Before OUTsourcing, are firms prepared for the PITFALLS?

The common reasons for using outsourcing partners are that it allows the company to reduce labour costs, free up capital and improve worker productivity. However, the recent service breakdown of DBS Bank’s network is a wake-up call for companies to re-examine their outsourcing strategy.

The cost to a company of a service or performance failure goes beyond the monetary, or even the punitive measures that could be imposed as a result of that failure.

(In DBS’ case, the regulator required that it set aside an additional $230 million to cover operational risk.)

For the company buying the outsourcing service, its brand equity is also at stake.

Brand equity is an important way to differentiate one’s product. Companies pay a huge premium for brand equity, which they justify not only on the grounds of extra profits that could be extracted but also the tremendous difficulty and expense of creating another similar brand from scratch.

In the case of the service disruption at DBS, great inconvenience was caused to customers. The unfortunate event — blamed on an IBM engineer — may have dented the brand equity DBS has painstakingly built up over the years.

We can draw some possible lessons from this. First, just as a company pays a price premium to acquire a brand, it should also factor into its outsourcing costs a “premium” for potential losses from negative brand equity resulting from a service or performance failure.

In addition, once the decision is made to outsource, the buyer-company must have in place a contingency plan to contain any negative impact of a possible lapse in the supplier’s performance.

In this, actions speak louder than words — hence, apart from keeping customers informed about recovery efforts, having staff engage affected customers will go a long way to restoring their confidence in the brand.

Needless to say, continuous investment in brand-building becomes even more pertinent when companies outsource their operations.Thee global outsourcing market for IT and business services exceeded $55 billion in 2008 and has been predicted to grow by 20 per cent annually over the next five years.

BITING THE HAND THAT FEEDS

This is particularly so when one must defend one’s brand against supplier opportunism.

This is when the supplier of the service competes for a share of the buyercompany’s market, after learning from the outsourcing experience.

Market trends show that such opportunism is on the rise. Legendary examples of such behaviour are companies like Goldstar, Samsung, Kia and Daewoo, which built up their product leadership through their early contracts to supply Western companies with components or products that were retailed under the latter’s brand.

Outsourcing allows manufacturers to increase short-term return on assets, minimise fixed costs and increase flexibility — but the long-term cost could be the multinational’s inability to contend with a growing number of local manufacturers, as it unwittingly nurtures its suppliers to compete against itself. Therein lies the outsourcing paradox.

In the automobile industry, it has been pointed out, car makers dependent on suppliers’ engineering capabilities could find their design and styling ideas leaked to competitors through shared suppliers.

Services firms that outsource their information systems run the risk of losing immediate control of their important valuechain activities. An e-commerce firm could give its competitors the edge through the defective performance of its supplier.

One aspect of opportunism which has largely been ignored, is when the supplier enters the consumer market as a direct competitor to the buyer-firm. This could lead to the loss of product differentiation for the original firm.

Eliciting pledges from the supplier, adopting multiple outsourcing and relying on relationship commitments, all do not adequately safeguard the latter.

Therefore, it is important that the buyer-company invest in brand-building as this creates in the market a preference for its product, which can help buffer the company’s brand from “me-too” brands.

When a firm deliberates whether to take the outsourcing route, its own ability to build and defend its brand equity must be an important criterion in its decision.

Outsourcing cannot be treated as a standalone activity, but one that should be integrated with its business and marketing strategies.

The writer is an Associate Professor at the Department of Marketing, NUS Business School.

tan soo jiuan

To most people, DBS Bank got off lightly for the seven hour breakdown of its online and branch banking systems on July 5. Perhaps too lightly, for the amount of inconvenience and embarrassment caused by rejected credit cards and not being able to draw cash from the bank’s 1,000-odd ATM machines across the island.

LAWS DO NOT ALLOW A FINE

However, MAS clarified that current laws [?] do not allow the authority to impose a fine on our banks for such infringements, although they can be subject to financial penalties such as having to set aside more money to cover risks — meaning, they cannot lend out that sum of money to make more money.

In any case, how large a fine can anyone impose on a financial institution, without hurting innocent stakeholders, including customers and shareholders?

A fIne also does little to assuage a wronged, inconvenienced or dissatisfied customer as it just ends up in the kitty of the authorities, and not the people who suffered.

Perhaps there should be a review of the rules regarding similar infringements of Internet banking and technology risk management guidelines, with some emphasis on speedily compensating affected customers without the need to engage in costly lawsuits.

MAS should also be able to extend its reach to take appropriate action against vendors and others involved in providing financial hardware and software services, including those providing outsourced services.

[# Can MERITOCRACY be OUTSOURCED ???? #]

To some extent, the ball is in DBS Bank’s court to assuage its stakeholders. True, DBS chief executive Piyush Gupta has offered his apologies several times over the past month for the inconvenience caused.

But is an apology enough to satisfy all customers?

Yes, it will be difficult to ascertain who actually suffered on that fateful July day. Still, a simple gesture of goodwill — say, an ice cream or a chocolate bar for all customers on a particular day — could go some way to recovering lost goodwill.

Or, DBS could make an appropriate donation to some charity or organisation in the name of all wronged or inconvenienced customers.

Conrad Raj

conrad@mediacorp.com.sg

The writer is Editor-at-Large at Today.

The financial burden placed on DBS by its regulator, the Monetary Authority of Singapore (MAS) — the bank must set aside [What is this ?] an additional $230 million to cover operational risk — was a minor slap, or rather tap, on the wrist for a bank so flush with cash that it has not got enough good customers to lend to.

The MAS has told MediaCorp that banks “are subject to financial penalties, regulatory sanctions, supervisory actions or reprimands if they fail to meet MAS regulatory or supervisory requirements.

MAS believes [?] the regulatory actions taken [?] against DBS are proportionate to the nature, severity and impact of the incident”.

There are those who would disagree that the actions were proportionate to the nature, severity and impact of the disruption.  [# nOt Meritocratic ? ? ? ? #]

The MAS should have tried to ascertain the financial impact to customers and businesses — at least the more serious losses.

Yes, DBS was censured in a strongly-worded reprimand and was asked to adopt measures to minimise the risk of such an outage taking place again. The MAS has also asked the bank to conduct an independent review of the incident and to improve its customer communication process to ensure timely communication with stakeholders.

And Ms Teo Swee Lian, the regulator’s deputy managing director of Financial Supervision, is on record as saying: “MAS takes a serious view of this incident. We expect [dId nOt chEck ?] all financial institutions to put in place a robust technology risk management framework that will ensure the reliability, resilience and speedy recoverability of the institution’s IT systems and infrastructure, whether outsourced or in-house.

“We have recently written to the CEOs of all financial institutions to remind them of this. MAS will not hesitate to take appropriate supervisory action against any financial institution which fails to meet the standards set in the IBTRM Guidelines.” Still, as the saying goes:

“Sticks and stones may break my bones, but words will never hurt me.”

Review rules for speedy compensation

MAS should also be able to take action against vendors and providers of outsourced services

Conrad Raj

conrad@mediacorp.com.sg

The MAS should have tried to ascertain the financial impact to customers and businesses, at least the more serious losses.

For DBS, a simple gesture of goodwill — say, an ice-cream or a chocolate bar for all customers on a particular day — could go some way to recovering lost goodwill. Or, make a donation to charity in the name of all inconvenienced customers.

is this a

gOOd  Or bAd

reasOn  ? ? ? ?

incirent      ( Date: 02-Jul-2010 22:15) Posted: Please do not forget that Tamasek is a major stake holder.

SiNGAPORE fInancIal  gymnastIcs

at  DBS ? ? ? ?

Recently on Sunday Times

Minister George said he accepted China's claim that

SiNGAPROE is "BONSAI"

everything is sO small and

can be tailOred made like "BONSAI"

"BONSAI"  market  ? ? ? ?