Focus: Outsourcing for profit

As the economy starts to recover, UK brokers are checking themselves over for recessionary damage. Reduced headcounts, tighter margins and tougher business conditions mean that many are looking at their business strategies, with outsourcing regarded as an increasingly popular option.

This can be seen in figures from the National Outsourcing Association. In its quarterly Outsourcing Confidence Index, which was released in April, it found that over half of the UK's outsourcing end users were more confident about using outsourcing to support their businesses' objectives this year. The survey also found that 60% of respondents were looking to transfer services externally this year that they had not previously.

Further, the sector most positive about outsourcing was financial services, in which 71% of respondents said that they were more confident about this approach than last year.

This renewed confidence is something that's been seen by many of the outsourcing companies. Kevin Child, a divisional director at information technology house SSP, says that he has seen a big upturn in interest in the last few months. "A lot of companies are revisiting their technology, with many considering a much more radical approach to their requirements," he says. "Businesses may be leaner now and outsourcing enables them to concentrate on being a broker."

Claims handling and accident management specialist WNS Assistance has also seen a renewed interest from brokers, claiming to trace this trend back over the past year. "Brokers used to turn to outsourcing to generate as much risk-free income as possible. This thinking has matured now and they are predominately focusing on the experience on offer to drive customer satisfaction and retention," explains Tim Rankin, managing director at WNS Assistance.

On top of this, Rankin says that brokers are realising they need to build stronger partnerships with insurers to help preserve business: "It is the end of the gravy train as far as motor insurance goes. Now, to get the best rates, brokers must offer insurers a better deal and help to protect their costs. Outsourcing the claims process can help to achieve this because insurers know that the third party will look to indemnify its costs too."

Reasons to consider
As well as cost pressures, another incentive to look outside your business comes from the regulatory environment. The Financial Services Authority has signalled its concerns regarding client money accounting, sending letters to brokers warning about properly segregating client money.

Philip Grant, chairman at consultancy Ambant, says: "The FSA is going to be more intrusive around areas such as client write-backs. It's looking for proper controls and risk mitigation but, when this is in legacy business, it isn't necessarily a high enough priority to put the right controls in place. Outsourcing can ensure compliance while allowing the broker to focus on the more pressing areas of business."

One area that can seriously eat into the revenue generated by a broker business is technology and, because of this, many choose to leave the responsibility for maintaining and troubleshooting with another party. For instance, SSP looks after the technology requirements of 5,000 users in close to 400 broker firms, ranging in size from sole traders through to a group of around 800. "We can provide everything they need through our managed service, from the broker software through to the standard office packages such as Word and Excel. All they need is an internet connection," says Child.

While taking this option might make a significant difference to a firm, Child says that the area growing most dramatically is online sales: "We've seen 60% growth in this area with requests from brokers to build web products covering motor and household through to hotels and holiday homes. We can have a motor product online in 14 days."

Child believes that this growth has been driven by a wider acceptance of the internet as a distribution channel: "Consumers have more confidence in buying online now but brokers also recognise that it's an important distribution channel. As everything is taken care of from the initial quote through to document delivery, employees can focus on other areas of the business."

As mentioned, another key area is the claims process. Rankin says that, although some brokers are keen to keep internal as much of this as possible, three areas are predominantly outsourced. These are first response, which is usually white labelled as a broker service; credit services; and accidental damage repair management. "Accidental damage repair management is a new-ish area for brokers but it's an important one. It means brokers can offer their customers a one-stop shop, sorting out all their needs with just one call," says Rankin.

New movement
Perhaps as a result of the shift towards outsourcing in the motor claims arena, a wide range of organisations are being invited to tender for broker contracts. These include specialist claims management companies, car hire organisations and repair networks. Rankin adds: "Some insurers are resisting the move because they don't want the broker to have control over the claims management side but it is really beneficial to both parties."

Another outsourced service that is seeing growth is legacy portfolio management, in part because of the FSA's focus on this area. This is one of the areas in which Ambant specialises, reconciling legacy claims and paperwork so that brokers can concentrate on live business. Grant says: "It could be business that no longer earns the broker an income but, from a compliance perspective, it's vital that some time is dedicated to it otherwise they risk damaging their reputations."

His company can take on legacy portfolios, scan documents so that everything is held electronically and then ensure all is in order from a compliance angle. Typically, the service will be a one-off exercise to reconcile existing paperwork, followed by a periodic review to ensure everything is still in order. "This is a classic area of outsourcing for small to medium-size brokers that want to separate live and legacy business administration," Grant adds.

Training has also become a commonly outsourced service, with brokers using a variety of different models to satisfy their company's training requirements. For larger brokers, it can be more appropriate to outsource the entire function to a training company that then places one of its own employees, an implant, within the organisation to manage and arrange employees' training requirements.

A variation of this can work for medium-size companies, with the implant coming into the organisation perhaps once a week or once a month depending on demand.
Ian Jerrum, managing director at training company Searchlight, says: "Companies can also outsource part of their training cycles. As an example, if a broker is looking at moving into another market, it might want someone to provide a training requirements analysis to identify the skills gap and training needs. The broker can then source the training from other providers or do it internally."

Consultancy
Another option for smaller organisations, or where it is not viable to fund a full-time member of staff, is to outsource a training resource; someone who comes into the organisation once a week or so to liaise with human resources and line managers and provide advice on what training is available to suit the company's needs.

Jerrum says that he has noticed several market trends here: "In part, it depends what the FSA is focusing on. It hasn't pushed training in itself but if it's looking at a topic such as treating customers fairly then we'll see an increase in demand for related training."

It is not always reactive though. "In the last 12 months we've had many more enquiries about management training for first-line supervisors as well as higher-level managers," says Jerrum. "This could be a reaction to coming out of the recession and needing to increase employees' skills but it's often something as simple as people talking and creating interest."

As we have come out of the recession, there's also been a shift away from the e-learning options, which peaked in popularity in 2006-07, to more traditional face-to-face training. This may be a cost-saving strategy as Jerrum explains: "E-learning looks cheap and ticks all the FSA boxes but, if an organisation has 100 employees at £100 each for an annual licence for its e-learning programme, this can attract the attention of a finance director keen to cut costs. With its more variable costs, face to face has become more popular again."

Keen to squeeze as much out of their businesses as possible, brokers are also looking outside of the core insurance services for outsourcing opportunities. Just about anything can be outsourced, from your IT and HR functions through to your travel arrangements and marketing.

IT is a good example of this. For smaller organisations, it might make sense to have an outsourced support service to pick up the occasional IT query rather than employ someone; a larger organisation might have sufficient work to make a full-time employee more cost-effective.

Externalising your IT requirements also sidesteps the cost of investing in hardware, which can be particularly important given the speed and regularity with which systems can become outmoded. As an example, the latest big thing in the IT arena is cloud computing, a concept for which servers outside the organisation are used, meaning that the company's IT infrastructure then operates something like a private internet. "This approach allows you to share your infrastructure across your own organisation as well as with your customers and other organisations," says Kevin Rayner, head of client services for outsourcing at Unisys, which launched a secure cloud offering in August 2009.

Nationwide Building Society has worked with Unisys to replace 500 internal servers with a virtual solution. This, it estimates, will save the company more than £8m over the course of the programme in reduced operational and energy costs.

Although few brokers can replicate the scale of Nationwide, as with any technology this will filter down to smaller organisations. Rayner comments: "At the moment it's the larger companies that are moving to this technology but everyone's talking about it."

Human resources
Another area that is not directly involved in the business of broking is HR, for which a range of functions can be outsourced. "It's a broad church," says David O'Connor, marketing and commercial services director at Ceridian, "but you can outsource anything from your payroll and HR administration through to recruitment, employment law and employee benefits."

O'Connor says that, by outsourcing HR functions, you not only free yourself to focus on the profitable areas of your business but you benefit from best practice. Smaller companies also tap into the knowledge of the big players.

As an example he points to salary sacrifice for pensions. This is growing in popularity as employees and employers become aware of the possible savings. O'Connor says: "Employees can save tax and National Insurance while the employer saves on their NI contribution. To achieve this, your salary sacrifice arrangement has to be compliant but, rather than become an expert yourself, it makes sense to get someone to do this for you."

Another trend in the HR outsourcing arena is for self-service delivery. This builds on the flexible benefit platforms that have grown in popularity over the last decade and allows employees to carry out other HR-related tasks such as booking holiday, sourcing a payslip and recording absences.

Currently, this type of service sits best with large organisations where, by bundling in other areas such as voluntary benefits and employee assistance programmes, O'Connor estimates that employees will realise a net pay rise of between £500 and £700. As the technology matures, it is anticipated that it will become suitable for smaller companies in much the same way that flexible benefits platforms became more widely available.

The state of the economy is also affecting HR outsourcing trends. While business is picking up after the recession, O'Connor has noted that more companies are taking standardised HR offerings rather than customising them. He highlights: "In the current environment, more companies are willing to go for standard application because this enables them to realise the benefits quicker."

It is also possible to outsource your expenses, which can further help to drive down costs. David Vine, chief executive officer at GlobalExpense, explains: "All expense claims are processed by us in accordance with the company's policy. Anything abnormal will be queried."

Proven case
Given the furore over MPs' expenses and the ensuing focus on this area across all sectors, there is a demonstrable need to ensure that expenses claims are valid. As an example, among the expenses claims that GlobalExpense vetoed in 2009 for failing to comply with company policy were a claim for more than £8,000 for mobile phones classified as building works; a claim in excess of £20,000 for a stay at a luxury resort hotel; and a claim for more than £11,000 for first-class air fares. Vine comments: "There's a huge reputational risk for companies if they're seen to be paying excessive expense claims and this is heightened for those regulated by the FSA."

Once a system is in place, interrogating data can then produce further savings. For example, by focusing on travel costs, instances can be identified in which employees could have saved by booking train tickets in advance or where it might be more cost effective to hire a car rather than travel by public transport.

In addition to helping to weed out unacceptable claims, using an external offering for processing expenses can also ensure greater levels of compliance from a VAT and income tax perspective. "It also wins favour with employees," adds Vine. "If a claim is put in and approved today it will be in the employee's bank account tomorrow. This is a big carrot for companies."

Systems can be designed for any size of company and can be running in a matter of weeks. Fees are generally based around an initial set-up cost followed by a user fee and receipt handling fee whenever an expenses claim is processed.

There are myriad attractive outsourcing options to add expertise and to save time and money. The only problem could be finding the time to weigh them all up.

Case study - Bluefin
When the Bluefin brand was born, every business process and policy had to be assessed to determine how it should be harmonised across the company. Among these processes was the outsourcing of motor claims, as Dick Tucker, claims director at Bluefin, explains: "Two of the five broker businesses that make up Bluefin were already outsourcing their motor claims and we felt that it made business sense for this approach to be adopted across the company. As brokers, we add very little to the client experience by having claims handling in-house and we knew there were companies out there that did it all the time that could enhance the client experience."

Work to find an outsourcing partner started in late February 2009, with Tucker pulling together a team from across the business and employing a procurement person with knowledge of the motor market. "The team was made up of a variety of people, some in favour of outsourcing accident management, others that doubted its viability. This gave us varied views on the companies we were looking at but also meant we got good buy-in from our employees," he says.

They put together a questionnaire, containing 84 questions, which was sent electronically to 27 accident management companies. Twenty-four replies were received. "We'd decided what was important and, based on this, we marked the responses out of 100, giving us a top seven that we then visited," says Tucker, adding that by collecting the questionnaires electronically it was much easier to compare responses.

A week was set aside for company visits and Tucker and his team went on the road. "I would definitely recommend visiting all the potential candidates in a short space of time," he says. "We really got into the zone and were able to eliminate a couple of companies almost instantly because the fit wasn't right. We marked them all immediately after visiting and came up with a final shortlist of two companies."

These finalists were visited again, this time with Tucker taking several of Bluefin's managing directors with him. "We were able to get a really in-depth look at how the two companies operated and how we could work together. As a result of this we decided unanimously to go with WNS Assistance," he says.

After three months of agreeing the contract and a couple more months of implementation, the claims management service was ready to go live in December 2009. Initially, personal lines business was rolled out office by office but Tucker intends to extend the service to commercial fleet at some point. Tucker comments: "We're outsourcing our reputation, so we had to make sure we got it right."

Outsourcing expense claims
Drilling down into expense claim data held by a specialist expense claims management company can highlight any anomalies within your own organisation's claims. Here are some averages from GlobalExpense's 2010 Employee Expenses Benchmark Report, based on more than 7.7 million individual expenses claimed over the last three years.
• Average number of claims in 2009 per employee - 30
• Average claim value - £55.50
• Percentage of claims that are out of policy approved by managers - 11%

In the financial services sector, the average value of approved individual claims was:
• Business travel - £55.94
• Entertaining - £124.11
• Subsistence - £22.91
• Accommodation - £219.49

Source: PB – June 2010