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The Actuary The magazine of the Institute & Faculty of Actuaries

Outsourcing: The drive for efficiency

Despite the well-publicised decline of Defined Benefit (DB) pension schemes in the UK, consultancies are experiencing increased workloads. The bedrock of this work remains the traditional actuarial calculations – both individual and bulk – but a myriad of new legislation, coupled with the demand for more complex assumptions, means that much of the work is becoming increasingly specialised. Meanwhile, trustees are ever more cost-conscious and salary costs for actuarial staff continue to escalate. The need for efficiency gains is paramount.

Increasing complexity demands greater specialism, and a natural solution is to employ specialist teams. Many consultancies have already set up teams focusing on areas such as accounting and legislation. These teams are almost universally in-house and UK-based. For actuarial calculations – most notably DB valuation work – there is more scope for flexibility.

Three options are to:

>> base a specialist team in the UK
>> set up a specialist team overseas
>> outsource the work to a third party.

All these methods can lead to improved efficiency, together with more consistency in method and presentation. Via the use of non-actuarial staff, the first two options can also lead to a reduction in labour costs – particularly if the team is based overseas. I have seen salary levels for such staff in Eastern Europe and India that are about 40% - 50% of those of their UK counterparts. The cost for the third option can be fixed in advance, thus significantly reducing the risk of going over-budget.

However, there are some potential barriers that may prevent the use of a specialist team. Some consultancies take the view that valuation work is an important element in the development of their staff, accepting the resulting negative impact on efficiency. Many Scheme Actuaries can also be quite protective of this type of work and are thus reluctant to delegate it.

While both these viewpoints are valid, I have found that the latter, in particular, can be countered provided the work produced is of a high quality. However, given that there are likely to be teething issues with the first two approaches, there is the real danger that confidence will be lost before they can be fully implemented. One way to ‘test the water’ would be to outsource a limited amount of work, and gauge the reaction.

Generally speaking, trustees do not appear to be concerned with who is doing the ‘number crunching’, provided that it is right! One trustee I spoke to (who is also a Scheme Actuary) commented, ‘The only potential issue is one of data protection – particularly if the work is outsourced overseas. However, this can usually be overcome via anonymising the data.’

The level of set-up costs is always a vital factor when appraising viability. If the work is outsourced, then initial costs can be avoided entirely. For in-house teams, there will inevitably be the need for an investment of time, resource and capital.

The question of whether to set up a team in the UK or overseas is a difficult one. While employing considerably cheaper labour abroad may seem attractive, this has to be balanced against factors including the availability of staff to support them, and the ability to recruit, train and retain a team.

Several other issues also need to be addressed at the outset, including processes and staff. The less experienced a team is, the more important it becomes to provide them with a rigid process. Defining and refining processes is both time and labour intensive. Also, for valuation work, implementing processes can only take you so far.

Perhaps the most fundamental requirement is to have a core of experienced staff able to guide the team. These will usually have to be recruited internally, but the issue of whether potential candidates are available and can be spared from their current roles may be prohibitive.

As with all new projects, the timing of implementation is an important consideration. Is it more effective to recruit a full team at the outset and ‘fast-track’ them with intensive training so that they are fully operational within a period of months? Or is a more slow-but-steady approach most suitable, whereby a small team of existing staff is given the time to set up and implement processes and train staff, before gradually expanding with the aim of reaching full capacity within two to three years? My personal preference would be for the latter approach, but commercial pressures may not always allow it.

While the advantages of a specialist team are clear, there are hurdles to overcome – both physical and emotional. The route chosen by those companies who opt for specialism will obviously vary, depending on company philosophy and their precise objectives. Some companies have already started moving in this direction, but many are in danger of being left behind in the race for efficiency.

Bill Harris is the founder and managing director of Exactval.