Time, resources and skills are the key components to why companies turn to Third Party Administrators to help with the smooth running of their business, says Terry Simister
THIRD PARTY Administration, unbundling of services, outsourcing, contracting out or sub-contacting. These are all terms which, over the years, have been used to describe a situation where a business decides that it does not have sufficient ‘cost-effective’ skills in-house for a particular project and therefore seeks to buy in specialists to fill the role. Perhaps the main differences today are that there has been an increase in the use of such facilities and that they are increasingly being used to supplement skills already in place.
So, what is available and should you, as a risk manager, even consider using them? I will try in this brief article to look at various aspects, but particularly the benefits, or otherwise, of going down this route.
In terms of availability of services, there is virtually nothing which cannot be bought in – provided that you are prepared to pay the price! You can certainly source everything from insurance broking to fund management, health and safety to business continuity planing, structural planning to fire protection, etc. The big question is – ‘Why should you?’ and the usual answer is ‘Because I haven’t got the time or resources to do it myself’.
Before getting to this point, however, perhaps the first question that should be asked is what facilities and at what level are these available from your own skills, those of your team (assuming that you are lucky enough to still have a team) and those of other members of the business for which you work. Secondly, are there any time restraints on the people who may be able to provide services in-house. I do recall being involved with a college on one occasion where the question of COSSH assessments was raised. The obvious solution, as far as the management team was concerned, was to give this job to the head of chemistry, conveniently forgetting that he was teaching all day.
Skills shortage
If this base is compared with the demands and needs of your business then this will provide the first indication of any requirement for additional services, either because there is actually a shortage of skill or there really is pressure on time.
Let’s consider what the modern risk manager needs to fulfil his role. We know that the needs are for multi-skills, but do these have to be in one individual? Historically the risk management practitioner came from an insurance background and had access to specialist personnel within his business. These specialists usually covered such areas as health and safety, security, fire, financing, personnel, etc. Given that the background for the modern incumbent is often no longer the traditional insurance route and that businesses have seen fit to remove many of the other skills during the down-sizing process of recent years, then perhaps the bigger question is now more about how can these various needs be met in the most economic way.
Obviously, in the first instance, the risk manager will be setting the policy and then identifying the needs and the shortfalls. Once he decides that he cannot fulfil these internally then the outsourcing considerations come into play. So let’s look at the benefits and pitfalls of taking this route.
First, the pluses, some of which, such as skill level and time, we have already mentioned. In addition there is usually a question of availability. Since most consultancies tend to work to a short-term contract base, they will generally have personnel available for an instant, or fairly instant, response. They also will mostly have a duplication of persons in any particular role and this will increase the availability and provide cover in the event of an unforeseen incident, such as illness.
Many consultants are specialists and will concentrate on one particular aspect only. This means that they are generally highly skilled in their particular field and have been used to operating in a variety of business scenarios over the years. This wide-ranging business activity means that there is a greater potential for expanding the knowledge across the various scenes and puts a distinct breadth into the skill base which is being purchased.
This is particularly true where the consultancy specialism is in a specific trade within a particular field means that comparisons are more easily dealt with as there will be a significant archive of knowledge gained over the period of work. With the modern and increasing requirement for benchmarking this means that the consultant has a head start in the preparation of such information, especially as it relates to the establishment of standards.
Competitive pricing
So, once a consultant has been chosen and their skills and availability have been outlined, the cost element has to be looked into. Here again the act of outsourcing can bring in benefits, especially if the need is for services from one of the currently ‘over sourced’ areas, such as health and safety. The sheer volume of consultants, ranging from individuals to large scale businesses, is such that there is immense competition and this has produced some extremely competitive pricing. In the longer term it also means that you can regularly measure both the benefits being obtained and the cost base – and, of course, if the consultant is aware that you are investigating these aspects it does help to keep their pencils sharp at negotiations.
Finally, there is also the cynical view that the consultant will (probably) have some professional indemnity insurance which can be brought into play if anything goes wrong!
Well, there we are, you have got a consultant, he is skilled, available and cheap – are there any potential problems?
Firstly, he may be skilled, but he really does not know your company. There has been much talk about business culture over the years, but I feel that it really is an important aspect of these considerations. For example, if you decide to outsource your business continuity planning to a specialist company they will, hopefully, spend time talking to your key personnel to try to understand what actually happens within the business before proceeding. How ever long these discussions are they can only produce a ‘surface’ view. Matters such as: ‘We are very friendly with our sole supplier’ may be indicative, but an outsider can never really understand the closeness of this relationship, which may have built up over many years.
Secondly, since he is an outsider, will your own people treat him as such rather than as a member of the in-house team. This is an important aspect since in much of the appropriate work the co-operation and honesty of employees is of extreme importance.
Thirdly, there is the question of commitment. Yes, you are paying a fee for the services – but does this mean that you will get the first choice or the special support when it is needed? You pay a fee to the IT. support company for facilities in the event of an IT disaster and then, just when you need to invoke these facilities, you find that there has been other failures and you are fifth in line for the three systems! OK, so they have got their own back-up – but it is in Newcastle and not London. Or perhaps things get a bit difficult on a health and safety inspection and it is taking much more time than originally thought. Will the consultant stay on, or will it be another day’s charge?
Fourthly, much depends on the consultant chosen. I’ve already mentioned that in some fields the available base is very wide ranging and includes many sole practitioners. How deep is the support if the individual is taken ill or has already made a full time commitment to another client just when you need the help. Obviously, the larger the firm, the less likely this is to happen, but you can still lose the services of the person with whom you were used to dealing. I understand that this has become a key problem in the insurance broking world following the recent mergers and the ‘consolidation’ which has followed.
Finally, the consultant needs a clear brief to work to and needs controlling within the role you are asking him to fill. All of this increases the responsibility and pressure on your own time.
As I said at the beginning, there is evidence of an increasing use of outsourcing and unbundling of services, but is there a driving force behind this change? It has been suggested that perhaps the development of corporate governance standards are to blame as businesses try to ensure that they are not falling foul of the quality needs. Personally, I have seen little evidence of this and as an alternative I would like to suggest that perhaps a greater force is the need to shift costs from a direct to indirect base to support the ‘downsizing’.
It is a relatively simple exercise to say that if you pay a salary of €30,000 to an in-house specialist then your overall cost is somewhere in the region of €60,000 plus support services. This buys skill and, hopefully, commitment but the actual availability is only around 200 days each year, allowing for weekends, holidays, etc. The same spend would probably buy between 100 and 300 days of consultancy time – but on an ‘as needed’ basis only!
So, in summary, there are a wide range of services available and benefits to be gained out of using them, but there are pitfalls and careful consideration needs to be given to ensure that the requirements are being driven for the right reasons.