If you are thinking of outsourcing some of your firm’s middle office functions or you have already, chances are you are leaving a substantial amount of savings on the table.
What is your baseline for saving and costs? Is it the current cost of providing these services versus the cost that the service provider is charging? Or should it be the current cost of the providing these services versus what the service provider should be charging you? In many situations there is a large difference.
Many firms are happy that they are saving money by outsourcing these functions, but to compare your current costs against the service provider’s costs is incorrect. There are different labor pools with widely varying labor rates and vastly different benefit packages. As well, the headcount should not be the same. In addition, the skill sets you are looking for from this Center of Excellence should exceed what you are currently receiving internally. The way to optimize your savings when outsourcing any function is to compare your costs to the benchmarked costs and performance standards of these outsourced functions, not the costs that the service provider proposes. In most situations, this could result in additional savings of 20%. As with any outsourced function, detailed performance standards are critical – not compared to what is currently being provided, but what should be provided.
Should you consider managing an operation like this yourself? Some firms do and they seem to do a good job, while other firms struggle and are getting out of the “outsourcing” business (or going out of business) entirely. Unless you are willing to pay your people competitively, are able to attract talent, manage the center proactively, and stay on top of the latest technology, it is easier to let the professionals do it. Also, they will manage it like a business which is how it should be run.
As with any contract, the best way to optimize pricing and terms and to partner with the correct service provider is to create a competitive situation. This is a huge commitment on behalf of the firm, and a competitive request for proposal process is the best way to select the right partner. Even after the contract is in place and is up for renewal, an open or closed competitive process will provide additional value.
Want to learn more?
Join Stephen Cole, Director of Client Technology & Strategy at 12:00 EST on February 28th for the webinar – “The Do’s and Don’ts of Middle Office Outsourcing.”
This educational webinar focuses on the do’s and don’ts of structuring a middle office outsourcing contract including key contract terms, terms to avoid, structuring performance standards and reporting for you to manage the operation effectively—and ultimately providing a framework so your firm can know it is getting a good deal.
Hope you can join us!