For a variety of economic, competitive, operational and technical reasons, business process outsourcing (BPO) is booming in insurance.

In a recent survey of 165 insurance personnel, Boston-based Celent found that 49% of respondents expected their company's use of BPO to remain level in 2011, while 36% expected it to increase.

For many years, insurers have turned to BPO providers to manage the operational aspects of their businesses that while necessary, were not necessarily competitive differentiators. Yet, it is only recently that insurers are availing themselves of a widening array of insurance-specific outsourcing services, some of which are customer-facing.

"The market place has not changed dramatically; the big players are still the big players," says Don Desiderato, a principal in Novarica's insurance practice. "What is changing is what these firms are doing."

Indeed, the arc traced by BPO providers is a familiar one. Much as, say, a manufacturer might initially offer a single commoditized component before eventually entering the consumer market with a fully realized product, BPO providers are making a similar, vertical move. In the broadest of narratives, BPO became popular in the 1970s and was largely synonymous with IT outsourcing. The most common instance was to utilize a skilled, and cheaper workforce located in developing countries to maintain legacy systems. To be sure, some insurers came to regard BPO merely as a handy way to dump problematic processes onto others.

As BPO providers gained more skills at the application level, many insurers utilized BPO as a staff augmentation strategy. This was especially the case in the 1990s, as insurers worked on re-writing code leading up to the perceived Y2K threat. By the 2000s this "human wave" theory of BPO had largely subsided, and BPO providers were eventually entrusted to perform more back-office functions such as billing, printing and scanning.

Now, a new era is at hand as BPO vendors offer specialized business capabilities and functioning as extensions of an insurer's operations. As trust has been built up between insurers and their BPO vendors, the vendors are now moving up into areas of moderate differentiation, such as call center operations. For example, a BPO provider might be tasked with recording FNOL or operating an entire call center during a CAT event, or managing customer service overflow for off-hours and weekends.

"Knowing technology is not enough, it's the ability to contribute from a business perspective that's more important," Desiderato says. "The most valuable technology people are the ones who know the most how the business operates."

To work, this type of relationship requires both parties to engage much more fully on technical, process and personal levels. These operations are sufficiently different from traditional BPO that Novarica has coined the term "virtualized insurance company operations" (VICO) in order to delineate the subset of providers offering true insurance-specific processing from the larger field of traditional BPO vendors.

"BPO vendors realize they will be rewarded for making improvements and bringing value to insurers," says Celent Senior Analyst Ben Moreland. "Likewise, insurers have to open up in order to create a tight partnership and make it a two-way street. The word partnership has been used and abused but you have to make [vendors] part of what you do because you are reliant on them."



It is precisely these types of relationships that Mike Lancashire VP, claims and integrated customer solutions at Jacksonville, Fla.-based The Main Street America Group, has been cultivating since 2006. Lancashire says the company initially identified non-core adjuster duties to implement under a BPO agreement with Rolling Meadows, Ill.-based Innovation Group. "When we started outsourcing some of our non-core services, the biggest piece was subrogation but we moved from there to other areas such as auto physical damage," he says.

According to Lancashire, this evolution from dealing with a vendor to dealing with a strategic partner was only possible after the company committed to building an interface to link the two companies. "I guess you could call business process outsourcing the engagement, but once you build the system interface there's much more commitment and it is similar to a marriage."

The benefits of such a union are many, says Bill Langley, CEO North America BPO for Innovation Group. "With a strategic partnership in place, insurers can use BPO as a strategic building block to ensure operational efficiencies, and as a vehicle to position strategic and competitive options," he says. "When an insurer goes this route, they will also likely have access to variable process options, affording them more flexibility in their business model."

Langley says the value proposition of outsourcing has changed and gone beyond operational cost savings and staff augmentations to more strategic business value enablement, such as the introduction of new business models and products and services. "It's not just about processing the data; it's a longer-term relationship built on operational efficiencies, innovation and competitive advantage. It's now more about the business and less about IT."

Lancashire agrees and is more enthused about the new capabilities BPO enables than the labor-derived cost savings. Aligning with a BPO partner enables regional insurers access into new geographical markets and volume discounts to ancillary services such as salvage and auto rental. For example, Main Street America Group's partnership with IG afforded them access to its network of 2,500 body shops across the United States. "The reality is that labor arbitrage doesn't give you the efficiencies you are looking for," he says. "Our biggest lift has come on the expense side by utilizing IG's network and truly maximizing the repairs on our vehicles. We've seen a 8% to 10% reduction in our allocated loss adjustment expense by leveraging the expertise of the process vendor."

Despite these successes, Lancashire cautions that carriers have to be judicious in their use of BPO. "At Main Street America, customer service is considered a sacred area, and we tread cautiously," he says. "Most of the things we've done so far are back-office or administrative processes. When it actually comes down to servicing our customers (independent agents) and their customers (insureds), the vision has been to hold it within the company. However, we've ventured into some partnerships with vendors, such as Innovation Group, with big success."



So what additional benefits can insurers accrue by leveraging BPO? Lancashire says one of the most profound is simplifying their technology stack. "Companies are looking to outsource their most complex processes," he says.

Celent's Moreland agrees that removing complexity is vital for insurers. Dealing with one strategic partner who closely understands a carriers' systems and objectives obviates numerous interactions with sundry consultants and vendors. "Especially during hard times, insurers have found that the complexities they built up are hurting them," he says.

In an era of flat IT budgets, some of the money saved by BPO could conceivably be re-purposed for other investments. Likewise, by eliminating the drudge work of managing networks and applications, insurers can reallocate time and people to more strategic and competitive initiatives. Another operational benefit for insurers paired with a BPO partner with global operations is the ability to "follow the sun" and go to 24-hour operation, Moreland says.

While BPO providers have long targeted Tier 1 insurers, one could argue that the value proposition of BPO is greater for smaller insurers looking to trim costs or expand into new markets. "Smaller insurers will use BPO offerings because of the initial cost savings," Moreland says. "The upfront cost of a datacenter is now so high, that they would prefer to pay by the drink."

The scale of the largest BPO providers offers another benefit, speed. By aligning with a company that has thousands of employees, insurers are able to ramp up significantly and ramp down when they need to, providing them with tremendous flexibility. "A start-up may have insurance expertise but no IT expertise built up," Moreland says. "They really don't have an option. If you want to get in the game quickly you have to go with something ready-made."

It is here that BPO intersects with the broader trends of cloud computing and software-as-a-service (SaaS). Since the cloud and SaaS promise a quicker implementation and upgrade path, many BPO vendors are partnering with and sometimes acquiring SaaS vendors. In addition to the speed advantage, this confluence makes sense on a financial level. Considering how expensive it has become for a carrier to buy, implement and maintain a policy administration platform, CIOs are bound to look on a per- policy basis.

"People are talking about 'process as a service' or outcome-based pricing," says Suresh Muthiswami, head of insurance for Tata Consultancy Services. "There's a lot of interest in those areas now."



The monetary and operational possibilities inherent in the BPO model notwithstanding, some impediments to wider adoption remain. There are a variety of cultural aspects and risk concerns that need to be managed when you execute on a sourcing strategy like this. What's the risk and how are you going to mitigate it? These are the typical questions that need to be addressed. One primary challenge is allaying fears many insurers have about moving data or processes outside their wall, let alone to another continent or subcontinent.

Moreland thinks as the technology has matured misgivings about perceived loss of control have waned. "As trust is built up, we'll see insurers outsourcing more and more - for no other reason than to protect themselves from themselves," he says.

Accordingly, he foresees see more true partnerships where insurers and BPO providers connect C-level to C-level. However, he thinks this will take time, especially for business critical functions. "We won't see widespread BPO of claims or underwriting, pricing or actuarial for at least five years," he says.

Muthiswami says three to four years ago European insurers were more open to BPO than American insurers. Now, he sees a more proactive approach to BPO. "More and more insurers have been asking us, 'where can you add value?' Lately we have been helping a lot of insurers set up a mobile backbone, whether it's android or iPhone."

When it comes to implementation, Lancashire advises insurers to have a long-term BPO vision. "The lesson we learned is to smart small and build from there. When we tried a big-bang approach and implemented all lines of business countrywide with a process change, we had limited success. Where we've gone in smaller pieces with a smaller business process, and then moved from a pilot to a staged implementation, we've had much greater success."

Moreland counsels insurers to optimize their processes before partnering with a BPO vendor. "With costs up, it may more expensive to do BPO if you have inefficient processes," he says. "Also, make sure you understand objectives from a business perspective and find the right vendor. Lastly, make sure you have the right contract in place and use monitoring metrics that you look at monthly."

Desiderato agrees that constant interaction between insurer and BPO partner is vital to avoid brain drain and loss of institutional memory surrounding critical processes. "When you use BPO you don't completely relinquish the function, you find a way to create a model in which your existing people are overseeing and interacting with what you are outsourcing," he says, adding that if he was building an insurance technology organization from scratch he would aim for a 40/60 split between full-time employees and vendor staff. "I would look heavily at every back-office function that is not-client facing and consider the opportunity for sourcing it." INN


The Wide World of BPO

While many of the world largest business process outsourcing firms are domiciled in India and have long relied on the country's labor as a source of competitive advantage, the global BPO market has become much more diffuse in recent years by migrating to areas where companies can take advantage of labor arbitrage.

Indeed, according to one estimate by IBM, BPO activity in the Philippines exceeded BPO activity in India in 2010. Don Desiderato, a principal in Novarica's insurance practice, says much activity has shifted to countries such as China and Ireland as prices have risen in established outsourcing destinations. "India no longer has the market to itself because prices are going up and the value proposition is not what it used to be," Desiderato says. "If I were an insurer investigating BPO I would do a broad scan."


Will BPO Give Way to BPU?

The concept for business process utilities (BPU) is simple enough. BPU seeks to hybridize highly customized BPO processes with the rapidity and scalability of cloud computing to enable a quick, standardized platform for buying business processes.

Much in the manner of cloud services, BPU enables businesses to choose a set of features and functionalities that best suit their needs and pay for them on an as-needed basis. Similar to how the mass production of automobiles greatly expanded their utility and availability, the argument for BPU is that commoditizing BPO will lower its price and boost its usefulness for consumers. While traditional BPO offerings were largely custom-built for large enterprises, BPU will be aimed initially at small and midsized companies.

By eliminating the need for upfront capital expenditures, BPU may help smaller or budget-constrained carriers achieve business transformation on the cheap. From the vendor perspective, BPU affords them the opportunity to defray development costs by selling a similar offering to multiple clients. Celent Senior Analyst Ben Moreland sees some merit in the concept. "Our systems, architectures and processes are not as unique as we like to imagine," he says.

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Corrected March 11, 2011 at 3:18PM: yes