LETTER TO BUMIPUTRA COMMERCE ON OUTSOURCING

Dr Rozali bin Mohamed Ali
Chief Executive Officer
Bumiputra Commerce Bank Bhd
6 Jalan Tun Perak
50050 Kuala Lumpur


4 September 2001


Dear Dr. Rozali,

OUTSOURCING

1. We refer to the briefing on 2 August 2001 on the Banks intention to outsourcing numerous functions to a new Operations Company (OPCO).

2. After due consideration and careful study, we are of the view that the outsourcing plans as it stand, would not be in the best long-term interest of the bank and its stakeholders - i.e. customers, shareholders and its employees.

3. Outsourcing as a business tool has its obvious advantages, quite apart from the fact that it is the latest fashion for companies to outsource their non-core functions. However, studies and experience throughout the world has not produced any convincing support to show that all outsourcing will achieve the desired results.

4. It has constantly been shown that outsourcing for the sack of outsourcing, without careful study and research, more often than not will result in adverse consequences to the company in terms of service level, cost effectiveness and ultimately, flexibility. This last consequence is indeed ironic, given that one of the main motivation for companies to outsource is to enable it to concentrate on its core competencies and hence to have greater flexibility to meet a rapidly changing business environment.

5. More often than not, the company that is awarded the outsourcing contract is unable to provide the necessary flexibility in both systems design and at a competitive cost. An example would be software upgrade to accommodate a new product.

6. Given the BCB outsourcing model, we can identify several weaknesses:

A. Lack of experience/ No economies of scale

i. For the OPCO to succeed (i.e. to be able to provide a service to BCB that is cheaper then current existing in-house system and to generate a profit) OPCO need economies of scale. OPCO can only achieve the desired economies of scale if can attract a large enough clientele - meaning it has to attract other banks apart from Bank Muamalat.

ii. OPCO's potential ability to market/offer its services to other Banks and companies is not tested and it may suffer from the perceived low standards and image - i.e. would the OPCO be able sell its services to other banks for example.

iii. Given that the other banks are competitors to BCB itself, they will jealously guard their sensitive customer database and customer profile. To convince them to engage OPCO to provide outsourcing service is difficult, to say the least.

iv. The BCB outsourcing model is nothing more than to transfer those functions, lock stock and barrel, to another legal entity (which will be almost entirely made up of existing BCB staff). Therefore no added value is being created and no new expertise/technology transferred.

B. Timing

Outsourcing of core operation has almost the same obstacles as integrating different computer system/corporate culture after a merger. BCB only just completed the integration of its operation system, and various other facets of its operations are yet to be fully integrated. To outsource a massive part of its operations will further complicate matters.

C. Lack of Consultation

i. Apart from the briefing on 2 August 2001 where the unions are basically told of the Bank's intention, there is no consultation with the employees, and more importantly with customers. Without the support and cooperation of the employees, as well as the understanding and confidence of its customers, the outsourcing project may spell disaster for the BCB.

ii. Customers must be convinced that any cost saving be passed on to them whilst employees must be comforted that their interest would not be jeopardized.

7. Outsourcing requires several factors to be successfully. Amongst them;

A. Competition

There has to be several outsourcing providers to generate competition and hence improve efficiency and reduce cost.

B. Corporate governance Transparency of contracts

More often than not outsourcing can suffer the same consequences similar to the government privatization programmes- i.e. the awarding of contracts to perceived cronies rather than those who can provide the lowest cost and best service.

The Malaysia Airlines example is a classic example, where operations are outsourced to companies controlled by certain individuals and which do not provide a more cost-effective service. When the airline outsourced its catering services, the cost of nasi lemak goes up, not down.

Unfortunately the above two crucial prerequisite are not convincing in the BCB model, given the plan to put OPCO under Commerce Assets and ultimately under Renong.

8. Given the above, we urge you to review the outsourcing plans so that the long term interest of the Bank, its shareholders, employees and more importantly, customers are not jeopardized.

We seek your indulgence.

Thank you.


Yours faithfully





ANDREW LO KIAN NYAN
GENERAL SECRETARY

cc:

BNM
Minister of Finance
Minister of Human Resources
Federation of Bank & Financial Institutions Employees Union