Whether you are a parent or CIO, letting go is never easy. While a parent seeing a child off to college can at least look forward to holiday reunions, an insurance technologist passing off an internal function to a third party may well be seeing it for the last time. Yet, just as college education is widely viewed as a necessity in the workforce, the rationale for insurers outsourcing non-core IT functions also is gaining credence among insurers. While most insurers have the wherewithal to accomplish a range of IT functions for themselves, the question is why. Indeed, carriers burdened with a complex IT environment may view outsourcing as a way to simplify their infrastructure, allowing them to concentrate on core competencies, assaying risk. "They are starting to question what it means to be an insurance company and define the activities they need to keep at the heart of their business versus the things they need to do at an average, minimal level," says Kimberly Harris-Ferrante, research VP at Stamford, Conn.-based Gartner Inc.
Like nearly everything else in the data center, you can trace the roots of ITO all the way back to the mainframe era. Since then, ITO has gone through a number of evolutions. In the early part of this decade, ITO became closely associated with offshoring as companies based in India joined the ranks of traditional ITO providers such as IBM, Electronic Data Systems Corp. and Computer Sciences Corp., and insurers looked to tap a newly available global outsourcing workforce as a way to shave costs. In addition to cost savings, outsourcers are now increasingly being asked to provide their design and management expertise.
CALLING COLOMBO
"Five years ago we couldn't done this," says Thad DeBerry, SVP for information technology at Franklin Lakes, N.J.-based Western World Insurance Group, of the company's decision to outsource some of its IT functions to Sri Lanka. "The increased capacity of remote access systems has really made this possible."
Also making the agreement possible was the realization by Western World-a privately held, small to midsized carrier that sells excess and surplus lines P&C in all 50 states-that trimming costs was a necessity for it to thrive in the marketplace. "The competitive environment is forcing us to be cost conscious," DeBerry says. "We're trying to squeeze everything we can out of the resources that we have."
DeBerry acknowledges that cost containment is but one of the reasons the company chose to partner with Dublin, Ohio-based 3SG Corp., which maintains a production center in Colombo, Sri Lanka. Another primary reason, he says, is the flexibility the arrangement affords him. Indeed, flexibility is key for DeBerry because the company's location in an affluent part of northeast New Jersey makes filling IT positions no simple task. "Where we are, it's especially difficult to find folks that want to do this kind of work," he says. "We had no choice but to address this and find somebody who could be an extension of our internal staff."
While initially tasked with a document scanning project, over the past few years, the relationship has evolved, and the focus has shifted to policy processing, DeBerry says. The upshot is that Western World is now able to do more with the less. Despite a 35% reduction in staff, the company is handling 20% more transactions. "We're now are to do as much or more with the same or fewer resources," DeBerry says.
Yet, the move did present some challenges. For starters, DeBerry had to sell the idea of outsourcing within the 44-year old company, long accustomed to doing things internally. Once that was accomplished, he had to focus on data quality and standards. To make sure the outsourced work is being done properly, DeBerry audits 20% to 25% of the work coming in from the staff in Sri Lanka, holding them to the same standards as internal staff.
A BIG DEAL
To view an outsourcing deal of a greater magnitude, consider the relationship between Zurich-based Zurich Financial Services Group and Falls Church Va.-based Computer Sciences Corp. In July 2004, the companies signed a seven-year global IT applications outsourcing contract. Under the agreement, CSC agreed to provide all applications development and support services to Zurich's businesses in the United States, the United Kingdom, Switzerland and Germany.
In April, the companies inked a desktop services outsourcing contract. Under the new six-year agreement, CSC will assume responsibility for the provision of Zurich's electronic Workplace (eWP) desktop services to its businesses in the aforementioned countries plus Italy and Spain. The companies say the eWP service will provide Zurich with the cost and performance benefits of a globally standardized desktop service environment while allowing organizations within Zurich to tailor services specifically to their business needs and locations.
"CSC already provides support for the development and maintenance of our application software, and our expanded relationship will allow us to provide a more integrated holistic solution for both our eWP and application support needs," says Michael Paravicini, chief information technology officer at Zurich Financial Services Group.
Jim Cook, president of CSC's Financial Services Sector, says insurers employing IT outsourcing can enjoy an investment arbitrage advantage. While an insurer is most likely to put dollars into growing the business and investment income, before investing in operations, an outsourcer's first investment priority will most likely be in process improvement.
"The last place [an insurer] wants to put money is into operations, so it ends up being a stepchild within the organization," Cook says. "On the other hand, when we have one more dollar to invest, we're likely to put it into operations to achieve better efficiencies."
Cook says outsourcing allows insurers to keep their focus on strategic leverage, not on the non-differentiating elements of their business, while saving money. "We can charge them licensing and maintenance fees that are far lower than if they had done their own thing," he says. "Insurers need to understand that the competitive advantage comes in the use of the system, not in the system itself."
Scott Schenker, senior managing director of Devon, Pa.-based SMART Consulting, agrees. "If you are just doing basic things, it doesn't make sense to build up a significant infrastructure."
Another reason a carrier will consider employing ITO is speed to market. If an insurer's internal IT staff already is bogged down, an outsourcer may enable them to get a new product off the ground before a market opportunity closes. "We use a standard system that we are able to adapt and get customers into markets rather quickly," Cook says.
What's more, while the costs of internal IT, such as facilities, salaries, hardware and software are fixed, ITO offers a variable, transaction-based pricing model that fluctuates with needs of the business, Cook says.
COSTS AND CAVEATS
For all the positives of ITO, companies need to have a good understanding of processes before pushing them out the door. The danger, Cook acknowledges, is "paving the cow path" and throwing new technology at a poorly functioning process. "Nine times out of 10 insurers haven't optimized what they are outsourcing," Schenker says. "There are many stories of failures in places where companies tried to outsource their mess to another organization and just ended up with an outsourced mess."
"The real goal is to have a firm understanding of cost before you enter into the outsourcing agreement," Schenker says, adding that companies should view ITO more as a way to achieve process improvements than just as a cost reduction measure.
If a lack of understanding of the business can cripple an internal IT operation, the damage is only amplified when things are outsourced.
As a consequence, Bruce Dodd, responsible for infrastructure outsourcing in North America for Bermuda-based Accenture LLC, says that a service integrator layer, which resides between the sourcing and the in-house business and IT staffs and takes functions from both sides, is becoming more popular.
DeBerry credits 3SG's base in Ohio for helping to bridge communications to Sri Lanka, taking loads off his plate. He also stresses training. Rather than directly train staff in Colombo, he instead trained a select group of trainers. "If you don't properly train and transfer that knowledge, there is no chance you will succeed," he says.
HYBRID OFFERINGS
As the market has matured, carrier expectations and vendors offerings have shifted significantly. While, the focus used to be primarily on application maintenance and development, the focus is shifting toward a more holistic approach, blurring the once clear distinction between ITO and business process outsourcing (BPO).
While this synthesis between ITO and BPO is not unwelcome, it may have been premature, contends Harris-Ferrante. "Vendors believed there were many more similarities between ITO and BPO than insurance companies did," she says, noting that for carriers, the two processes involve different buying centers, risk tolerances and negotiations. Recently, many vendors have stressed value added services on top of ITO. These services promise the carrier more than cost savings-dangling the prospect of process innovation.
Ajoy Menon, global head for the insurance vertical at Bangalore, India-based Wipro Technologies, says the company can combine slices of BPO and ITO together to meet the evolving needs of insurance companies. "Earlier they used to come to us and say 'help us reduce costs or make us more efficient,'" he says, adding the company is now being tasked with more strategic tasks.
"Over the last few years we're seeing a change in outsourcing," he says. "Clients are becoming increasingly focused on real business outcomes, and are leaving the choice in technology usage to the service providers."
Where service-level agreements once specified the number of employees and the tasks performed, clients often now clients ask Wipro to manage a budget and take 30% of the cost out. "Today, we're in a position to say to clients that we can look at things holistically, and are asked to do more transitional things such as consolidation of data centers."
BIG AND SMALL
Another interesting consideration for insurers employing ITO is scale.
Menon notes that larger insurers tend have more legacy and M&A baggage and, as a result, often ask for consolidation and simplification. "You see larger insurers go further down the customization path, and that lends it self to needing help from a outsourcer," Accenture's Dodd adds.
Smaller insurers have a higher propensity to outsource because they can ill-afford to do things that are non-core. "The Tier Threes, as much as they want to operate as the big guys and have everything custom, they realize they can't afford to do that," Dodd says.
Many see mid-sized organizations as the ones that benefit most from IT outsourcing. "Right now, they are in the sweet spot," Harris-Ferrante says. "They have to compete with Tier Ones. If you bring in a third-party that has worked with a Tier One, they can help the Tier Three be competitive in ways that they couldn't otherwise because of internal employee size."
Cook says CSC is focusing on the middle market by offering prepackaged, turnkey solutions. "The mid-size market is a different beast-you can't customize everything," he says. "The cost of that customization will eat you up."
DeBerry says in some ways scale is irrelevant. "I think we have all the same concerns that a larger company has," he says. "I think we have the same inherent challenges with what we're trying to deal with."
IN OR OUT
Ultimately every carrier, regardless of size, has to weigh what to keep internally and what to push out.
"Clients want to retain strategy, architecture and application design," Dodd says, adding that there is more leverage on the mainframe side, than on the server side where plunging server prices make keeping things in-house more economical. "Even though you can get smaller mainframe boxes that don't cost as much, they're still expensive. You need a lot of software and tools, and it takes many skilled peopled to run those boxes."
Accordingly, Dodd recommends retaining assets in the lower end of the stack (Unix and Windows), and leaving management of Big Iron for outsourcers. He also says insurers should seek to outsource the mundane overhead functions such as the management of networks and print servers, while keeping things inside that have a greater impact on the business.
This is the case at Western World, where DeBerry says tasks such as premium coding and imaging will be done offshore, while areas with too much internal knowledge and interactions with other business units, such as premium audit and claims coding, will stay stateside.
"It's become a lot more accepted as there have been more success stories," DeBerry says.
Schenker says insurers should plot a middle course where they can leverage capabilities on the outsourcing side while use inside IT to manage the process and retain control.
The ITO TOP TEN
A new report shows a mix of American and Indian firms dominating the global information technology outsourcing market. The annual "State of the Outsourcing Industry" report out from the Tampa, Florida-based Brown-Wilson Group finds firms based in the United States in the top five positions. Leading the list are Plano, Texas-based Perot Systems and Electronic Data Systems Corp. and its parent, Palo Alto, Calif.-based Hewlett Packard, Falls Church, Va.-based Computer Sciences Corp. and Blue Bell, Pa.-based Unisys Corp.
Foreign firms dominate the second half of the list, with Mumbai-based Tata Consultancy Services Ltd., Hyderabad, India-based Satyam Computer Services Ltd. and Bermuda-based Accenture all on the list.
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