Outsourcing Excellence Award – Best Financial Services - Channel Life and Alfinanz
It was clear Channel Life, a South African long-term life insurance company, "was going nowhere," says Cornie Foord, its COO.
The problem was sluggish processes and aging technology. The financial services company, which specializes in funeral policies, did its own processing internally. Over time the technology began to age. "We had trouble reading our transaction history," reports Foord. And its expense-to-premium ratio was 65 percent; the industry norm is 15-20 percent.
The aging technology had a deleterious effect on the company, which was founded in 1969. "We weren't growing because we couldn't put out new products quickly. We had a laborious development process," recalls Foord.
The COO says management realized "we had to do something different if we were going to grow our client base." The company, which also sells investment products with a three-to-five year term, decided to change its technology to put out new products faster and handle bigger volumes.
Channel Life first looked at the shelf products available at the time (2000). It studied its peers as well as its biggest competitors to determine what products they were using. "We realized none of those solutions would work for us," he says.
Then a business change led the financial services firm to change course and outsource. At the time the insurer was a subsidiary of a bigger group. The holding company asked its executives to buy the company, then turn it around. "We felt outsourcing would make us more competitive," says Foord.
Its supplier-selection criterion was simple: it wanted a supplier that could transform its technology. "We wanted a supplier who could jointly develop our system using the latest technology," the COO explains.
Channel Life selected Alfinanz, a South African supplier specializing in the financial services business. The firm opened its doors in 2001; Channel Life was its first client. "They decided to be our guinea pig," says Marc Tison, Alfinanz CEO, with a laugh.
Tison says both parties had little to lose and much to gain. "Channel Life ranked 42 out of 42 insurance companies. They had to do something quickly and dramatically. They had a strong desire to fix their operations. We needed to find a client. That's how our marriage got started," Tison recalls.
Tison agreed to work with Channel Life because he believed his company's solution could help the insurer grow dramatically. "At the end of the day, the game is about volume. We wanted a client whose business case promised further growth in a five-year period. We spent a lot of time evaluating their business model," he says.
Tison had been a well-known management consultant before starting Alfinanz. "I had credibility in the marketplace. They trusted me when I said we could deliver and run the system," he recalls.
Foord says the biggest internal challenge "was to stick to our guns once we decided to outsource."
At the outset, Channel Life realized its biggest outsourcing challenge was educating its supplier about the intricacies of insurance. "We had delivery problems because they didn't fully understand the products we were selling," says Foord.
So, for the first two-and-a-half years, Channel Life had two employees working with the supplier the entire work day "to help them develop their insurance experience. We held each other's hands," says Foord. The upshot: the new technology became a joint development process.
As soon as Foord felt comfortable that the Alfinanz workers fully understood the insurance business, they continued on their own.
Teams from both buyer and supplier had to learn to work together. "During the first 18 months, we had some personality clashes because of personal agendas," says Foord. "Since I am responsible for the solution, I had the liberty of forcing the two groups to communicate and work together properly. Instead of personal agendas, we now have frankness and complete transparency."
In hindsight, Foord says it would have been better to start with a fresh team who could work together. "We would have gotten quicker results," says the COO.
Tison adds companies can only enjoy transformational change if they have a culture that nurtures change. In this case, he says many financial services companies have separate IT platforms for each division. He proposed Channel Life have a single platform to support all its products, current and future. He agreed to take on this challenge "because they were in line with our way of thinking." It was not something that had yet been developed anywhere, to their knowledge.
The Winning Game Plan
Tison and Foord decided they would first ensure; once the right processes and people were in place, the insurer would concentrate on growth.
Channel Life had 165 people supporting 100,000 policies when it decided to outsource. The supplier reduced the head count to the top 28 performers. The others were retrenched; in South Africa employers have to follow fair procedures when they release an employee.
In the meantime, the two partners worked on the technology platform in a lab environment away from the real work for three years. Halfway through, they realized their original BPO model wasn't a good fit. The two partners changed track and selected an ASP model as the focus for Alfinanz, so Channel Life could retain the people who did the processing and become the supplier.
Tison reckons this was one of the best decisions the twosome could have made because it created an esprit d'corps between the two teams. "We now promote this kind of relationship with our new clients," says the Alfinanz executive. He says the company's pay line is: "We do what you don't," simply supplying the functionality and technology for its buyers. "Our clients and their staffs don't feel threatened by our outsourcing proposition because they are instrumental to the solution, managing the process using our platform," he continues.
Sticking to its guns worked. Before outsourcing, Channel Life's lugubrious development process took six to nine months. Now it takes between 14-30 days from receiving signed-off product specifications to being able to accept new business and service customers.
Here's the bottom line. "We are making more money," says Foord. Expenses are now in line; they range between 10 and 20 percent of premiums. Foord says it now costs Channel Life 60 percent less to introduce a new product.
The company finally has been able to grow. In the last 18 months it took on 450,000 new policies. "That's four times the number of policies we had previously," Foord says. (Policies went from 150,000 to 600,000.) With two new acquisitions, Channel Life will add another one million new customers to its platform this year.
Alfinanz's new technology sent Channel Life kicking and screaming into the twenty-first century. It can now send clients instant messages on their mobile phones that the insurer will be deducting the premium for their accounts in two days or tell beneficiaries how much they are getting if they submit the necessary documents. It can now receive and process claims electronically. "That reduced our claims turnaround time substantially from more than a month to a daily process," Foord reports.
Customer satisfaction improved markedly. "We reduced complaints by 30 percent," Foord notes. The company now ranks No. 6 out of 42.
"Today Channel Life is in a growth and acquisition mode. We did that for them," says Tison proudly.
Why This Relationship Works
"They were committed to making this relationship a success," says Tison. This is crucial because Tison insists buyers are equally responsible for the health of the outsourcing relationship. "Buyers must realize there is a shared responsibility," heads. In fact, in initial meetings with prospects, Alfinanz executives look for those signals from buyers. "If they don't have that commitment, we walk away," he says.
The Alfinanz executive says his leadership team views its clients as colleagues. "We are not simply a supplier supplying a service. We supply a business solution," he points out.
Strong governance is the foundation of this relationship. It has formal service level agreements (SLA) with penalties and corrective actions. "The system electronically tells me if a certain process misses an SLA," Foord says.
The two know how to handle disputes. As Channel Life's sales soared, the insurance company wanted volume discounts. Alfinanz, however, saw higher profits. The steering committee discussed the situation and came up with a solution amenable to both parties. And Channel Life agreed to let Alfinanz price new business Channel Life was considering buying before it signed a purchase agreement.
Foord says whenever there is a problem, the two groups acknowledge they have a challenge and then fix it. Truthfulness and transparency are required. They cut time. "We do not tolerate anyone not telling us the true story," says the COO. He acknowledges some of his past employees were not able to fit into this new model of total trust. "They were the casualties," he notes.
Foord says Channel Life continually updates Alfinanz on any changes to its business model "so they know what we have to do to stay competitive in our market."
But in the end, it was about friendship. Tison, who has worked in the financial services sector his entire career, says his mentor told him on his first day at work that the only way to build long-term relationships is to "make your business partners friends." Whenever a challenge occurred, he asked himself: Will my decision destroy our friendship?
"Outsourcing worked for us because we helped each other," says Foord. "And we learned to become smart friends."
Alfinanz's Top 10 List: 10 Factors for a Successful Outsourcing Relationship in Financial Services
- Build strong relationships
Relationships are a critical dimension of the cliques that form in this industry. Relationships are about investing in trust. Generally business will not happen if the buyer and supplier cannot relate to one another. Like a marriage, this is something that requires continued effort from both parties. Building on this requires regular communication, continual contact, and a mutual display of really caring and listening.For example, Alfinanz has weekly feedback sessions with Channel Life (and our other clients). Our clients also have secure access to our office. They can just walk in. When we can, we enjoy social events where we can interact as friends. Such events include all staff from both sides.
- Commit to the relationship's success
Both the buyer and supplier have equal responsibility. It is not about outsourcing or insourcing, but a commitment to co-sourcing and helping each other succeed. The success of the buyer is as important as the success of the supplier. It is about a symbiotic commitment towards one another.For example, when we started with Channel Life, this was not the case and we struggled. After a while we all realised that we had to make this work. Today Channel Life's staff works alongside Alfinanz in the same teams with the same goals and objectives.
- Build volume
When there is volume, everyone is happy. The ability of the buyer to bring more volume (via distribution, new business, or acquisition) and the ability of the supplier to handle more volume is the essence of what makes commercial sense. In addition, when the markets are economically bad and volumes drop, then the supplier has to be flexible around the floor for minimum fees.For example, Alfinanz designed a platform that allows scalability in terms of functionality and volume. This has allowed Channel Life to grow its business across several business lines. We had to drop our floor minimum fee to allow Channel Life to survive its management expense stabilisation. Nine months ago, Channel Life introduced a direct sales operation selling policies over the phone using the Alfinanz platform. Today that operation sells 10,000 policies a month and is approaching 300 call centre personnel. Their volumes are growing because they sell well and because we supply a platform that allows them to add more policies.
- Develop strategic alignment
The buyer needs to have a strategy that will grow its volumes; the supplier needs to understand where the buyer is going to provide the appropriate support.For example, if the buyer wants to do direct sales through call centres, then the offering needs to include the capability to sell financial products via a call centre. In the case of Channel Life, Alfinanz anticipated this and were able to have a solution running within three weeks--with one bug!
- Build technical acumen
The supplier has to demonstrate a high acumen for financial services and technology. The environment is complex and technically challenging. If the supplier cannot stand its ground with actuaries, accountants, and technology-focused buyers, it will end up providing the wrong solutions to simple problems. This will result in a lack of trust.For example, Alfinanz will typically get involved at the start of our buyers' product development lifecycles. We are able to offer our views in terms of components and the best way to package a product from sales to back-office processing.
- Determine the proper pricing
The supplier has to understand how to price financial products to understand how to make a winning price proposal that can sustain itself. This goes beyond just pricing, to how to allocate expenses that impact the buyer's business. Suppliers who miss this can get used to an emotional session where they have to renegotiate their pricing because the buyer knows the current pricing is not working for them. On the other hand, a buyer that is not transparent about expense allocation and plays the numbers to deceive the supplier will find a supplier unwilling to go the extra mile.For example, Alfinanz will discuss initial and ongoing expense allocations openly with our clients at the start of a new product. This input allows us to mutually build a business case that makes sense for both parties.
- Be devoted to excellence
The supplier needs to be "in search of excellence." The supplier should continually research best practices and apply them before the buyer actually needs them. The supplier must always be one step ahead of the buyer and anticipate demand for functionality and service.
- Allocate enough resources
The buyer and supplier must allocate full-time executive and operations resources to create day-to-day success. It is never a part-time project, but a full-time project which requires full-time resources. Some buyers like to abdicate resource responsibility and save. On the other hand, suppliers have fewer people doing more. Both can end up "cutting off their own noses to spite their faces." The attitude should rather be: in order to help myself, I will add more people to manage this account.For example, we have a number of full-time resources dedicated to manage the account. The teams are a complete mix of people from both companies. Interestingly, these teams often socialise together and occasionally will find time to relax off the ball.
- Do "first things first"
Rome was not built in one day. Achieving real sustainable success takes time. It is like building a new business. Think along the lines of two to three years. Taking a pragmatic view and establishing a sequential list of goals that are realistic from the buyer's perspective and achievable from the supplier's perspective are crucial.We call these "circles of success." Focus initially on the very inner circle of projects. Once you deliver them successfully, move towards the next circle and so on. So often the supplier paints the vision (the very outer circle) and neglects to explain to the buyer that the plan encompasses many inner circles. Then expectations are mismatched.For example, in Channel Life's case we focused initially on fixing the process and the people. Only once this was fixed, did we introduce the systems and train the people in what we referred to as "the new world of work": Internet-based and business process management focus.