Trade Execution Outsourcing - a game changer for competing in todays complex trading environment....
Updated: Jun 13
In today's global marketplace, outsourcing can play a crucial role in addressing the trade execution and shipping operations challenges faced by commodity trading companies. By entrusting certain aspects of trade execution to external experts, businesses can unlock a multitude of benefits.
In this article, we explore the opportunities, challenges, and risk mitigation strategies for implementing outsourcing solutions for commodity trade execution.
Offshoring vs Outsourcing
While large trading houses and industrial commodity buyers have consolidated and centralised organisation functions into 'service centres', typically offshored outside of the HQ home country, it requires significant scale and capabilities to implement and manage offshoring successfully. However, even for those without equivalent scale to consider offshoring, outsourcing remains a viable option, offering comparable benefits and flexibility.
In addition to offshoring, large trading enterprises (think ABCD++) also outsource processes to third parties. Even core functions such as merchandising & trading will outsource tasks which are not always feasible, or desirable, to execute in house. Examples would include knowledge based tasks that require significant expertise or experience, such as outsourcing business development and price discovery to third party agents and brokers.
Consolidating and centralising process execution, whether for related or unrelated entities, leverages the scale of the client base to access expertise, improve performance and flexibility, and reduce costs.
A central theme in all Crest's trade execution posts is 'improved performance.'
An expert trade execution professional is also an advisor to the business on contract execution, shipping, and exceptions management. They use their domain knowledge to bring actionable insights to manage and mitigate performance risks.
Trade execution process outsourcing combines elements of Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) to deliver enhanced performance. It achieves this by executing repetitive and standard processes (BPO), such as invoice payables processing, while also leveraging knowledge and domain expertise to manage complex processes and provide actionable insights to clients (KPO). For instance, tasks like laytime finalization and dispute resolution benefit from the specialized knowledge and expertise offered.
Opportunities and Benefits
There can be a perception that outsourcing decisions are generally made on the basis of cost savings. However, in our experience cost reduction is not always the strategic driver for an outsourcing decision, but is an added value and benefit if it can be achieved.
As an example:-
For traders in high-cost locations, such as Switzerland, the cost benefits of outsourcing can be significant but of more strategic importance could be access to a broader pool of talent and expertise to mitigate business continuity risks which can arise from the relatively small local talent pool, and high level of competition for experienced employees.
Meanwhile, traders operating in relatively low-cost locations may need to access expertise and capabilities, not readily available in their local market, to manage growing business complexity. While the cost of execution may not decrease, overall gross margins can be enhanced through the timely mitigation of execution risks that an expert and experienced professional can identify and address.
Outsourcing commodity trade execution processes offers numerous opportunities and benefits in today's trading environment:
1. Improved Performance: Access to expertise, experience, and capabilities which improve performance and meet customers service expectations.
2. Reduced Execution Risk: The visibility and timely & accurate reporting by service providers improves decision making and reduces execution risk. SME’s will be able to access digital solutions at low, or no, capital expenditure through outsourcing.
3. Reduce Costs: By eliminating the need to hire and train additional personnel, businesses can reduce the fixed costs of operations. Typically, the service provider would also leverage the scale of their client base to provide further operational savings.
4. Increased Organisation Flexibility: Outsourcing allows business to scale quickly to meet changing demands arising from seasonality or new market opportunities. The service provider manages the demand for its services across its client base by allocating resources internally.
5. Reduced Complexity: The business is concerned only with managing the process handover and performance outcomes, not with the process execution itself. Internal resources are freed to focus on more strategic activities.
Lastly there is also the peace of mind, gained through outsourcing to reliable providers, which allows leadership teams to focus on business development and value creation, as the business resourcing and performance concerns are mitigated.
Determining The Processes to Outsource
Identifying the processes to outsource requires careful consideration and analysis. An experienced consultant can support the business decision making process in this.
Managing uniqueness: While there is some uniqueness in every business, execution processes are generally standard across commodity sectors. Any uniqueness can be managed by having clear exception management protocols in an agreed operations framework.
Core competencies: Processes directly related to the competencies that differentiate you from a competitor, and create customer value and retention, should generally be kept in-house.
Cost-Benefit Analysis: An analysis should be concluded to determine the financial cost-benefits of an outsourcing model versus in-house execution. While a comparison can be made on total direct costs of in house employees vs an outsourced solution, there must also be consideration to potential cost savings arising from increased efficiency, and the benefits of reduced risks.
Below is a table of costs to consider in a like for like analysis .
Implementation Challenges and Risk Mitigation
Outsourcing presents numerous advantages, but it's important to acknowledge the challenges it entails. Effectively addressing these challenges and developing proper risk mitigation strategies is essential for a successful implementation.
Let's begin by addressing a common concern related to the perceived risk of relinquishing control. It is often expressed as,
"The risk is too high to entrust someone else with this responsibility."
While every business may have initial concerns, challenges, and questions, it is crucial to clarify the specific scope of "this" within their context. The term can encompass different activities and processes depending on the unique nature of each business. Identifying and understanding these concerns is key to developing an appropriate strategy that aligns with the desired business objectives during the implementation phase.
Establishing a well-defined, documented operational framework, along with clear decision rights between the service provider and the client principal, becomes imperative to maintain control over outsourced processes and exceptions.
Regular communication and reporting between the provider and client organisation is a critical element for successful outsourcing. Open communication channels and periodic performance reviews help foster trust and transparency. Defining a set of key performance indicators ensures visibility into the performance of the outsourced operations.
While selecting service providers, it is essential to prioritise those with robust data protection measures and adherence to information security standards. Safeguarding sensitive data and ensuring its confidentiality is generally of utmost importance in outsourcing arrangements.
Finally, effective organisational change management is paramount. Ensuring the engagement and involvement of teams throughout the process is key to successful implementation of process outsourcing.
By implementing appropriate risk mitigation strategies and following best practices, businesses can navigate the outsourcing landscape successfully and reap the rewards it offers.
Outsourcing can be a game-changer for businesses looking to streamline their processes, access expertise, scale with speed and consistently meet their customers’ expectations. The opportunities and benefits make outsourcing an attractive option.
It is essential to address the challenges and implement proper risk mitigation strategies and exception management processes. Clear communication channels, robust data security measures, and cross-cultural understanding are key to successful outsourcing partnerships.
In the dynamic and complex business environment of commodity trading, staying ahead requires innovation and leveraging the best available resources. Outsourcing can be the catalyst that propels your business towards excellence in trade execution.
Connect with Crest Trade Services to start a conversation on how we can support your trade execution transformation.
Tel: +41 22 710 21 60