The need for economies of scale and cost
efficiency has led many card issuers to outsource their processing
to third parties. Francesco Burelli and Anthony
, principal consultants at global strategy consultancy
Capco, look at the points organisations need to consider when
choosing to outsource.

Since the late 1990s, more and more card issuers have followed
the blazing trail to India for business process outsourcing (BPO).
With US processors now breaking into the European market, many
European card issuers are outsourcing their processing to them.

Outsourcing and offshoring are seen as the answer to the
challenges of cost reduction and increasing complexity, as well as
increasing levels of regulation such as the Single Euro Payments
Area, which is enforcing standardisation within Europe. But is
outsourcing the ‘magic bullet’?


The early adopters of offshoring and out-sourcing in the cards
arena included American
, Citigroup and HSBC, most with captive centres (see
Figure 1).
Late adopters in the UK included Barclaycard, which
has only recently started moving certain functions offshore to the
Barclays captive centre Intelenet.

The leading global BPO service provider in which Barclays held a
50 percent stake, was acquired by private equity firm The
Blackstone Group in June 2007.

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Results have been mixed even for the mega issuers. In 2004,
Capital One pulled out of India on a credit card telemarketing
venture with India’s full-spectrum outsourcer Wipro Spectramind,
citing quality of service as the key reason. Citibank was also in
the media in the same year when approximately $425,000 was
fraudulently transferred from US customers’ accounts. In March
2007, Lloyds TSB announced that it was closing its Indian call
centres, and making direct calls to UK branches possible.

Card issuers, offshored operations, systems selection

What is it worth?

What has been undeniably achieved with offshoring has been cost
reduction. The average reported savings tend to be in the 30 to 40
percent range, with some companies reporting a significant increase
in service levels and cost savings (see Figure 2). In our
experience, the benefits achieved can be further enhanced by
re-engineering the business process and offshoring simultaneously,
but the cost reduction gained through offshoring has not been
without its consequences.

In 2005, a report by research and advisory company Gartner
revealed that four out of five outsourcing deals would be
renegotiated within the lifetime of the contract, as short-term
cost cutting had come at the expense of flexibility and the ability
to cater for changing needs.

Often, the cost savings originating from offshoring have come at
the expense of customer satisfaction. For example, in the UK, a
number of banks have had customers migrating accounts due to
dissatisfaction with offshore call centres. The most common reason
stated is difficulty in understanding accents. Certain UK-based
companies are now taking advantage of having onshore call centres
and are making this known to prospective customers through
aggressive advertising.

Outsourcing and offshoring are considered to be the solution to
the quest for lower-cost operations, but for how long will this
approach will be sustainable? In India, the number one destination
for offshored processes, rising wage costs of between 12 and 14
percent in the major Indian outsourcing centres have caused
companies to seek either lower-cost cities in India such as
Calcutta (now known as Kolkata) or lower-cost countries. Some
projections show that India will no longer be a cost-effective
option within the next five years, although a more conservative
approach predicts 20 years, due to the large arbitrage gap between
India and most European countries.

Moreover, outsourced operations are starting to experience
similar challenges to onshore operations. The National Association
of Software and Services Companies, the trade association for the
Indian software industry, estimates that contract attrition is
currently in the 35 to 40 percent range in India, but industry
experts place it higher at 65 to 75 percent. In addition to this,
of the major outsourcing destinations such as India, the
Philippines and China, few have strong political stability and
those that have it typically do not have the infrastructure

In spite of all these concerns, for card issuers with margins
under pressure, one of the primary remaining options is to reduce
costs through outsourcing and wherever possible to offshore. The
question for most is not if they should outsource or offshore, but
rather what to outsource and offshore, and to whom.


Cost reduction benefit scale


Although the selection of functions to offshore should be driven
by the strategy and criteria set by an organisation, over the past
years common trends have started to emerge among global card

After the offshoring of simple processing such as application
data capture, most organisations, particularly those providing
customer services and outbound telesales, moved their call centre
operations offshore. Functions that generally continue to remain
in-house are those that set the rules for operational functions
such as risk strategies, collection strategies and pricing.

The organisations that have offshored have been forced to
enhance what had previously been seen as important capabilities and
functions but which were small in size, such as governance and
supplier management, in order to effectively manage their offshored
operations and ensure that service is commensurate with the
customer expectations.

Best practice phasing

Best practice in terms of the sequencing of offshored functions
is shown in Figure 3.  The model allows issuers to typically
start with low-complexity, well-defined and hence low-risk
functions that require little or no customer interaction, and as
they build confidence and capability in the offshored facilities,
to move higher up the value chain.

Assuming a company has decided to investigate offshoring, the
question arises as to what should be done to guarantee the expected
results. Learning from what has been done successfully before, the
broad steps are:

In-house versus outsource The first step is to
define what processes are seen as having a strategic advantage for
the company. These processes are the ones that the company will
want to retain the greatest flexibility and control over and hence
retain in-house. To ensure a full definition of what is seen as
strategic, an agreement for what defines strategic advantage in
terms of business processes should be made by the board as a whole
and not simply seen as the responsibility of one director.

Pick the process to meet the objectives of
Based upon the reason(s) for offshoring, the
criteria for making the process selection must be defined. These
criteria will allow an organisation to rank in terms of eligibility
those processes most suited. There are a number of typical criteria
for this selection, including, for example, the numbers of
full-time equivalent personnel per process (where the objective is
cost reduction), whether direct customer contact requires onshore
culture, language, complexity of the process, infrastructure,
system constraints, and so on.

Select offshore country destination This
selection will largely be driven by the criteria set in step two,
but additional criteria may include skills availability, average
cost of resources and expected inflation, and whether the country
has a mature market in the processes that are being sought.

Once the appropriate country has been selected, the next major
decision will be which model to follow. The choice of model will be
affected by the decision on whether to outsource the process or
keep it in-house. If in-house, the company has the choice to either
set up a wholly owned captive processing centre or to purchase a
controlling stake in a processing centre. The time-span
within  which the objectives must be achieved will often drive
this decision. The longest and most complex model to establish is
the setting-up of a new captive centre. For processes that have
been deemed eligible for outsourcing, a joint venture (JV) or the
selection of a third party (the quickest option) will be the
primary options.

If the model chosen is a purchase, JV or outsource, the next
step is to go through a partner selection process.

Systems or system vendors selection (if using an
outsourced offshore provider)
A further consideration in
evaluating onshore against offshore and outsource against in-house
is which systems to use to support the processes. If a company
wishes to retain greater flexibility and to be able to create
innovative products that cannot quickly be imitated by competitors,
then an in-house system or a licensed external system maintained
in-house would provide the best choice.

If, however, the product offering or business process is seen as
highly commoditised and flexibility of change is not seen as a
differentiator, then the preferred option would be to use an
external processor.

Another primary consideration will be the speed at which the
benefits are to be obtained. The quickest option will be to utilise
the systems that the company currently uses (external if licences
allow, or internal). The longest and most complex option, but the
one with potentially the highest financial benefit, would be to
utilise the same systems as the BPO provider, if applicable. This
will free the company of responsibility for any maintenance that is
required with the normal technical standards upgrades, as the
vendor will have to guarantee compliance.

Furthermore, if the contractual model is based upon the mutually
beneficial gain share arrangement, it will fall upon the partner to
constantly improve productivity and make the system changes or
enhancements required.


Offshoring model: Best practice phasing


For outsourcing or offshoring, a major consideration must be
what the desired outcome is. For example, cost reduction,
improvement of service level agreements (SLAs), providing scarce
skills, etc, each have very different implications for the
outsourcing decision.  Organisations should fully consider the
implications at the strategic level pre- and post-execution.

Finally, specific attention should be paid to the selection of a
partner and the set-up of governance and procedures for the
management of vendors and offshored operations.

Needless to say, the implications at the strategic, operational,
people management and core competitive positioning levels cannot be
underestimated, especially the risk of very costly mistakes.

Preference should be given to the gain share model, whereby both
the company and the offshore supplier share the benefits of a joint
operation. SLAs and key performance indicators based on mutual
success should be made part of the contractual relationship.