Offshoring? Time to Look at Operational Efficiency

By TMCnet Special Guest
Tony Tregurtha, Co-CEO, Founder & President, Enlighten Operational Excellence

With the slowness of the economic recovery, pressure to increase earnings has moved the focus of organizational leadership to driving down costs more aggressively. The recently published Conference Board CEO Challenge survey for 2013 found that the number one and two priorities for this year are human capital and operational excellence. Operational excellence is seen as a critical ingredient in driving down costs while improving quality and service.

In the operations areas of banks and insurance companies, the temptation to outsource and offshore many jobs has been hard to resist, with the promise of a “quick” labor-cost arbitrage savings. But is there a better way that can achieve as good or a better outcome? Can one avoid the downsides of offshoring, where one must deal with the tyranny of distance, communication challenges, cultural differences and more? Can operational excellence be applied right here onshore and in-house and achieve cost savings as good or better, while avoiding the less attractive aspects of offshoring?

In the area of back- and middle-office operations of insurance and banking organizations, new metrics and methods can produce remarkable sustainable shifts in performance. Until leadership has optimized operations, offshoring simply results in a transfer of those same inefficiencies to the overseas partner, while unnecessarily damaging the local economy and employee morale and loyalty.

Costs can be driven down 20-40 percent in less than a year by applying a new type of transformation program.

Metrics that Matter

Many executives are under the impression that the company’s back-office operations are already running efficiently and that opportunities for extracting significant savings have been largely exhausted. For the vast majority of these organizations, this belief is not based in solid metrics. There are still several measures executives can take to drastically cut costs in their onshore operations. In fact, most executives would be astonished- even appalled- to discover what is really going on in their operations and just how much inefficiency can still be removed with a business optimization system. The lack of daily objective metrics of productivity, efficiency and quality in the back and middle office has hidden the potential for significant improvement in all these measures of operational efficiency.

A national insurance company with 16,000 employees was looking to offshore a substantial part of their operation to benefit from the labor cost arbitrage. They received initial price quotes from an offshore partner and made preparations to commence offshoring.  However, at the time they introduced a new performance optimization system into their business which was routinely reducing their costs by 30 to 40 percent in 20 weeks.  From past outsourcing efforts the company knew that if they moved inefficient processes it leads to a bigger mess in the outsourced provider many thousands of miles away.   They therefore made a decision to clean-up onshore operations before outsourcing by looking within the company.

As part of an overall transformation the company introduced new daily metrics for all staff, with a focus on behavioral change in the front-line management and their teams. Through the embedding of a continuous Lean methodology (waste removal), operational efficiency improved radically and costs were reduced by 40 percent. Still expecting to offshore, executives then re-approached the intended overseas partner with the new productivity metrics. The partner could no longer match the internal costs – at the new cost the offshore project was no longer viable.  All jobs remained at home.

Most senior executives are not aware that their front-line managers largely work on the transactions personally and spend very little time actually filling the role of leader and manager. In fact, across financial institutions and large insurance companies, the typical front-line manager only spends approximately 5 percent of their day actually managing their teams; because they are too busy doing the work they should be managing. To illustrate this point:

A “day in the life of” a typical front-line manager will look something like this:

In contrast, a “day in the life of” an ideal front-line manager looks something like this:

In order to optimize your back-office operations, the responsibilities and focus of your team managers must radically change, with a much greater emphasis on:

• Identifying waste/lost-time and systematically eradicating it from the business
• Managing workloads (bottlenecks/duplicated effort/inefficiencies)
• Planning, then making a result happen rather than letting one occur
• Analyzing results then creating feedback loops as the basis learning
• Developing staff skills

For example, front-line managers should be regularly allocating work throughout the day and following up on its completion. That is, they should be setting reasonable expectations with their team and then following up to make sure that their team members are reaching those expectations. If those expectations are not being met, then the manager can immediately work towards identifying and removing the barriers. This is the behavior that drives results, productivity gains and ultimately - exceptional cost reduction.

The dominant approach that most executives and consulting firms bring to back-office optimization projects may miss some important opportunities for improvements. The reason for this is that most companies adopt a problem-solving approach to managing their operations. They focus on:

• Identifying problems and challenges
• Removing obstacles that stand in the way of progress 
• Closing the gap between current capability and “normal capability”. 

The problem-solving approach results in normal or expected performance, because that is precisely what these organizations are aiming to achieve.

In contrast, companies known for exceptional back-office performance supplement the problem-solving approach with an “abundance approach” (Cameron 2008). They focus on:

• Identifying extraordinary success
• Fulfilling the highest potential of organizations and individuals
• Closing the gaps between acceptable performance and exceptional performance.

The “abundance approach” does not substitute for the problem-solving approach but rather supplements it by focusing on truly exceptional back-office performance.  

For example, a benchmark should be calculated using ideal processing times, rather than standard or average processing times. Timings should be based on how long it takes a fully-trained, competent staff member to process a transaction. Benchmarking your desired processing times devoid of any non-value added and waste activity is the footing to systematically identify and remove these activities into the future. If you include lost time and non-value-add activities in your measurement metrics time standards, you will hide all the inefficiencies. This small change in your assumptions will have a significant impact on your bottom line.

Performance Focused Culture

Offshoring simply results in a transfer of the same inefficiencies to the overseas partner and adds distance, cultural and language barriers to the challenges of managing and improving performance. You can realize significant cost savings right here at home by embedding lean metrics and methods at the front lines of your operations. Keeping your back-office at home and managing it more effectively also engages your staff in a constant quest for optimal performance. Relations with staff and your community will be greatly improved by investing in their training for this process. The result is a shift to a performance-focused culture.

Tony is the Co-CEO, Founder & President, Enlighten Operational Excellence and has been single minded in his career focusing on how to create Operational Excellence. Whether it’s developing new concepts, testing new methods or challenging traditional practices, Tony has been pushing new frontiers.  He has had nearly 25 years experience in large business operations, internally as a COO in charge of operations, and externally as an adviser to management.  He has worked with clients in countries around the globe including US, UK, Australia, Singapore, New Zealand, Hong Kong, Malaysia, Indonesia, India, China and Middle East.A change management expert, Tony has extensive experience in cultural transformation and leadership/ management development to deliver a quantum-leap improvement in operational performance.