Allied Irish Bank Becomes First Financial Institution in Europe to Outsource Global Trade Processing End-to-End | Article

Irish moneyWe’ve all been in this position before. We use a software program for years. We’re comfortable with it and it still does the job. Then the vendor decides it won’t support the now obsolete program. The change forces you to look closely at the way you do business.

That’s what happened to Allied Irish Bank (AIB), an Irish banking and financial services organization with operations principally in Ireland, Britain, Poland, and the United States.

The result: AIB became the first financial institution in Europe to enter into a full-service outsourcing partnership to process its global trade finance transactions.

The history: In 2002 its software vendor informed AIB that it would no longer support the system AIB was using for its global trade document processing. “We were faced with a decision: how should we replace that system?” recalls Terry Danaher, Head of Trade Finance Services. In addition, the bank wanted to gain access to an Internet solution.

This was a major decision because global trade finance is an important business for AIB; it has a high market share in Ireland–up to 45 percent of trade import business in Ireland. As well as being a successful business in its own right, AIB’s global trade business is also an important part of AIB’s full-service offerings to its customers. “If we don’t provide trade finance, our customers will have to go to another bank. They might not take just that business but the entire customer relationship,” explains Danaher. That alone “makes trade finance valuable to us,” he says.

Buying a replacement system was the first option. AIB decided that was not the way to go since trade finance is a mature business without a huge growth potential. “Our margins here are continually compressed. So that makes it quite difficult to justify a large investment in a new system,” Danaher explains.

AIB looked at various options to replace the system, but they were all expensive. Then the bank considered outsourcing. Over the course of a year AIB looked at five banks that offered global trade services. “ABN AMRO was the only bank that could provide the complete end-to-end service AIB was looking for; the other banks were able to provide parts of the service only. So that eliminated them,” says Danaher.

But cost became an issue. “Outsourcing looked to be even more expensive than replacing the system. ABN AMRO had the superior offering, but we could not justify the cost,” he explains.

Offshoring Made Outsourcing Possible

Offshoring came to the rescue. While AIB continued to explore its options, ABN AMRO opened a processing center in Chennai, India. That led to a significant reduction in fees; “India made outsourcing economically viable for us,” Danaher says.

The initial investment AIB had to make to hook up to ABN AMRO’s global trade system was less than purchasing a new system. “We were able to compare their costs with the cost of doing it ourselves. They charge us by the transaction, so we would have ongoing savings in our operational costs. These savings swung it for us,” recalls Danaher.

Once AIB resolved the cost issue, it faced one more hurdle before signing an outsourcing contract: It was going to be ABN AMRO’s first European end-to-end trade outsourcing client. Fortunately, it would not be ABN AMRO’s first global trade outsourcing customer–that was KeyBank in Cleveland, Ohio. (Read the KeyBank story). Danaher and his team traveled to the United States and spent time with the head of the trade area at KeyBank. “We got a lot of comfort from the job they were doing. However, they were doing their processing in the United States and ours was going to take place in India, which was a new aspect,” he says.

AIB signed a five-year contract in 2003. AIB outsourced virtually every component of its global trade and finance business except sales–but included the front office, reports Terry Hubert, Director, Trade, Financial Institutions, Transaction Banking, ABN AMRO. AIB also private-labeled MaxTrad, ABN AMRO’s front-end Web-based platform as its global trade portal. The bank called its portal TradeAccess (http://www.fxcentre.com)

ABN AMRO handles all the back-office processing in Chennai, India, while ABN AMRO’s office in Dublin handles the front office.

Managing the Transition

One of the most critical aspects was transitioning to ABN AMRO’s system without negatively impacting AIB’s business customers. ABN AMRO sent experts from Dublin, London, and Chennai “to understand how they do their transactions,” says Hubert. “We had to identify the types of special requirements they needed.”

Then ABN AMRO developed business requirements for each specific process: letters of credit, check collections, import and export collections, standby letters of credit, and guarantees. “This helped us define the scope of the project and get our business model to align with theirs,” adds Hubert.

The partners decided the best way to do this was in phases, product by product, starting in February 2004. The staff at AIB managed the old business until the level of outstanding transactions became more manageable to migrate, which took three months. During that 90-day period, ABN AMRO managed the new business and AIB handled the old business.

The transition was further complicated by the fact that AIB’s software included a proprietary database that made it difficult to electronically migrate the information from its database to ABN AMRO’s. ABN AMRO was willing and able to migrate all the information manually.

After ABN AMRO went live with all AIB’s global trade products, the relationship faced another challenge: “They weren’t meeting their service levels and our customers were voicing their dissatisfaction,” reports Danaher.

There were a couple of causes. ABN AMRO had underestimated the level of personal touch that AIB customer services had afforded their clients. Also, there was a limited number of trade specialists available in Dublin. To solve the problem, ABN AMRO drafted senior resources from other offices; team members from The Netherlands, Dubai, Portugal, the United States, and the UK flew in to help their Dublin colleagues. “They resourced a team in reasonably quick time which quickly resolved the issues,” says Danaher.

“They accepted they were experiencing problems and then did something about it. They were eager to fix it,” says Danaher, giving him further reassurance that this would be a successful, lasting outsourcing relationship. He says no members of this SWAT team left until both parties were satisfied they had the right resources in place.

In hindsight, this potential storm cloud had a silver lining. During this time ABN AMRO reassessed how AIB managed its trade business and reengineered the workflow; “this had a positive impact,” says Danaher.

“This was a difficult two months for us,” says Hubert. “It was our first deal in Europe of this nature and we had to work hard to meet agreed service levels. Now we vigorously check how much detailed attention our clients need to give their customers and we make sure we have the staff to make that happen.”

“We wanted ABN AMRO’s staff to view our customers as their customers. The feedback we get from our customers on a daily basis is that their people in Dublin now know our customers as well as we did and have developed strong relationships with them. They go out of their way to do what’s best for the relationship. This has really made this relationship a complete partnership,” Danaher says.

Business Benefits

The promised cost savings did materialize. Danaher says his department is achieving a significant cost saving against the in-house cost of global trade processing. “The move from a fixed towards a variable cost base has provided us with sizeable annual cost savings. We realized a payback on outsourcing within 15 months of implementation,” reports Danaher.

But there are other benefits. Danaher says ABN AMRO’s staff has replicated and in some cases exceeded AIB’s own high ISO 9001-certified processing standards.

“The very high level of accuracy means each transaction is smooth for every party involved–our customer and our customer’s customer. Our customers are not coming back to us complaining, questioning, and creating more work in tracing the problem,” reports Danaher.

In addition, outsourcing has streamlined AIB’s processes. AIB was able to replace its aging DOS-based, front-end system by private labeling MaxTrad. Now its customers can deal with the bank on the Internet, taking paper out of the system. “This enhanced product offering has elicited very positive feedback from customers,” says Danaher.

ABN AMRO’s Web-enabled trade portal is a thin client operation, which means no software needs to be loaded onto client systems. “Our previous system wasn’t as efficient and you couldn’t roll it out to as many customers. And it was difficult to maintain. ABN AMRO’s system is much more streamlined and helped us reduce our technology costs,” says Danaher.

Just as important, the Web portal gave the bank an edge in the market. “Our strategic aim is to maintain our position as the market leader. We now had impetus in the market because we offer customers a service other Irish banks can’t offer at the moment,” reports the AIB executive.

The supplier maintained high customer-satisfaction levels. “Our clients enjoy a very high level of customer service because of this outsourcing partnership. Direct feedback from customers and general market surveys endorse this,” says Danaher.

Outsourcing also reduced congestion in AIB’s branches. Using the Web reduced the number of customers going in and out because they don’t have to go into the branch to get forms or give them to the teller. They can now deal with the bank electronically.

Offshoring

ABN AMRO was confident about its offshoring capabilities; it sent its own trade business to Chennai years before it added AIB to its client roster.

“Since offshoring to India was a new concept, we were all slightly nervous about it. But we visited India in advance of doing this, so we were perfectly happy that they could manage our processing,” Danaher recalls.

Today there is ongoing contact between the two offices. “We talk to our counterparts in India on a daily basis,” he says. In addition, AIB sends representatives to ABN AMRO’s Chennai office every year. AIB has three people who manage the day-to-day interaction with Chennai.

The AIB executive says the quality of the staff in India is “unbelievably high;” all are college graduates. The bank measures its performance with a monthly scorecard. He reports they “consistently outperform the benchmark targets we’ve set for them. They are not doing the bare minimum; they’re exceeding the targets by quite a margin on a regular basis.” One of the service level agreements (SLAs) requires 90 percent accuracy and timeliness. The scorecards are almost always 100 percent. “Now, if we get anything less than 100 percent, we question it!” says Danaher with a laugh.

The team in India holds regular brainstorming sessions, discussing any issues that arose the week before and determining what they could have done better. On quite a few occasions they have proposed certain changes they believed would improve AIB’s processes; Danaher says many ideas the supplier implemented have come from this forum. They are constantly looking at the process to see how we can do it better, both for our sake and our customers, reflecting the close partnership approach we share with ABN AMRO,” notes Danaher.

Why This Relationship Is Successful

Danaher says the bank took “great comfort” in seeing how its supplier approached the staffing problem. Senior management got involved at an early stage. “We were impressed with how they were able to mobilize resources to address our problem. That gave us comfort to know that they will act promptly when things go wrong,” he says.

“The relationship has always been based on an understanding that the success of the partnership has to be mutual,” Danaher adds. Both banks meet regularly to discuss how to improve service and develop new cost savings and revenue opportunities.

“Both banks work as one team with one common goal–to provide the best level of service to AIB’s clients. Both parties take pride in delivering a first-class service. Working together has fostered mutual trust. The cultures and industry expertise of both institutions are truly aligned, which allows both parties to contribute to the growth of AIB’s trade business,” Danaher adds.

Hubert says both sides have a can-do attitude. “This is our baby,” he says of the relationship.

AIB also talks to other prospective banks who are thinking about outsourcing their global trade processing.

“We have been able to leverage the best practices of both institutions, creating a unique processing and service model that ABN AMRO can replicate in other outsourcing partnerships,” adds Danaher.

Success Equals More Business

In July 2006 AIB outsourced a further service to ABN AMRO: processing Dublin’s check collection payments. This consists of 10,000 annual transactions. It required no additional investment on AIB’s part because the supplier is able to leverage the same infrastructure it developed for processing AIB’s trade transactions. “When we decided to outsource this, we automatically gave the business to ABN AMRO. The agreement already in place has proved so successful we didn’t consider any other alternatives,” says Danaher.

Was outsourcing a good trade from its in-house operations? “Outsourcing has allowed us to ‘stay in the game’ at a lower cost and with access to vastly superior technology and investment spend,” Danaher says.

Lessons from the Outsourcing Journal:

  • Allied Irish Bank wanted to outsource, but buying its own system was cheaper until its preferred supplier opened a center in India. The new numbers made outsourcing the best solution then and in the future.
  • One of the scenarios in which outsourcing makes sense is when a business process is important but mature like global trade.
  • Outsourcing gave AIB a leg up in the market because it could private-label its supplier’s Web trade portal, which offered services its competitors didn’t have.
  • When buyers are happy, they help their suppliers win more business.


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