This article was originally published in the July edition of the SuperFunds magazine.
Outsourcing administration and IT in the superannuation industry has become increasingly popular in recent years. Understanding the changing wealth administration landscape, as well as the different types of outsourcing available, will help you decide whether this practice is right for your fund. ROLAND SLEE reports.
The story so far
Outsourcing in the financial services industry – and in superannuation in particular – is certainly not a new concept. Funds have long outsourced non-core activities such as marketing, auditing and legal services, as well as core activities including member administration, investment management and technology platforms. The practices of third-party administration and IT outsourcing are well established in the industry.
There are numerous reasons to outsource – reducing cost, improving efficiency, accessing expertise not readily available in-house, achieving economies of scale, enhancing customer service, reducing risk, increasing agility and focusing on core capabilities – the list goes on.
The leading drivers of outsourcing globally were ranked in Celent’s 2012 research report entitled Wealth Management Outsourcing – A Global Market Perspective. The report identified cost reductions, efficiency improvements and the ability to quickly scale up or down as the primary motivators of outsourcing decisions.
In recent years, technological, social and regulatory revolutions have placed unprecedented pressure on superannuation funds. Highly-sophisticated and continuously evolving technology, ever-increasing expectations of customers who have been empowered by social networking and the Internet, and a raft of legislative changes have stretched the capabilities of many organisations to the limit. In this highly competitive business environment, good is no longer good enough; excellence is now the minimum required standard in everything. In practice this means it is no longer possible for superannuation funds to excel in all the areas they must master without some external assistance.
In this context, decisions on outsourcing are less about lowering costs or improving efficiency, and more about accelerating innovation and maximising advantage. In today’s ultra-competitive, fast-changing business environment, successful businesses must be world-class from top to tail. That makes outsourcing an essential element of strategy for every successful business.
As funds are looking for better ways to respond to powerful market pressures, tap into exciting business opportunities and deliver outstanding customer experiences, outsourcing has become a vital tool in their strategy kitbag.
Funds need to identify their unique and enduring strengths – those things that set them apart from the crowd in ways that are defendable and sustainable – and focus on refining and leveraging these strengths to build a moat between themselves and competitors. Historically, many funds have found these defining strengths in the areas of product, pricing, distribution and membership, but today they are more likely to be found in customer knowledge or customer experience, areas that are deeply dependent on enabling technology.
Pursuing excellence and sustainable differentiation requires funds to work with business partners that offer best-of-breed, state-of-the-art solutions. Leading funds will seamlessly combine these best-of-breed solutions from partners with their own internal strengths to create uncompromising, distinctive product and service offerings for customers. In financial services, this recipe for constructing world-class enterprises that can punch above their weight – by maximising internal strengths, while also powerfully leveraging the strengths of others – is the key to achieving sustainable competitive advantage.
Methods of outsourcing
Depending upon a fund’s individual needs, outsourcing of core administration or platform technology can be employed to great effect and in a number of ways. These include the third party administration model (TPA), the managed service arrangement model (MSA) or a combination of the two.
Third Party Administration
Some superannuation funds opt to outsource their member administration and registry systems needs to a third party administrator (TPA). Depending on the functions being outsourced, this model may also be known as Business Process Outsourcing (BPO) or Information Technology Outsourcing (ITO). BPO allows funds to focus on core strengths in product, investment and member engagement, while also increasing service levels, at least in theory, by passing much of the administrative burden to a specialist provider. With ITO, partnerships are leveraged to outsource administration system modernisation and ongoing IT management post-implementation.
Steady growth is forecast for the worldwide BPO market for 2014 and beyond. According to the May 2011 International Data Corporation (IDC) report Worldwide and US Business Process Outsourcing Services 2001-2015, the global BPO market will be worth US$191 billion by 2015.
An example of the TPA model in the Australian marketplace is Perpetual Investments’ engagement of Tech Mahindra, an Indian multinational IT provider, as a BPO/ITO partner to provide core registry services. The arrangement includes the migration of Perpetual’s retail superannuation and registry business onto a next-generation platform. Tech Mahindra will provide administration services to Perpetual and manage the ongoing relationship with the registry software provider.
This kind of arrangement can be referred to as ‘layers of excellence’, because specific functions are being outsourced to a hierarchy of specialists, each focusing on their sustaining core differentiators, in order to deliver the best possible outcome for the ultimate customer. In this case, a superannuation fund has turned to a BPO/ITO specialist to provide superannuation administration and IT outsourcing services, the BPO partner has turned to a registry software specialist to provide a next-generation wealth management platform and that software provider has turned to other specialists for enabling technology for cloud computing, big data and mobility.
The TPA outsourcing model is useful to superannuation funds on a number of fronts. TPA partnerships provide vital elasticity, allowing funds to keep their capital costs down and engage additional expertise as needed. Further, the engagement of an expert IT partner can significantly mitigate the cost and risk associated with migrating from legacy systems to next-generation platforms, while also ensuring IT capability is maximised throughout the change period.
TPA partnerships also assist funds seeking to deliver best-in-class functionality to keep pace with rapidly changing consumer trends such as smartphone and tablet apps. Functionality for member directed investments, tools and calculators for automated advice and other value-adding services can be pre-integrated by technology partners providing platform solutions to TPAs and funds.
Managed Service Arrangements
The optimisation of core competencies can be taken a step further via managed service arrangements. Under the ‘software as a managed service’ model, day-to-day management of registry software and supporting IT infrastructure is outsourced to a software partner. This model of outsourcing provides funds with the flexibility to retain administration in-house, while leveraging a fully outsourced IT platform. Some perceive this to be a point of significant advantage.
There are considerable benefits to opting for a managed service arrangement. In an industry driven by consumer trends towards greater control and self-management, enhanced mobility, broader product offerings and rapid, interactive responsiveness, the ability to quickly innovate is essential to remaining competitive.
When IT functionality is outsourced to an expert partner, the latest technology can be leveraged to maximum effect. The IT partner can more effectively manage the increasingly complex nature of systems, while also keeping pace with technological, social and regulatory trends to accelerate innovation. Funds benefit from regular, contracted upgrades that provide them with leading edge, client centric functionality, as well as continuous regulatory compliance. Where the software is a commercial ‘off-the-shelf’ solution, the cost of enhancements can be kept to a minimum as they are shared among all users of the platform.
If the business functionality is being delivered through an Agile software development method, the rewards can be even greater. Funds benefit from high-quality software that is continuously evolving to meet changing business needs. On larger change programs, evidence of progress can be seen with each software iteration, greatly de-risking strategic systems initiatives.
In the UK, the managed services model has been common in the financial services industry for many years. In Asia Pacific, the model is now steadily gaining ground. For example, New Zealand life insurer Partners Life has outsourced its core registry system under a managed service agreement. Day-to-day management of the company’s core policy administration platform is undertaken by a software partner on a fully-hosted basis with tuning, configuration and upgrades included in the service.
Partners Life Managing Director, Naomi Ballantyne, says the potential for a strong partnership is key to the technology selection process, adding that Partners Life is an expert in life insurance, not technology. It outsources its needs to companies with deep technological expertise and chooses technology partners on the basis that they will work with the business as a team.
Combined TPA/managed services
Superannuation funds can also combine the use of TPAs with managed service arrangements. A combined model can be seen as outsourcing at its best because each party is contracted to focus on its area of specific expertise, allowing the whole to become much more than the sum of its parts. It is rare for an outsourcer focused on business process administration to also excel in the development and maintenance of world-class registry software platforms.
A number of key outsourcing trends have emerged in response to the technological, social and regulatory revolutions that are occurring in wealth management. They include cloud-based infrastructure, business process outsourcing, business consolidation and value-added services.
Many funds are struggling to meet the challenge of managing increasingly diverse and complex technology needs without the assistance of specialist IT providers. Demand for cloud-based infrastructure services is gathering momentum as firms seek to leverage their IT capability to maximum effect. Currently, infrastructure-as-a-service is one of the most talked about offerings in the market.
BPO is increasingly popular as funds look to hand over the day-to-day management of core and non-core business activities to third party providers. Functions commonly outsourced include fund administration, finance, accounting, call centres and product administration.
Another key outsourcing trend is data consolidation. Many businesses are recognising that they possess vast quantities of business data but lack the expertise to integrate, manage, interpret and operationalise this precious resource.
In addition, funds are turning more and more to outsourcing initiatives to deliver added value via the new frontiers of big data, analytics and mobility. These tools are vital to customer experience and hence competitive advantage.
|Key outsourcing trends|
Source: Business Briefing Series – 20 issues on outsourcing and offshoring, p.7, Ernst and Young and the Institute of Charter of Accountants in Australia, November 2011.
It is important to recognise that outsourcing will not deliver the desired benefits unless it is carefully managed. Successful outsourcing must be underpinned by effective contracts and service level agreements (SLAs) that clearly define the boundaries of the function being outsourced, roles and responsibilities, expected service levels and the implications of non-delivery. SLAs need to be smart, simple and clear – they must set realistic targets and focus on what is important to the client. Agreements should set service level objectives and good governance must be in place to ensure the terms of the agreement are fulfilled.
No organisation can outsource reputational risk, so it is vital to choose partners with a proven track record of delivery and genuine expertise. When seeking bold innovation, a multi-layered partnering approach – in which a strategic consultant brings governance and experience to a project that depends on less-proven technology – can enable the benefits of innovation, while also reducing risk.
Outsourcing is not for all
Of course, outsourcing of administration and information technology is not the Holy Grail for all funds.
For some, self-administration or internal IT management may be well suited to their business model. For example, some state-based funds may prefer self-administration because local knowledge and local presence is of particular value to their members.
Size also matters. Smaller funds may find that the modest scale and relative simplicity of their business does not warrant the overheads of establishing and managing outsourced arrangements. It should be noted that there are also examples of small organisations using outsourcing to great advantage.
Outsourcing overly complex, inefficient or out-dated administrative and IT environments to a BPO can be imprudent. Traditional outsourcing rarely solves these problems and may actually inhibit the modernisation and process changes needed to move ahead. Funds should consider whether it’s best to get their house in order before engaging a third party provider or whether a more modern outsourcing approach can actually help get their house in order. Some outsourcers now offer a “transition then transform” model that enables and accelerates core systems and business process change.
Funds must assess the relative benefits of outsourcing and should only proceed down this path if, and when, the organisation is ready.
Outsourcing at its best
In today’s highly competitive financial services environment, business success requires the delivery of world-class product and service offerings, driven by continuous, rapid, customer-centric innovation.
The true value of outsourcing lies in its ability to assist organisations to perform optimally across every aspect of their operation from top to tail. Funds should carefully determine their core competencies and seek to hone their unique strengths. For everything else, they should consider developing partnerships with specialist providers that can assist them in their quest to secure sustainable competitive advantage.
- If someone else could do it better, consider outsourcing.
- Avoid outsourcing the status quo – use it to ensure every aspect of your business is performing optimally.
- Don’t expect outsourcing to magically solve overly complex, inefficient and/or outdated systems. Instead consider enlisting specialist providers to simplify, standardise, modernise and automate your business.
- Build sustainable, win-win partnerships so that specialist providers become an extended part of your business team, not just external suppliers.
- Look for seamless integration – ensure your brand and service offering presents as a single customer experience from the outside and functions smoothly from end-to-end on the inside.
- Always remember that the ultimate responsibility for the success of your business lies with you.