Fund accounting – it’s a central function for life and pensions providers as it is connected to proposition, distribution, financial reporting and customer service.
However, when we look at the UK’s top ten life and pensions providers, we can see at least 80 per cent of them have had problems with pricing errors in the last three years – resulting in annual remediation costs of over £50 million, regulatory censure and poor customer experience. Problems and constraints in fund accounting can have serious knock-on effects for the wider business and its customers, but managing it effectively is no mean feat when faced with multiple legacy systems, complex fund hierarchies, pricing methodologies and large volumes of funds and product ranges.
One solution is to outsource fund accounting services to a specialist supplier – taking advantage of their technical expertise and significant cost benefits. Outsourcing, however, has a mixed record of success. Despite firms rigorously conducting pre-contract activities, the expected cost benefits and risk reduction do not always materialise.
These failures – the result of organisations focusing too much on pre-contract work and too little on post-contract execution – can be avoided if the firm transforms the operating model left behind at the same time. A recent outsourcing study, conducted by Whitelane Research in collaboration with PA, investigated more than 800 unique outsourcing contracts and found that client organisations need to significantly up their game in the areas of governance and transition management. From the outset, it is essential for organisations to look at their capabilities beyond striking the contract if they are to realise the benefits they seek.
2015 UK IT outsourcing study results, produced by Whitelane Research in collaboration with PA Consulting Group
In our experience, this can be achieved by following the four steps outlined below.
Create a clear supplier governance and an oversight structure – with a central, strategic vendor management office
The Financial Conduct Authority’s (FCA) 2013 report into unit-linked funds identified poor oversight of outsourced providers as one of the key issues for companies failing. Too often, firms have oversight teams that simply deal with the operational management of the third party – but this isn’t enough. The model needs to be revamped into a pyramid structure. At the top sits a senior, strategic layer responsible for driving high level value from the supplier relationship, and at the bottom are small to medium sized enterprise leads and service managers who resolve complex operational issues found from the checks of supplier outputs. At the centre is the crucial vendor management office (VMO). This function will oversee everything and act as the glue between the top and bottom layers. Its job is to resolve conflicts and drive service improvements across the operation.
The benefits of a highly proactive VMO were stressed during a recent discussion with a number of prominent pension providers. These firms found that if they individually approached a vendor to ask for the latest technologies and techniques on offer, they were refused. But if a number of them lobbied together, the supplier was much more likely to agree. It is the VMO’s role to champion this external networking and push the supplier to provide the best possible service.
Design an effective, risk-based control framework
From our work across the industry, we find many firms make the mistake of asking the outsourcing provider to supply bespoke services – which often leads to increased costs and risk of errors. Instead, insurers should seek to adapt their business to fit around the providers’ best practice model to ensure optimum efficiency and benefit from proven processes and capability.
Additionally, some oversight teams make the mistake of carrying out the same checks and balances on their suppliers as they did when the operation was in-house. As a result, high amounts of duplication are still prevalent in the industry. For control frameworks to drive value, they should be dynamic – allowing oversight teams to adjust the style and depth of oversight. As the FCA recommends, the team should conduct reviews over a longer period of time and introduce thematic assessments in addition to routine daily checks. This will make it more likely for the smaller errors that are missed on a daily basis, to be identified.
Control automation can also drive efficiencies and reduce operational risk, with a number of tools, including pControl, now available to greatly increase the speed and accuracy of checks, as well as providing alternative calculation methods to corroborate supplier data.
Promote cross-functional skills
Insurers are notoriously poor at breaking down traditional functional boundaries and integrating service operations – with many operating a static set of controls, delivered through siloed teams. These siloes need to be broken down, and employees need to be flexible enough to undertake multiple control activities.
In practice, this means those who were previously middle office ‘doers’ now need to be able to resolve issues in multiple technical areas. Similarly, middle managers must develop into experts across many parts of the retained model and be responsible for managing supplier outputs rather than simply operating business processes. Firms need to recognise this represents a fundamental shift from functional to service-based skill sets – which means further training and development are required. Our expertise in setting up HR policies within a multi-vendor landscape recently helped a major financial services organisation to create the optimal operating model to leverage the right resources in a timely and cost-effective fashion.
Insurers should also look towards the manufacturing and pharmaceutical industries which are very successful in ensuring their processes are as lean and agile as possible. We have helped a major pharmaceutical company to execute complex, high-risk integration initiatives reliably and efficiently, with 25% fewer resources, with the simple, repeatable integration processes we developed.
Create a ‘one team’ culture
A distinct ‘them and us’ culture can form between the insurer and the outsourcer. In our experience, high performing outsourced operations take active steps to prevent this. One way business leaders can break down this culture is through the secondment of oversight staff from the firm to the outsourced provider. This helps to create a more collaborative environment and ensures knowledge exists in-house if the firm ever needs to bring the function back or change supplier.
It is only through taking these steps, that life insurers can ensure their outsourcing provider meets their expectations and ensures this critical activity is delivered effectively.