Born-Again Companies Achieve Radical Renewal

Companies and public enterprises that need a radical renovation of critical processes and functions don’t have many options. Outsourcing is one way to replace the engine in the airplane while it is in the air. We’re not talking about catalyzing change. We’re not talking about clearing away a roadblock to growth. We’re talking about changing the guts of the organization so that it becomes dramatically more effective.

These companies will not survive unless they find market traction quickly. National Savings and Investments executives used outsourcing to radically reshape their organization. Out of 4,500 employees, only 120 were retained in the original organization. The rest transferred to the outsourcing partner. Before the initiative, NS&I management questioned whether the organization should even survive. Four years later, it boasted a sleek, low-cost operation that was one of the most competitive in the financial services industry.

NS&I is probably the best example of radical transformation through outsourcing, but it isn’t the only example. In 1986, one of the largest financial institutions in the UK—we’ll call it Consolidated National— entered the Spanish market. It established two small branches with a narrow product line and very limited service: It made mortgage loans.

At the end of 1992, the CEO of the Spanish bank engaged a consulting company to conduct a strategic review to determine why the bank consistently lost money and to define a more effective direction going forward. The consultants’ report drew a line in the sand. It gave the CEO two choices: leave the market or play the same game as the other banks in Spain. That would mean selling a full range of products to a clearly defined target market with a capable staff in a large number of convenient branches.

The CEO decided to stay. However, his situation was anything but enviable. He lacked the information systems, the data center, the branch infrastructure, and the staff to run the bank the consultants recommended. And parent company management had lost patience with his financial performance; they were looking for profitable operations. The CEO didn’t have money, and he didn’t have time. He turned to outsourcing.

By the beginning of 1994, the CEO had chosen an outsourcing provider and had signed a six-year contract. Over the next 18 months, the provider implemented a full-line bank’s information systems platform, opened 23 new branches, hired staff, and defined and developed new products. It also brought seasoned partners to the table to help the CEO define and implement bank strategy. One executive from the outsourcing provider described the relationship this way: ‘‘We had a very informal relationship. Our company paid no service penalty in six years. In many of its points, the contract did not match what we were really doing, so we managed the work like we were partners. We worked side by side to continuously improve the bank’s performance.’’

Consolidated paid for the help in an innovative way. The provider charged a minimal monthly fee until the systems and processes were put in place and the bank reached a threshold volume of assets under management. After that point, the provider received a percentage of the assets as its payment. The more the bank grew, the more both partners earned. In 1997, the bank approached break-even results, and in 1998 it was profitable.

For companies seeking radical renewal, outsourcing is a lifeline. These companies need all the benefits that transformational outsourcing can provide. An NS&I executive said it best: ‘‘We didn’t have all the skills; we didn’t have the technology; and we didn’t have all the resources to fulfill our mission.’’