Applying Business Model Design to Transformational Outsourcing

Transformation through outsourcing means making a substantial change in your organization’s business model. National Savings and Investments adopted a new business model when it outsourced its operations to Newport Systems. On the cost side, it capped, then reduced its operating costs; it passed some of its fraud risk to its partner; it eliminated the need for capital investment in technology. At the top line, it contractually obligated its partner to implement dramatic improvements in customer service and convenience; it required its partner to develop a stream of new products at no additional operating cost; and it gained a share of the revenue its partner could earn serving other clients with its customer service center.

These changes, implemented through outsourcing, altered the business model. Before outsourcing, executives at NS&I would have said, ‘‘We create value by offering risk-free investments. Customers are willing to endure our inconvenient service because they value risk-free investments so highly. The Treasury is willing to live with our modest returns to them because we require limited capital investment and running costs.’’ After the business model shift, executives would say, ‘‘We create value by offering innovative, risk-free investments coupled with superior customer service. Customers prefer them because they are among the most competitive products in the financial services industry. The Treasury continues to support our program because we deliver funds to it at a substantially lower cost than its other sources. We attract the best management talent because of our record of innovation and superb execution. Finally, we self-finance the investments we need to keep our operation competitive.’’

The NS&I team went through a business-modeling thought process before they decided to use outsourcing for transformation. They reasoned that a processing center staffed by loyal and experienced employees could create more value in the hands of a private-sector company than it could buried inside a government operation. They also understood that some of the costs and risks associated with implementing and operating new fi-nancial services technologies would be lower for experts than for themselves. If part of their operation would have higher value and lower risk- adjusted costs, they concluded that an outsourcing provider could make money, NS&I could get the benefits it was seeking, and a joint business model could work.