The Many Downsides of Outsourcing

Credit unions have traditionally always outsourced significant and core aspects of their business. The reasons for this, especially in the area of core data processing are very clear and straightforward. Even though a credit union’s day-to-day transactional processing is vital to its existence; the cost for a single institution to create and maintain it’s own complete infrastructure is substantial. In fact, the cost is so great that most credit unions would not exist if they had to go this route themselves.

Outsourcing has become so commonplace in today’s business world, and has become such an accepted part of everyday business thinking, that I am taking a few minutes to argue the other side of the coin, and point out the myriad drawbacks to outsourcing vital business components. The benefits of outsourcing are well documented, and usually enumerated in cost and time savings.

Here are several very important downsides to outsourcing:
• Lack of innovation
• Competitive parity
• Lack of integration
• Dependency mentality

Lack of innovation

The first drawback is a lack of innovation. Increasingly in today’s business world, a company’s only true competitive advantage in the marketplace is its ability to innovate. When you are at the mercy of third-party company to improve or differentiate your offering, you are stunting innovation possibilities for improving your offering to your customers.

Let me get specific about what I mean in the preceding paragraph. I am talking specificially about credit unions and online banking adoption in the late 1990s. Because online banking is intimately tied to core data processing, many credit unions decided not to even offer online banking and bill paying until their core processor offered it, a severe competitive disadvantage.

Competitive parity

The lack of ability to innovate is directly related to another major downside to outsourcing core operations, and that is competitive parity. When many organizations are using the same technology provided by another company, and then offering that to the public, there is no differentiation to the customers.

Again, I will use online banking and bill paying as an example. Many credit unions and banks serving the same geography have chosen the same online banking third-party provider. In today’s technologically advanced society, there are many customers who would like to make their choice of financial institution based on their online banking system. These customers will have different criteria for what constitutes the best online banking system. Some will value simplicity. Some will value speed. Some value comprehensiveness. Some value flexibility. Some value personalization. Some value phone support. All of these different types of people have absolutely no basis on which to make a decision when the online banking experience is identical across multiple institutions.

Lack of integration

In credit unions, working with a conglomeration of disparate vendors is practically a way of life. Reaping the benefits of service and products that would otherwise be cost-prohibitive is nearly always the reason. However, there is another price paid by utilizing such a practice, and that is a lack of integration. Answers, balances, and synchronization which OUGHT to be transparent and seamless to the customer become confusingly disjointed. Deposits made via one method (such as ATM) are not available on other systems, such as online banking and bill pay, or for debit transactions, until a frustratingly long interval.

Dependency mentality

Another insidious drawback is the creation of a dependency mentality within the entire organization. Because it is assumed that no innovation is possible with the outsourced system(s), it creates a culture whereby innovation is stymied. This creates further dependence on the third-party, and can possibly lead to stifled creativity within the credit union in general.

The upside of self-created technology

We here at EverythingCU.com faced all of these questions when we had a decision to make about brining webinars to our membership. We could have continued using a third-party provider after initial webinars let us know that it was a viable service to offer our membership. But there were many advantages to developing our own. And those advantages are exactly the opposite of the outsourcing disadvantages. Our webinars technology is: Innovative. A competitive advantage. Completely integrated. And we can continue to innovate, increasing our distinctiveness and competitive advantage. In the arena of competitive advantage, we developed our webinar with a few simple principles in mind. The main principle, besides providing engaging distance learning at a reasonable price, was to make the experience as interactive, and as close to actually being in the room with the presenter as is reasonably possible. Toward that end, we created the ability for the participants to simply Raise Their Hand. The presenter can “see” exactly whose hands are raised, and call on them, and/or take a head count in response to a question. This very simple premise is one that has yet to be copied by any other webinar provider, nearly three years after we’ve been offering webinars.

And, in the realm of integration, this may seem to be again, a simple thing, but the benefits are great: There is no additional sign-in or password required to access the visual portion of our webinar interface from the main body of our web site. Also, all data is synchronized between the webinar and every other aspect of our web site, including member photos. Having member photos creates that much more of a personal, intimate experience for presented and audience alike. Without integration, it would not be worth it for people to upload them every time they attended a webinar, even if such a thing were made possible by a third-party provider. Again, I know of no webinar service provider that allows participant photos to be uploaded.

It was a big decision for us to create our own webinar technology compared to using an outsourced third-party. It was a very large investment in time, energy, dollars, and resources to develop our own. We’ve had our share of hiccups along the way. But it has given us all of these advantages AND has actually saved us a very large amount of money.

We haven’t regretted the decision.

Technology is such a vital part of today’s business. Think twice before outsourcing any aspect of it. Are the advantages worth the drawbacks?