By guest writer Keir MacKenzie – an intern in our Glasgow office – and Ross Hunter, who’s been here a bit longer
Recently, the financial press has become increasingly agitated about the low level of productivity in the UK economy. In this article, we investigate the UK’s productivity shortcomings, explain how businesses can enhance efficiency through outsourcing and assess the investment industry’s performance in this regard, with a focus on marketing.
The 2008 financial crisis had dire consequences for UK productivity. In fact, over the past 10 years, the efficiency with which the economy creates wealth has ground to a halt. This contrasts starkly with the decade prior to the financial crisis, when the UK enjoyed average annual productivity growth of 2.1%. Had the pre-crisis trend continued, productivity in the UK would have been 20% higher than the present figure.
Between 2007 and 2015, the increase in the UK’s output per hour was a meagre 0.7%, placing Britain 17th in a Conference Board list of 20 high-income nations. Furthermore, in 2016, UK output per hour – an accepted measure of productivity – was 15% below the average in this group.
So why is productivity in the UK so much worse than elsewhere? Part of the reason for this could be because of the UK’s poor investment in infrastructure and the substantial gap between the UK’s productivity frontrunners and stragglers. For example, London, the UK’s most productive region, houses companies with productivity levels that are approximately 60% greater than those in Northern Ireland, the UK’s least productive region. What’s more, this sizeable gap does not look like closing soon, with record low interest rates enabling unproductive, ‘zombie’ companies to survive on ultra-low borrowing costs.
Further still, UK physical investment remains worryingly low compared to the rest of the G7, averaging around 16.5% of GDP since the financial crisis. Putting this into context, the UK invests a mere 1.7% of GDP in private and public research and development, substantially lower than the 3% of GDP that most other G7 members spend on such areas. And finally, the increasing number of people finding employment in unproductive industries – cafes, restaurants, supermarkets, etc. – is only making things worse, with fewer people finding work in more productive areas of the economy.
How outsourcing can enhance productivity
Despite this gloomy situation, there are some sectors playing a pivotal role in turning the UK’s productivity fortunes around. One way of improving business efficiency is through outsourcing, with the UK’s outsourcing sector second only to that of the US, according to Mark Fox, the chief executive of the Business Services Association.
Outsourcing enables a firm to concentrate on delivering their core services more efficiently by offloading non-core tasks to specialist independent businesses. The outsourcing company can benefit significantly from cost savings and lower overheads, and can reallocate resources to higher-value activities. Adopting an outsourcing strategy has also been known to result in quicker turnaround times, a competitive advantage over industry rivals, and a reduction in overall operational costs.
A study by Oxford Economics supports this idea, highlighting that for every percentage point of growth in outsourcing in the UK between 1995 and 2013, productivity increased by 0.12% more than it would have done otherwise.
The most active sector for outsourcing in the UK is financial services. Out of a total worth of £5.2 billion in outsourcing deals agreed in the UK in the first six months of 2017, financial services accounted for more than 50% of that figure. It is no coincidence, then, that the financial services sector boasts a gross value added per employee that is 1.5 times greater than the average employee contribution of other sectors.
Financial services companies have become adept at outsourcing “non-core tasks” to IT companies, legal companies, accountants, recruitment agencies, customer-service centres, and data-management companies. This begs the question: what are the “core” tasks undertaken by an investment company these days? The answer is probably designing investment strategies, marketing the products and managing the money that comes in from investors; pretty much everything else is peripheral. To cite an example, premium-bonds manager NS&I employs only 180 people but manages assets of £147 billion for 25 million customers, which the company can only do with a strong outsourcing strategy.
Elements of marketing are ripe for outsourcing
“After staff compensation, marketing and distribution is the single-largest category in most fund managers’ profit and loss accounts.” – Amba Research
But even within the ‘core’ area of marketing, there are areas where in-house marketing teams make use of external expertise. Creative and digital agencies have long been the staple outsource partner of choice for investment marketers. Now, add to that copywriting, communications and fund commentary. From our perspective as investment communication specialists, we see our asset-management clients enhancing their client retention and acquisition programmes through outsourcing in three ways.
First, many asset managers view fund reports as a regulatory burden, and thus the quality and effectiveness of such basic client communication can suffer. By outsourcing investment writing, asset management firms can spend more of their time on the “value-add content” and still have high-quality, accurate, and well-written client reports. Having such high-quality reports can provide essential communication between fund manager and client, as well as playing a vital role in marketing communications and in differentiating themselves from rival funds.
Second, your in-house writers are a precious resource – but few teams have the capacity to handle everything thrown at them, from engaging fund reports to creative communications to technical thought pieces. Outsourcing investment writing and communications allows firms access to a large and multi-skilled workforce, with a wealth of experience in investment writing and in working with all types of media and channels.
And third, outsourcing in general allows asset managers to save money on their fund reporting, add creativity to white papers and communications, and flexibly match resources to requirements in a more efficient manner.
Asset managers continue to look for ways to enhance the productivity of their businesses, improve competitiveness and secure a stronger position in a crowded market. To achieve these goals, we expect firms to use outsourcing in a more aggressive manner as they see it as an opportunity to manage their balance sheets, increase their productivity and improve their profitability.
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- How Financial Services Can Drag Britain From A Productivity Tailspin - November 20, 2017