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?

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6 Responses to “The Many Downsides of Outsourcing”

  1. Jon A. Reske Says:

    Well this is the first time I am “blogging” so I hope I don’t mess up! Although I hear what you are saying Morriss, I don’t believe it is an either or situation as you seem to feel.
    I will give an example in a minute to all back up my points.

    I think one problem is CU’s do not do a good job of finding high quality third party partners.

    Most CU’s check out a few vendors with very little research and then make a move. I also think it’s the CU’s that don’t have the innovation to design what they want and then look for it in the marketplace. I think a lot of CU’s are just coasting along, and taking the easy road. You know the cookie cutter attitude. It’s like “well the more things I can check off the list the more it will look like I’m doing something” even if it is not of high quality or what my members are really looking for. There are a lot of high quality resources out there if you just bother to look.

    I think many CU are just lazy. I go to everythingCUmarketing and see people looking for a simple letter sample. I mean, why they don’t just write their own darn letter. I don’t mine sharing but boy just take the time and do some of the homework yourself. You might learn something in the process.

    Another problem is there is an inability to manage and push vendors to do the things you want and need. Too many times I have hear CU’s say “well they say it can’t be done with the current system”. My answer is: “get them to tweak the system for you”. Push them on it. You be surprised what they will do. You may need to pay a little extra but who cares if you are getting exactly what you want instead of 75%. You really do get what you pay for. We always have extra money in our budget for custom work when dealing with outsourcing. That’s what I mean about managing the process.

    Now here is my example. We needed to revise our statements. They were hard to read, and were static so we had no real ability to selectively message or insert on a one-to-one basis. We found a company that not only understood data management but incorporated four “new” features they never had before into the statement rendering process just because we asked for it. Did it cost us some money? Sure but is was minimal and well worth it. When we went to e-statements, they came through again adding function and flexibility they didn’t have before to satisfy our needs.

    We now have a great product for our members. It saved a lot of money in the process and increased our member communication ability with a very cost effective tool. It is so good we just won an International Award from the digital printers association in the category of statement redesign. I’m going to Las Vegas at the end of the month with my statement processor to present on the subject. We did this all with a third party vendor!

    It really isn’t an all or nothing approach, but how you leverage and manage the outsourcing process.

  2. Morriss Partee Says:

    Hi, Jon,

    Wonderful comments! Thank you so much for them.

    I am not advocating that things never get outsourced; I am just pointing out some of the downsides, and just trying to make sure that people look at both sides of the coin. Nearly everyone in the world thinks that outsourcing is ALWAYS the right thing to do; I just want to make sure that the drawbacks are also considered, not just the advantages.

    Every situation is unique and should be evaluated on its own merits.

    Thanks again for your excellent insights and counter-argument!

  3. Matt Dean Says:

    Morriss,

    I’d like to speak from the vendor’s perspective. My company creates websites for credit unions, and we consider ourselves to be fairly innovative in our offerings. We started in the CU industry by developing a custom-built solution for Houston FCU, much as an internal development team would. Since the initial launch of the site, we’ve made incremental improvements (innovations, if you will) at their request.

    The problem is, developing custom solutions requires quite a bit of time and effort, often incurring a significant amount of development cost. This cost can be prohibitive for a single CU to bear.

    However, we’ve found that most of our clients have the same basic goals and can benefit from the innovations we implement for other clients. So we’re able to spread the cost over a combination of current clients and projected future clients. This gives us an incentive to create innovative tools to address the needs of the industry.

    Credit unions are not in the computer programming business, nor are they in the website development business. There are some talented internal developers out there, to be sure, but CU’s should leverage the core competencies of other businesses. I agree with Jon — there are quality vendors out there. And some of those vendors have a strong desire to innovate in this industry.

  4. Melissa Says:

    I just wanted to say thanks, I was searching for information on Outsourcing and this article that you have is excactly what I was looking for, it is simple, easy to understand and based on the drawbacks and even advantages it is detailed oriented.

  5. Credit Unions and Technology « EverythingCU.com World 2.0 Adventure Says:

    […] spread the cost over multiple institutions, is the natural way to go. But there are indeed certain dangers along this route, one being the lack of integration from the members’ point of view (e.g. my mortgage, CU […]

  6. Thuy Luong Thanh Says:

    Thank you very much indeed. I am searching this information for my essay. Very useful.

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