OUTSOURCING AS A MEANS TO ACHIEVING COMPETITIVE ADVANTAGE? A SYNOPSIS OF A RECENT BLUEROCK CONSULTING CASE STUDY INTRODUCTION Whilst the European Wholesale Banking sector as a whole has been slow to embrace business process outsourcing (BPO) arrangements, the broker community has traditionally held no such reservations in pursuing the outsourcing option as a means of delivering effective operational capability. This appetite is well exemplified by the launch of Refco's Direct Equities electronic share trading platform in August 2001, a product supported by Merrill Lynch Securities Services (MLSS) outsourced post-trade clearing service. This synopsis derives from a recent Bluerock Consulting case study with the key personalities involved in the launch of the Direct Equities product from both a BPO customer (Ian Peacock, Head of eBusiness, EMEA (Europe, Middle East and Africa) at Refco) and supplier (Todd Scanlon, Director of the Merrill Lynch Securities Services Division) perspective. The case study focused on the following topics: - Why Refco chose to go down the outsourcing route ("Drivers for Change"), - Why MLSS was selected and how the outsourcing arrangement was implemented ("Transition"), and - How the ongoing relationship between BPO customer and supplier is managed ("Management"). DRIVERS FOR CHANGE From the outset, two key business drivers meant that Refco identified the need for the new platform to be supported by an outsourced post-trade clearing service: 1. Speed to Market Refco has built its reputation through the speedy delivery of innovative products and responding to demand from existing customers, was keen to bring an equities trading product to market as quickly as possible. The delivery of the Direct Equities front-end trading platform was viable within the timeframes Refco's management had envisaged. However, the time required to build a European and US equities clearing operation of sufficient scale and capacity from 'scratch' would mean the loss of any competitive advantage the new product might confer upon Refco. In addition, there were insufficient synergies to allow Refco to 'piggy-back' an equities clearing operation off its existing global futures clearing infrastructure. "Our objective was to create a pan-European and US platform that could become global very easily, in a very short timescale to satisfy demand within the existing customer base and the demand that we were seeing from new customers." Ian Peacock, Refco 2. Cost Control Traditionally, securities broking businesses are built on a number of clearing relationships; with one local clearer for each market traded. The maintenance of a network of local clearing relationships, particularly in Europe, has two severe cost implications. First, the costs of building and maintaining an 'in-house' back office team to manage these relationships. Second, fees charged by local clearers will typically be at a premium to rates negotiated by global clearers and will prove particularly expensive where volumes traded in a particular market are low. Refco's new equities trading product was developed on the idea of offering global market access at a significantly lower cost to market norms, meaning that it was imperative that clearing costs be minimised. TRANSITION Supplier selection Having decided an outsourced post-trade clearing service to support the new product, Refco was very clear on the criteria required to select a potential BPO supplier: - Global coverage; clearing membership of all current and future target markets, delivering a consistently low cost clearing product and able to provide a single point of global customer contact for Refco. - Scalability; possessing a clearing infrastructure of sufficient scale and flexibility to handle Refco's projected trading volumes in all markets and products with comfort. - Innovation; the ability and willingness to think and act commercially in conjunction with Refco; tailoring the service to Refco's bespoke needs often at short notice - mirroring the needs of Refco's customer base. Whilst a number of potential BPO suppliers could satisfy the first two criteria, it was Merrill Lynch's ability to demonstrate a commercial and innovative approach to customer delivery that won Refco's business. Implementation The entire process of implementing the outsourcing arrangement, from negotiation to 'go-live' was completed in four months. This speed of movement was, of course, assisted by the absence of a significant equities legacy infrastructure at Refco. The 'hands-on' involvement of senior European Refco management in Ian Peacock (Head of e-Business) and Mark Slade (Chief Executive) was also crucial to the reduced timescales achieved. A dedicated client 'take-on' team at MLSS handled the Refco implementation once the commercial negotiations had been completed by the MLSS Sales and Marketing team led by Todd Scanlon. MANAGEMENT Operations Merrill Lynch provides an equities clearing service for all markets in which Refco clients currently transact, together with a number of additional post-trade activities such as transaction reporting and contract notes(delivery). The 'day-to-day' customer relationship is managed by a dedicated client service team at MLSS, providing a single point of contact for all Refco's issues and questions relating to trade status or operational / technological performance. High rates of STP are delivered through electronic interfaces between the Refco and MLSS system infrastructures, whilst Refco are able to monitor trade status and MLSS system performance 'on-line'. Commercial Partnership A key feature of the Refco / MLSS relationship is the ongoing commercial dialogue between BPO customer and supplier. Refco's continued development of the Direct Equities product to incorporate new instruments or markets is closely referenced to Merrill's capabilities as a provider of clearing and post-trade services. This interaction is enabled by the efficiencies of the daily clearing operation which has enabled Refco's senior management to concentrate on its 'core competencies' of customer service and business development. A commonality of corporate culture is also acknowledged by both parties as a significant contribution to the dynamic nature of this relationship. LESSONS LEARNT Although the Refco / MLSS outsourcing relationship is a little unusual in that it did not involve the handover of an existing product or function, there are a number of interesting 'learning' points for potential customers of business process outsourcing or readers with a close interest in the BPO marketplace: - The decision to outsource must be taken as part of a clear corporate strategy. - Cost control is only one of a number of reasons for outsourcing and not necessarily the most important. - Service flexibility and a willingness to innovate are key characteristics to look for in a potential supplier. - Senior management sponsorship and appropriate involvement are vital to facilitating a successful transition to an outsourcing arrangement. - Synergy of corporate culture and a shared vision, creating a sense of 'partnership', are crucial to the success of the BPO customer / supplier relationship. - A successful outsourcing 'partnership' can create a real competitive advantage for a BPO customer.