Here's an unhappy corporate dilemma: You have a critical process whose usage is falling but will never go away. It now needs a significant investment in new technology just to compete. Do you spend the money when you know the unit costs will rise because of the falling volume? Or, do you outsource a core process?
Barclays Bank PLC in London, England, faced that problem. It solved it with a unique solution based on an outsourcing partnership.
Barclays knew it needed to innovate and improve its check processing operation. Its current process was designed to handle three billion items a day. However, debit and credit cards have become wildly popular in the U.K. Consumers often prefer to use them instead of checks. As a result, check volume has been falling five percent per annum. At the end of 2000, Barclays was only processing 2.5 billion items a day.
The bank was not interested in investing in a legacy process that was clearly in its sunset years, given the new technology on the horizon. Instead, the clearing division wanted to upgrade its operation to a new technology, image processing. This new technology allows the bank to take a photograph of the check and then send the image through the banking system, not the physical check itself. The technology wrings cost out of the process because it eliminates check transport. But the bank would not underwrite this substantial investment in new technology, even though it was clear the new process would drive down cost. The falling number of checks undermined its business case.
"We felt it was a smart move to give the process to someone who specialized in it," says Linda Walton, director, sourced service delivery for Barclays Bank. Barclays joined hands with Lloyds TSB, another large British bank, and began looking for an outsourcing partner so they could access this new check processing technology. "Concentrating our check processing provided the volumes that made it worth it to a supplier to invest in the new technology," she explains.
The two banks put out a Request for Proposal in 1999. EDS, FiServe and Unisys bid for the business. Lloyds had a longstanding relationship with Unisys, using its software for its check clearing operations. "And we had a track record in the U.K," points out Janet Russell, chief operating officer of iPSL, a wholly owned division of Unisys based in London, England.
Unisys of Blue Bell, Pennsylvania, has been involved in check processing in the United Kingdom since 1997. By the end of 2000, Unisys had built a customer base for small banks that wanted to outsource their check processing. As the century closed, it had cornered 13 percent of the UK check processing volume. "We built a track record in outsourcing for both service delivery and technological innovation," says Russell.
But Unisys did none of the processing for the four big banks that dominated this market. Barclays, HSBC, Lloyds and Natwest controlled 85 percent of the market. Each bank processed a little over 20 percent of the national volume.
Unisys, however, was in the process of moving to image processing. "The small niche players were getting ahead of the big processors," reports Russell.
Barclays and Lloyds decided to form an outsourcing partnership with Unisys to outsource their check clearing. The three partners formed a new company, Intelligent Processing Solutions Ltd (iPSL), in December 2000. Unisys received 51 percent of the shares, with the two banks owning 24.5 percent each.
"The banks opted for a partnership instead of a straight outsourcing relationship because check processing was a mission-critical operation for them. They wanted to stay close to the process since the new technology required very significant changes in the check clearing process," says Russell. Being a partner gave the banks a seat on the board and a say in the company's strategy.
In addition, appearances were important. "They didn't want to signal to the market they were walking away from their check processing. Being a partner meant they were still involved," Russell continues.
Of course, as volumes grew and other banks wanted to outsource their check processing to iPSL, the banks were entitled to participate in the company's growth.
"Unisys is using the shared services model to reinvent this process," says Susan Cournoyer, senior analyst at Gartner Inc., a Stamford, Connecticut research and advisory firm that helps its clients understand technology. "This partnership jointly tackles a process that was too complex for the banks to tackle alone," she continues.
Cournoyer adds the U.S. Federal Reserve system is currently trying to adopt its process to utilize electronic payments. In the British case, "Unisys is managing the investment and the process reengineering."
By the end of 2001, iPSL was processing 50 percent of the U.K.'s checks. HSBC opted to become a partner in December 2001. Barclays and Lloyds sold 50 percent of their shares to HSBC. While Unisys stills owns 51 percent, now Barclays and Lloyds own 19.5 percent and HSBC owns 10 percent of the company. "The initial banks made money on their capital appreciation in the first year," Russell points out.
Today, iPSL processes 13 million items a day, averaging five billion pounds. It now controls 67 percent of the U.K. market. It has 14 operating sites (which it inherited from its three bank partners) around the U.K., employing 4,500 employees. The goal is to reduce the sites to seven and employ just 2,500 people. iPSL also saves money on transport, since it doesn't have to truck the checks from place to place.
"As an outsourcer, we can process items with less equipment and fewer people because our equipment doesn't lie idle," explains Russell. "We have such scale we can drive out 30 percent of the unit cost."
While cost savings are usually the primary driver, image technology provides additional benefit to iPSL's banks. When banks had to physically hold the checks, they kept them no longer than three days. The banks erased their image from their hard drives in that period, too. But iPSL is building an image archive so the banks can retain the checks' image indefinitely.
This new process aids fraud checks. The computer can match signatures automatically.
The banks' corporate cash managers also don't have to wait for the physical checks to arrive before investing their money. iSPL loads its checks on a CD and sends them to the bank that day, allowing the banks to invest their cash overnight.
If England joins the European Union, it will have to convert from pounds to Euros. This change requires costly technical investment. iPSL can make that investment just once for its seven bank customers instead of each of them having to purchase the same equipment. "We can make the change just once instead of seven times. That's a significant savings," Russell says.
iPSL is now offering these services to other banks that buy them on a per item basis.
To date, the banks are pleased with the arrangement. "A joint venture can end in tears," says Walton. "But we see more benefits than drawbacks." Adds Cournoyer, "This is a new outsourcing model since the supplier and the customer have now become partners." She says this is becoming more common when a financial institution is the customer because now banks view IT as a financial asset. "Today they expect good business results from IT."
Lessons from the Outsourcing Journal:
- Outsourcing a core process is the most effective business solution when the volumes are falling and new investment is needed.
- A joint venture between buyer and supplier allows the buyer to remain involved in the core process while providing the supplier with the needed volumes necessary to underwrite the new investment.