QBE rolls out restructuring success
Savings from a methodical restructuring that pulls much of QBE's administrative work world-wide into a giant processing centre located in the Philippines capital of Manila are on track to hit his target of at least $250 million a year, and should beat the mark comfortably.
The head of QBE's Australian businesses, Colin Fagen, says for example that he is now extremely confident that his businesses will lock in more savings than expected.
Redundancy costs are lower than anticipated in Australia, for one thing: 521 staff have been affected, but 364 of them are being relocated within QBE, and there have been only 39 payouts. Fagen also says that the new Manila office is delivering significantly better productivity gains than expected.
Neal has designed the restructuring to deliver savings quickly by putting capital-intensive information technology changes at the back of the process instead of at the front as often happens, and he says natural disasters are not bearing down on the group's reinsurance business.
He has formally maintained QBE's profit guidance but there's a growth asterisk next to it after the briefing, and investors reacted on Tuesday by pushing QBE's shares up by 4.2 per cent to $15.94, adding almost $800 million to the market value of the group.
The shares fell from $28.05 in October 2008 to $10.10 in December last year, about 11 weeks after Neal took over. They are up 58 per cent since then, and have risen by 25 per cent since the end of February when he announced the restructuring.
O'Halloran turned QBE into a genuine global force in the general insurance industry, but incomplete integration of businesses that he acquired became an increasingly pressing issue from 2008 onwards as the global crisis and the economic downturn it spawned made cost controls much more critical in profit growth plans.
There is an element of catch-up in Neal's restructuring, which centres on creating common administrative processes for the insurers the group owns around the world, and sending the homogenised workload to Manila. The group's big overseas competitors, including Travelers, Ace, Zurich and AXA have had centralised offshore processing for a decade or more.
O'Halloran completed so many acquisitions that there is significant latent power inside the Australian-headquartered group, and Neal argues that in some respects he is going to get last-mover advantage.
Having reviewed the options, he is for example building his Manila processing centre as what is effectively another wholly owned division of the group, instead of contracting the processing work out to an external company, or joint-venturing the project.
QBE is taking on business development risk as a result, but it has greater management control from day one, and Neal has put in place solid processes for the switch to Manila, including the duplication of work until QBE is certain transfers have succeeded, and a series of "go/no go" checkpoints as the project rolls out.
The stronger-than-expected productivity lift Manila is delivering in areas such as work turnaround times, meanwhile, may reflect not only economies of scale as the same task is done in Manila many more times for offices around the world, but a quality of work dividend, as QBE emerges as an employer of choice in Manila's offshoring industry.
So far, 90 per cent of its employees there have an undergraduate degree: 30 per cent have postgraduate qualifications.
RBA on course
The dollar's 10 per cent depreciation in May and June explains why the Reserve Bank left the cash rate unchanged at 2.75 per cent on Tuesday.
It says once again it can cut if it wants to, but the declining dollar adds a layer of support to the economy that supplements the Reserve's own monetary easing - a reduction in the cash rate from 4.75 per cent in October 2011 to 2.75 per cent by May this year that has pushed all borrowing costs lower.
The Reserve as good as says it would like the $A descent to continue, in an orderly way of course, but even if that doesn't happen, it will need time to assess the double-barrel impact of a lower currency and low rates.
Employment and jobless numbers are the key measuring sticks, and the June labour force data will be released on Thursday week.
A month's data on jobs may not be enough, however, because the currency effect feeds in slowly: rates may now be on hold until after an election, regardless of whether Kevin Rudd chooses August, September or October.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
John Neal, who became QBE's CEO in August last year, launched a methodical restructuring to unlock economies of scale from more than 120 acquisitions made under his predecessor. The plan centralises common administrative processes across the group's insurers and funnels homogenised workload into a large processing centre in Manila to cut costs and improve efficiency.
QBE is targeting at least $250 million a year in savings from the restructuring. Management says the programme is on track to meet that target and expects to beat it comfortably as productivity gains from the Manila centre and lower-than-expected redundancy costs come through.
QBE has created a giant processing centre in Manila to handle centralised administrative work for its global insurers. The centre is delivering stronger-than-expected productivity gains — faster work turnaround times and higher quality — helped by scale and a highly qualified workforce (around 90% with undergraduate degrees and 30% with postgraduate qualifications).
In Australia 521 staff were affected by changes, but 364 were relocated within QBE and there were only 39 payout redundancies, which meant redundancy costs were lower than initially anticipated according to QBE's Australian head Colin Fagen.
Investors reacted positively: QBE shares rose 4.2% to $15.94 after the briefing, adding almost $800 million to group market value. For context, shares had fallen from $28.05 in October 2008 to $10.10 in December last year but were up about 58% since that low and 25% since the end of February when the restructuring was announced.
Yes. By keeping the Manila centre as a wholly owned division rather than outsourcing or joint‑venturing, QBE is taking on business development risk. Management says the trade‑off is greater control from day one and it has built safeguards — duplication of work during transfers and a series of 'go/no‑go' checkpoints — to manage implementation risk.
According to John Neal, natural disasters were not bearing down on QBE’s reinsurance business at the time of the briefing, suggesting no immediate reinsurance pressure from catastrophe losses in that update.
Macro factors matter for investors. The article notes the Australian dollar fell about 10% in May and June, which helped the Reserve Bank hold the cash rate at 2.75%. A lower currency and low interest rates can support the economy and borrowing costs, but employment data remains key — the Reserve Bank will watch jobs figures closely before changing rates, which could influence investor sentiment more broadly.
Call 1300 880 160
Start a chat
Schedule a call
