The Story of a Turnaround: Before Outsourcing, a Key Division Struggled; Today It Excels | Article

Best Financial Services

Outsourcing Excellence Award – Best Financial Services – Aon Consulting–South Africa and Alfinanz

Three years ago Aon Consulting SA was not in a good situation: its clients were firing it because of poor service delivery. The company, a division of the Chicago, Illinois consulting company, lost 50 percent of its business and was bleeding badly, according to Carel Smith, Business Development Director, Retirement Funding for Aon.

Today, Aon has turned 360 degrees and utilizes all its clients strategically as a reference of good service. Its customer service has become the envy of the industry, allowing it to compete with the big guns. Now Aon even offers a penalty rebate promise, which any client receives if it does not service them as contractually agreed.

Aon, which provides services to a diverse range of clients in different market segments ranging from vanilla to complicated retirement fund structures, had an IT outsourcing provider servicing the Retirement Funding division; “but the relationship was going nowhere,” according to Smith. He says “the big problem was they were an IT group that knew nothing about retirement benefit consulting and administration services and were thus unable to provide value from a strategic perspective.”

This lack of industry understanding caused the Retirement Funding division reputational damage; “we weren’t living up to our global brand image. Our client relationships and retention abilities were strained. We were unable to compete and procure new clients as our processes were outdated and costly. Feedback from our clients was that we were on the wrong track,” reports Smith.

The wrong track included:

  • Aon employees were behind in work
  • Aon employees had to reconcile accounts manually
  • The supplier’s staff was poorly trained
  • The infrastructure experienced a lot of down time
  • Aon had to plug gaps in the software manually
  • Good governance was lacking with potential exposure to business and reputational risks
  • Trading conditions were difficult

In addition, pension fund regulation in South Africa is onerous and regulated both by law and statutory bodies. At the time, Retirement Fund trustees were worried they might fail to comply with regulations because of Aon’s poor service. Best industry practice and good governance were of particular concern.

“We needed a provider that had the services, industry skills, experience, and IT platform vis-‡-vis a value-based solution to take us forward. We wanted to stick to our knitting and do what we do best and let a strategic supplier provide the IT platform,” explains Smith.

Supplier Selection

Aon decided to review its then current arrangement and go out on tender to the market. It considered three providers. Here are some of the specific criteria on its scorecard:

  • A supplier of similar size. Aon SA was still a small company at the time, “so we wanted a supplier of similar size. We didn’t want a huge, well-known name because we felt we wouldn’t receive the service and attention we needed and deserved,” says Smith.
  • Someone who could be a development partner. “We wanted a supplier that was also young and formative. Aon selected Alfinanz because its executives identified an opportunity to extend Aon’s service offering with a long-term partner in the retirement fund industry – an industry in which Alfinanz was not active at the time. However, Smith says Aon considered Alfinzanz’s internal business process, expertise, quality control, and IT architecture “strategic components which could help us grow. “
  • A supplier that would have a cultural fit with Aon and invest in the Aon solution. “We wanted a partner for the long-term. The opportunity was equally exciting for Alfinanz. The supplier took a long-term view by investing time, money, and resources in a corporation and market segment that would give it scalability and reward down the line,” says Smith.

In 2004 Aon entered into a three-year contract with Alfinanz, a solutions service provider (SSP), for retirement and pension software and hosting. The contract also includes IT infrastructure and disaster recovery.

Unusually, Aon also requested that Alfinanz assist it with its sales and marketing because Alfinanz would be able to integrate and complement Aon’s skills in closing deals with Alfinanz’s IT expertise. The retirement industry is driven to closure by the ability of Aon to provide consulting service, administration, and technology services. It was an unusual mix of talent but one that proved to be enormously successful.

The Transition Period

Aon Consulting said time was of the essence. “Together we had to fix the business fast,” says Marc Tison, Alfinanz CEO. “Business principles, not IT, drove our strategy.”

From the outset the two partners agreed strategically to keep Aon’s old system operational and not migrate to Alfinanz’s core system; in the meantime, Alfinanz implemented an interface via the Internet. That objective created the first hurdle: Alfinanz had to negotiate a new arrangement with Aon’s third-party vendor at a time when its relationship with the vendor was “emotionally sensitive,” recalls Smith. The Aon executive was impressed that “Alfinanz managed to turn this situation around with the vendor to a positive relationship that was able to deliver results.”

Step two: Alfinanz conditioned Aon’s employees at the time to “embrace change and forget how they did business previously.” Alfinanz worked with Aon’s executives to implement new processes that would improve the profitability of the business model. “They helped us stretch our thinking. We called this ‘the new world of work,'” says Smith.

The new processes (new world of work) resulted in a division of the operations between front and back office. In the past, Aon employees were multi-skilled, servicing a single client from A to Z. “That’s dynamic from a client perspective, but highly unprofitable for Aon’s consulting business because it lowers productivity,” says Smith.

The Aon/Alfinanz processes now break the work into functions. Front-office workers just focus on the client; they don’t work on the system, they just draw information from it. Any consulting business has a social element to it and clients feel comfortable with accurate and prompt answers to their queries. “This has enabled us to add value to our clients and build a professional reputation; before we were just fighting fires on things that were not core to our business,” says Smith.

This structural change created “an external client focus, as opposed to a struggling business with internal focus on its problems,” says Smith. “It enhanced our ability to impress the client. The end result–client loyalty with the opportunity to use them as references for future business,” he continues.

Segmenting the work has allowed Aon to streamline its back office and leverage efficiencies as well. Before outsourcing to Alfinanz, Aon’s administrators were processing about 2,000 members a month. The industry standard was 3,000. Today each Aon administrator processes between 4,000-5,000 members a month. “We think we can really stretch that further without lowering standards,” says Smith. Understandably, “those numbers have had a huge effect on our productivity and contributed to our bottom line,” he adds.

In hindsight, Aon Consulting believes that tearing down and rebuilding processes was “a good strategic move. Aon Consulting now works completely differently from the past and is seen as a leader in the Retirement Funding industry in South Africa,” reports Smith.

After everyone became comfortable with the new procedures, Alfinanz replaced the old technology with its own. It created portals to enable members of retirement funds real time access to their benefit and account information.

Step three: changing the division’s mind-set and confidence that the new world of work was a good business and operational strategy. The Aon executive says there was employee skepticism since the company had already tried working with another provider unsuccessfully. “Management’s tainted reputation of an unsuccessful outsource attempt was still lingering in employees’ minds. Some echoed the sentiment of ‘We’re on another joy ride. Two years down the road we won’t be any better off,'” recalls Smith.

The partners eschewed a big-bang approach. By agreeing on a project plan and addressing problems step by step, the partnership achieved success fairly quickly. “Once we showed the employees some wins, it was easier to get buy-in from them,” says who.

Aon executives were impressed at the amount of support Alfinanz gave the Retirement Funding division. “Their executives participated in our operational meetings, which showed their commitment to the partnership. They went beyond the scope of the agreement to assist in the migration and data clean-up process because it was in our mutual business interests,” recalls Smith. He says Alfinanz expressed its interest in Aon’s business quite nicely: “Your volumes are our volumes.”

Governance

The business relationship had no formal governance structure for the first six months. “We just partnered with each other to map out the work as defined in the project plan. It was based on mutual trust. We formed a bond and relationship of understanding,” says Smith. Then the business relationship concluded a formal service level agreement (SLA).

In the new environment the two partners have monthly compliance meetings, where they jointly set high-level goals and map the relationship’s direction. Alfinanz has operational meetings at least once a week vis-‡-vis the identified objectives.

Business Benefits

For the first time Aon can “box above our weight.” says Smith. The Retirement Funding division now has the capability to compete against the really big consulting firms, “says Smith. Aon now competes directly with the top three players in retirement benefits in South Africa and consistently wins. “For a division struggling three years ago, that is a big turnaround,” says Smith.

Today Alfinanz representatives actually assist Aon in sales presentations. “We can talk business language on par with Aon’s consultants and their clients,” says Tison. The joint effort works: Aon’s short-listed sales closure rate has improved on average by 60 percent. Tison says Aon’s business has grown 33 percent per annum over the last three years and highlights the fact that the outsourced partnership with Alfinanz has made Aon more competitive in the industry.

Aon is healthy enough to grow, expecting to grow 100 percent in the next year or two. For the first time, Aon’s Retirement Funding division is thinking about growth by acquisition rather than relying solely on organic growth, an idea unthinkable three years ago. “We couldn’t consider that before because we were so internally focused on managing our business. We couldn’t absorb the people and processes. Now we have the strength and depth to do that. We’re now actively planning and perusing acquisitions,” says Smith.

Part of this energy comes from the ideas developed around the “new world of work.” Globally Aon has operations in 16 other African countries; it wants to expand and develop best practices regionally. “Alfinanz helped us get where we are; they positioned us well for taking these ideas forward,” says Smith.

The new processes have “dramatically improved” Aon’s turnaround times. “Aon says the industry turnaround time for servicing regulatory tasks is typically 30 days. “Aon wants to continually improve on its standards. That will just make us more efficient and make it more difficult for our competitors to compete,” says Smith.

Aon’s improved productivity has improved profit margins. Smith says the industry’s average profit margin is eight percent. While lagging this in the past, Aon now meets local norms and hopes to surpass international norms in future. Outsourcing reduced costs dramatically and more than doubled productivity, which continues to contribute to improved profitability and service delivery–a powerful combination.

More importantly, the South African market has noticed these major changes at Aon, which makes Aon attract new business. Aon is excited by “‘the talk in the marketplace saying that what Aon is doing administratively on retirement funds is improving employers’ images. Word of mouth is spreading,” says Smith.

The trend in South Africa is that more and more trustees of pension funds go to tender every two to three years to test the price and service levels of administrators and consultants. Aon is now on the “shopping list and makes the short list regularly,” says Smith.

Finally, outsourcing has made life easier when the international auditors show up. One auditor told Aon three years ago “the Aon assignment was always a bit of a short straw. Now you are one of our favorite clients. Our people want to go there to gain experience about how it should be done. We’ve enhanced our compliance ability,” who Smith proudly.

Aon’s efforts have actually directly helped South African workers on the shop floor, too. Most retirement funds have inclusive funding mechanisms; Aon’s ability to drive cost down enables it to offer a better value proposition to retirement funds. On numerous occasions, Aon has been able to leverage its cost savings for clients, thus enabling funds to redirect savings to enhance benefits and investments. “We’ve saved money for employers and we’ve improved the lives of workers by enhancing their benefits. That’s value creation for everyone,” says Smith.

Relationship Hurdles and How the Partners Resolved Them

In the early days of this relationship, Alfinanz was ahead in its thinking. It had worked with other companies in similar operational distress and had experience in turning things around. “The division was in such a weak position that we needed all the help we could get,” says Smith.

However, dynamics change all the time and particularly in the last three years, now that Aon’s process problems are largely behind it. “We’ve moved on to growing our business,” says Smith. “Aon has become a lot more demanding in what we need and expect. That’s been a difficult dynamic and has caused tension at times, but we always seem to survive these because of the relationship,” Tison reports.

The business leaders on both sides discussed the evolving relationship both formally–but just as importantly–informally over drinks, dinners, and visits to each other’s offices. “It is something we like to keep in the open. We try to always understand where each party is going strategically,” says Smith.

Both businesses had to accommodate financial pressures. At the beginning of the contract, Alfinanz charged a fee of one US dollar per member per month to use its system. However, the division faced real business-survival issues on the horizon. “We realized the Alfinanz costs were too high,” Smith says.

Alfinanz and Aon renegotiated a reduction in costs to 50 US cents per head. “They went the extra mile for us. They almost halved their income flow to assist our business because they took a long-term view of what we can achieve together. They were prepared to run the model below cost because they were excited about our potential,” marvels Smith.

Why This Relationship Works

  • “When the going gets tough, honesty and transparency are always at the forefront,” says Smith. “We don’t sugar-coat things. We tell Alfinanz when things aren’t happening. Marc will call Aon back and say, ‘What’s the real issue? What needs fixing? Is it a personnel or operational issue?’ Then we work through the problem together,” says Smith
  • “We have the same vision for the future: more volume please!”.says Tison
  • Both parties are willing to go the extra mile. “We have gone to their offices and worked late into the night, if need be, to sort out a problem,” says Smith. “Likewise, Alfinanz will do the same when we have ad hoc issues we know they are capable of handling.”
  • No one points fingers. “We don’t say to Alfinanz: ‘There’s a problem, you fix it.’ It’s: ‘We’re partners and let’s assist each other in fixing it,'” says Smith. Adds Tison: “We don’t want to upset the relationship in any way as this is our holy grail.”
  • Alfinanz is constantly working to improve its systems and processes. “All their clients can suggest improvements that we get to enjoy. There is a lot of knowledge sharing to build a more robust model. There are no costs to us to enjoy these improvements. They pick up the development cost on everything; we just pay our agreed usage cost,” says Smith.
  • The supplier sends extra support when needed. “They will send an account manager to our office whenever we ask. They are willing to devote quality time face to face instead of just talking on the phone or exchanging emails,” says Smith.
  • The buyer feels comfortable in making constructive criticisms. “We are able to add input into the other’s domain without them feeling offended,” says Smith.
  • The supplier checks out the buyer’s processes from time to time to confirm its employees haven’t gone off on a tangent and forgotten the relationship’s original intent.

Lessons from the Outsourcing Journal:

  • Buyers who need IT and infrastructure expertise often turn to IT experts. Sometimes, however, that isn’t enough. This outsourcing relationship was successful because the IT supplier was also well versed in the buyer’s industry.
  • Change all the processes first. Once people are comfortable with the new world of work, then change the technology in order to enhance efficiencies and improve service delivery.
  • Have specific requirements when looking for a supplier. In this case the buyer wanted a supplier of similar size and one with the same entrepreneurial and growth philosophies. Big is not necessarily better.
  • Create a business friendship. This makes tough discussions like finances and revision of service levels easier.


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