Today's blog comes from Peter Allen, Partner and Managing Director, TPI.
So many of us are accustomed to the ease with which we run our lives in today's electronic-enabled and Internet-connected world. The number of us who remember the days of entirely-paper processes, such as check-writing, mortgage applications, and legal gambling, are dwindling. But not fast enough.
I am struck by the urgency some industries are moving to rid themselves of paper-based processes. It's definitely a good move for the consumer - fewer misplaced forms and less opportunity for error. For businesses, it's an even better move. Manual and paper-based work processes are costly, error-prone, and grossly inefficient.
The financial services sector is among the most aggressive in eliminating inefficiencies. That industry has been harkening about straight-through processing for several years, and I can attest to the fact that no stone is being left unturned in the relentless search for process improvements.
We recently supported a large regional bank in the United States with a bold move to outsource its check and item processing. The issue for banks is that paper check volumes are continuing to decline as consumers become more comfortable with electronic payment methods. Yet, the use of checks has not gone away entirely and will not for quite some time.
As my colleague John Eagleson reminds me, based on his work with several banks, the implication of this fact is that large retail banks have managed down their variable costs just about as far as they can on their own. They've maintained a competitive unit cost of processing a check while the volumes continue to decline and fixed costs remain constant.
This is why we feel so strongly about making sourcing decisions through the lens of a forward-looking, volume-sensitive business case.
With outsourcing as a solution for dealing with a retiring business model, service providers can pull the final lever that banks cannot: aggregating scale via multiple clients, investing in new technologies and spreading fixed costs over sufficient volume.
The net result: maintain or even lower unit costs. Allow processing costs to attenuate downward with decline in volume. Outsourcing is a perfect and invaluable resource in transitioning business models from legacy to the next generation.
