Risks associated with outsourcing financial services have been highlighted by the spectacular profits warning from travel promotions company Landround, which is responsible for handling points-for-travel claims from customers of a new credit card from Morgan Stanley.
Alternative Investment Market-listed Landround dropped the ball by underestimating the response to a promotion it was handling for another client.
The mis-management left the company’s staff unable to process claims without incurring additional costs, which ultimately forced the company to publish an exceptional charge of £454,000 in interim results last week
Landround shareholders had to deal with a 35% fall in the value of their holdings on the day and an interim dividend slashed to 2.5p from 3.5p this time last year.
However, managers at Morgan Stanley and their customers are more likely to be concerned that the outsourcing deal signed will not live up to expectations.
Landround itself made much of that deal in its results, pointing out what a big step it was for its “Buy and Fly!” credit card services – through which credit card holders can exchange points for travel.
”[It is the] first major consumer-orientated contract and is, thus, a very important development for Buy and Fly! We expect it to be the forerunner of a number of similarly large contracts.”
Given that connecting with customers has never been more important for financial services providers and distributors, Landround’s difficulties come as a poignant example of the risks associated with handing over responsibilities to other firms through outsourcing deals.
There is no suggestion Landround will not be able to meet its obligations under the deal with Morgan Stanley, but it is clear Landround has suffered financially because of its own ability to properly manage travel-related promotions in the recent months.
The risks associated with outsourcing may not only be financial or reputational: with authorisation to perform regulated activities comes the burden of explaining to the FSA why customers have been mis-treated, if that is the case, even where failure to provide the service may actually lie with another party.IFAonline
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