well defined.

It is important that the broker is involved in drawing up the agreement together with the outsourcing company. Typical SLAs set out:

- The service being provided.

- The standards of service.

- The timetable for delivery.

- Respective responsibilities.

- Provisions for legal and regulatory compliance.

- Mechanisms for monitoring and reporting of service.

- Payment terms.

- How disputes will be resolved.

- Confidentiality and non-disclosure provisions.

- Termination conditions.

Legal eagles tackle outsourcing

To ensure that you are both protected and have a get-out clause, having a lawyer check your outsourcing contract could prove invaluable. Darren Dale, partner at ELS International Lawyers, says: "Even if you have been recommended an outsourcing company or already know of it, I would urge considering a formal tendering process and, in this climate, there is more room for negotiation on what is being offered and to obtain more competitive terms."

Dale says that it must be clear from the outset which party is going to be responsible for managing the relationship: "You need to have a mechanism to deal with matters if the company does not perform. The business that takes on your work will be using your data and this opens up all kinds of risks: you cannot know how the outsourcing company is going to be training its staff and if any mis-selling ever takes place. You also know that, if there is a problem, the outsourcing company will want to protect the business and you may not get the full story."

If a provider does not meet its service-level agreements, the broker should be able to terminate the contract straightaway.

Dale argues that there are potentially damaging reputational issues: "Someone may send a letter of complaint. Then they may start talking about their experiences. It may turn out that others are dissatisfied too. Before you know it, one of them has started a blog or a website. You can risk losing control of the situation."

Dale adds: "Don't just accept things, even if they appear to be going well. I recommend using someone independent to verify that your key performance criteria are being met."

Victor Fornasier, partner at Lovells, comments: "It is common that brokers might want a white-label arrangement and the FSA is aware of problems here. You need to look at what is compliant in terms of disclosure given to clients and in trading names. The client must be aware of who is advising them. Any customer should also know who they can pursue if they want to complain."

While it is possible to lend a name - for example, banks and retailers often use insurers to white label their insurance products - this opens you up to reputational damage. Fornasier adds: "The key is to build in adequate controls. Too often, we find that a company will look at the contract they agreed to only when things go wrong. Being robust at the very start is the way to go."

Alexis Roberts, partner at Pinsent Masons, agrees that in the worst-case scenario, a broker could be struck off the FSA's register: "Whatever the situation, where it comes to enforcement, the FSA is increasingly going after individuals."

Roberts says that there should be careful checks of an outsourcing company's regulatory controls, including the way that calls are monitored. He concludes: "In this uncertain economy, brokers need to ensure that the extra risks this raises can be managed, while it may not be something they want to focus on, brokers should also think about what would happen if their outsourcing company went bust and ensure they can retrieve their data."