Industry Insights: Game Xchanging- financial services and business process outsourcing

Updated: October 30, 2009

We're experiencing a bit of déjà vu, says David Andrews, CEO of Xchanging. He likens what is occurring today in the business process outsourcing industry to the early 1990s when CIOs first began to question whether it made economic and strategic sense to outsource business processes to a third-party. What's different this time around, says Andrews, is that the current economic crisis adds immediacy to the outsourcing debate, forcing organizations to consider outsourcing as an effective way to cut costs and survive the downturn.

Xchanging is a global business processor that is on the fast track and is continuing to expand. Xchanging is well positioned to take advantage of the global growth of outsourcing, says Andrews. The company recently secured a 7-year deal with AonBenfield for its U.K. insurance broking business, a 5-year procurement outsourcing contract with Alexander Mann Solutions--one of the largest of its kind in the industry--and has completed its acquisition of 75% of Bangalore-based Cambridge Solutions Limited.

Discontinued

There is a sea change occurring in BPO, says Andrews. "What financial institution will still have an internal accounting department in 10 years?" he asks. "There are no economies of scale for accounting or similar business processes. We are on the brink of a major discontinuity."

The idea of discontinuity in outsourcing is not new—McKinsey has been predicting the disaggregation of the back office for 20 years, Andrews says—but only a small number of companies are mature enough and have a strong enough reputation and credibility to take advantage of discontinuity. He counts Xchanging as one of those companies.

Think evolution rather than revolution. "Discontinuity will take five years to play out," predicts Andrews. "But it's on the agenda of all big financial institutions." For example, procurement is an area that is ripe for business process outsourcing but growth is hampered by in fighting between corporate procurement directors who feel that procurement can be better done in-house. However, Andrews believes that any aversion to outsourcing will disappear.

New, But With History

In the world of business process outsourcing, Xchanging is a relatively established firm with a history dating back to 1999. Although ten years is not a long time to be in business compared to other larger outsourcing firms such as his former employer Accenture, Xchanging does bring both experience and history to its clients, says Andrews. "If you try to establish yourself today as offering BPO, it's too late. You need experience. For example, we deliver services to over 40 countries, giving Xchanging a maturity that is difficult to replicate quickly."

On the other hand, the relative newness of the company has benefits as well. "The big, established players don't understand the changing market for business processing outsourcing services," says Andrews. "They don't get it and they don't want to understand it because it means cannibalizing how they do business. If you want to create a new way of doing things and a new market, you need to be a new company."

Cost Savings Take Time

Achieving cost savings from business process outsourcing takes time, says Andrews, since this type of outsourcing is people intensive and requires a transfer of knowledge. "It's difficult to get rapid savings and retain quality of service," says Andrews. "Instead, you have to view BPO as a long-term strategy." He cites the example of Deustche Bank, an Xchanging customer that has achieved a 30% cost savings over the course of five years.

A lengthy ROI is to be expected, he notes. "There is no low hanging fruit since financial institutions are already so well run," says Andrews. "Cost savings come gradually by doing lots of little things better."

Continuing to Grow

There is significant opportunity for Xchanging to continue to grow, says Andrews, noting that companies only outsource 3% of the $2 trillion they spend on basic back office processing per year. "According to analysts, the outsourcing industry is going to grow at 10-12% per year," says Andrews. "But I think we will see outsourcing revenues increase enormously, even doubling for several years. Within four to eight years, we'll see a massive shift to back office outsourcing."

Andrews is keen on mortgage processing since he believes there are currently very few good third-party mortgage processors in the marketplace. He anticipates partnering with a large U.S. bank and creating a utility to provide mortgage processing services through Xchanging.

Andrews predicts that Xchanging will benefit from doing business in economies "that are in the drivers seat" such as the U.S., Germany, and India. But Andrews doesn't discount smaller economies such as Malaysia and Australia, which he considers forward thinking, as having an impact on the company's growth.

Although Xchanging is headquartered in London, Andrews doesn't expect his company to get much of a boost from U.K. businesses since much of the U.K. economy is tied to government, he notes.

Causes and Boat Races

Andrews has a soft spot for the sport of boat racing and Xchanging has been a sponsor of the Oxford versus Cambridge Boat Race for five years. Andrews makes an analogy between boat racing and business: "Boat racing requires precision, power and the ability to perform on race day," says Andrews. The Boat Race pits two of the best crews in the world against each other in a unique course that is 4.5 miles long. "It's the ultimate endurance racing event from the world's finest rowers. These athletes train together for six months for no other prize than winning."

In addition to sponsoring The Boat Race, Andrews also gives generously to charities supporting causes such as prison reform in Rwanda. "My philosophy is if you earn lots of money, you should give lots of money away," he says.

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