The decision to send IT operations overseas is often viewed in the pejorative by IT line personnel, who feel they must continuously "skill up" or face the unemployment line. Though carriers are often reluctant to publicize their strategies, sources indicate it's definitely a topic of executives' conversation.IT offshore outsourcing, i.e., offshoring, has intensified, and from a business driver perspective, its discussion is becoming more commonplace in the boardroom, where it holds less controversy.
"If carriers can become more efficient in their back-end operations, they can potentially spend more money on their distribution channels, sales agents, offices, and electronic messaging technology that feeds leads back to the agents," says Susan Cournoyer, research vice president, Gartner Research, Stamford, Conn.
Discussing the research firm's latest outsourcing study, Cournoyer reports IT spending on India-based offshoring services by North American insurance companies jumped to $364 million in 2004, a 21.5% increase from 2003. This is in line with IT professional services spending as a whole, which saw a 24% jump in growth from 2003 to 2004. Other offshore provider segments quickly gaining market share: Canada, Russia, the Philippines, China, and Mexico.
Europe's offshoring activities are also on the rise. Forrester, Cambridge, Mass., reports that during 2004, two-thirds of European insurers' offshoring deals were new, and a third were renewals. The research company cites the insurance sector as "flourishing," with the U.K. the most mature of Europe's market, recording $12 billion in value.
Shift in business drivers
The rise in IT offshore spending by domestic and European carriers may not be totally unexpected. What is significant, however, is the construct behind its decision-making.
"We are seeing a movement of spending from the back office-which previously constituted 40% of all spending-to the front office, which in the past represented 20% to 30% of the total spend," confirms Cournoyer. "The shift to offshoring is one way to reverse those percentages and make sure the front office is the key part of the business."
Carriers that shift their emphasis to the front office are responding to a competitive marketplace and using offshoring for enterprise shared services to achieve benefits beyond the application level, says Cournoyer.
"Traditional carriers that are losing market share face a challenge because in a good economic climate they would be hiring IT staff," she says. "But they can't, so some of that business is going offshore."
This shift also points to senior management becoming more directly involved in initiatives to align enterprise business strategies with IT outsourcing strategies.
"What's different now is that the CEO and CFO have gotten involved and are setting up requirements," Cournoyer says, "so the focus is changing from one of bottom-up to top-down."
Some carriers agree that offshore decisions need to be made in a partnership that agrees on the company's IT value proposition.
"Initially you need to work with the business to agree on future positioning of the IT organization," says Mike Byam, vice president of eBusiness and technology at The Hartford, Hartford, Conn. "The IT organization then needs to determine if it can deliver on its own, or needs a partner to either add capability or take on non-core competencies while you refocus your own organization."
Carmine DeGennaro agrees. A seasoned insurance technology veteran who now consults for one of the largest life insurers in the Southeast, DeGennaro believes the offshoring decision starts with a stated business need.
"The business sets the direction, and it's IT's responsibility to provide the business with guidelines as to how to proceed with the direction," DeGennaro says. "Often, IT ends up doing whatever it has to do to satisfy the management's needs and goals."
A top-down approach typically begins with an evaluation of the drivers to measure and demonstrate value to the business, which takes the form of a formal review of the costs, opportunities and expected returns.
Byam believes that it is critical that both the business and IT sides are involved in decision-making process. "You need to select a supplier that aligns with your value proposition. The right supplier is more of a partner in helping meet your business objectives," he says.
And although some CIOs are enthusiastic about using offshore services, many view it reluctantly. "They have worked hard to build the staff that is about to be affected," Cournoyer says, "and they are basically being asked to dismantle their programs and teams and rethink their entire approach."
Turning over control to an outside organization is another factor. Once the decision is made, the CIO faces additional challenges, including moving the advance team to a location where English is not the primary language, dealing with the location's associated culture and time zone, staffing, setting up infrastructure systems, and ramping up rapidly for a quicker return.
The real costs
Expectations for quicker returns may be a large contributor to offshoring's growing popularity, but not necessarily based in reality. Offshore service providers operate with a different business model, and with a different cost structure, points out Cournoyer.
"Part of what is happening is that the CEO hears exaggerated figures about savings," she says. "They look at the difference in price between an American programmer at $60 to $100 per hour and an India-based programmer, at the high end of the scale, at $20 per hour. It appears at the outset as a tremendous cost savings. But when you factor in the reality that you need people onsite to conduct your requirements gathering, extra people to deal with the cultural gap, and a host of other potential onsite costs-even if the company manages this effectively, it's more like a savings of 20%. And that's if you build your skill set, i.e., hire and develop a global sourcing team, and if you are strong at those sourcing capabilities."
Cournoyer says it's more realistic to expect savings to differ during different parts of the engagement. "Requirements gathering early on in a project utilizes a lot of onshore people, application development work is typically given to offshore staff," she says.
Costs were only one of several factors in Secura Insurance Companies' strategic decision not to outsource its IT operations. "Looking at the real numbers, it really is a business decision, but one that also represents our corporate culture," says Ernie Pearson, systems development director at the Appleton, Wis., regional mutual P&C company. "Our organization's culture is one that supports the local community, so we spend more in training and hiring from the local college than we do even with consultants." Secura's examination also included a study of its requirements and core competencies, and whether the scope of its various projects would warrant offshore operations.
Having the business side drive decision making usually signals expected changes in implementation process. Carriers with a top-down approach will experience more domestic job loss earlier than later, suggests Cournoyer.
"In the past several years it was common to do a pilot or two," she says. "A midsize carrier may have outsourced 20 positions and a larger carrier up to 200 positions. For these companies, that was business as usual."
As a result of a lean economy, insurers aligning the business with IT requirements are using attrition in the entire organization.
"Many carriers have not substantially rehired since the recession, so they had a lot of contracts for year 2000 and let them go," Cournoyer says. "Having created an extremely lean staff, outsourcing is seen as incremental growth as opposed to layoffs."
With initiatives coming from the business side, what is being outsourced is also under scrutiny. "It comes down to an insurance company's perception of what its core competency is," says Cournoyer, who points to claims processing business process outsourcing (BPO) as being a hot ticket, along with policy administration BPO.
In addition to BPO, infrastructure outsourcing (first-level help desk, remote monitoring of network systems, and 24/7 managed security services) is growing in popularity.
Who is providing what
A number of different IT skill sets are a requirement for any offshore enterprise, and the specific area of expertise offered by offshore service providers differs from country to country. According to Forrester Research, Cambridge, Mass., India-the fastest growing offshore segment-offers IT technical skills, while the Russian business climate is known for it's mathematical skill set.
Forrester claims call center popularity is growing fastest in the Philippines, where nationals familiar with American accents can better understand and speak to American callers. Other segments quickly gaining market share: Canada, Mexico and China, where more than 60% of American manufacturing companies currently source their requirements.
Carmine DeGennaro, IT consultant with Kanawha Insurance, Lancaster N.C., isn't convinced that offshore call centers will be successful. "I don't know if the "up close and personal" call center work is best placed overseas, because agents can be very demanding, and if you think about the various accents and problems people have understanding each other in the U.S., it doesn't sound likely that an American agent demanding answers is going to feel they are being understood by someone in the Philippines or in China."
While their success may remain to be seen, there are several IT service providers, including Cognizant, Teaneck, N.J., and Kanbay, Rosemont, Ill., that have large labor pools working in India, according to Gartner Group, Stamford, Conn. The research firm reports that other large vendors, such as Bermuda-based Accenture, Armonk, N.Y.-based IBM, and CSC, El Segundo, Calif., are currently building out operations in India and other global locations.
With the stated goal that it creates domestic and offshore operations teams that work together, CSC maintains that it's more about "creating the best solution for the customer."
Outsourcing now more sophisticated
Vendors that provide both domestic and offshore outsourcing services have gained significant insurance expertise, according to Forrester, a Cambridge, Mass, research company. Most major outsourcers have developed insurance-specific reusable packages that include data models, requirements templates, and supporting software, reports Marc Cecere in a June study entitled "Drivers and Trends for IT Insurance."
Forrester notes carriers such as The Western and Southern Life Insurance Company, Cincinnati and vendors such as Fiserv, Brookfield, Wis., are examples of organizations that provide business process outsourcing as an extension of their services and platforms. Other insurance companies have hired CIOs and senior managers from outsourcers.
"This greater sophistication on both sides is demystifying outsourcing and turning it into simply another tool of the CIO," notes the report.
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