Depending on whom you listen to, offshore outsourcing is the best - or the worst option available to insurance companies.The downbeat discussion typically follows the "hidden costs have pushed the business cycle full circle" path, while proponents focus on the logistical effort and patience required for an improved-if not elusive-bottom line.
Whether the bloom has left the offshore outsourcing rose remains to be seen. Countries with expanded geopolitical clout, especially those offering contact center support, continue to boldly enter the field, from the fast-growing business climate of Brazil, to the fragile, measured growth of South Africa.
It's no wonder that insurance company executives are shaking their heads in bewilderment. The deliberation, sometimes painful, most often centers on costs versus benefits and establishment of the most appropriate core business processes best served by a popular offshore service provider. Examining onshore options follows a similar practice, with IT managers wondering where, in the United States, they will find qualified help at a reasonable price.
Because the business side's bottom line carries a "get it done" mandate, the path that's chosen is a critical one, as insurance organizations face enormous pressures to meet the competitive challenges of providing efficient and effective services to their customers at the lowest possible cost-without sacrificing quality.
"Insurance companies are embracing more flexible and affordable architectures and resource strategies, and doing it all under tight supervision from the business side," says Matthew Josefowicz, group manager of Boston-based Celent LLC's insurance practice.
In its recent survey of CIO-level insurers representing more than $100 million in premiums, Celent confirmed that use of IT outsourcing of both types continues to be strong and growing, with the average large and midsize insurer spending 17% and 11%, respectively, of their IT budgets on outsourced services.
A Path Less Followed
It follows that an insurance company that acquires almost 90% of its IT requirements-700 jobs-from an outsourcer based in America's heartland, may seem to be following an atypical path. Yet for Old Mutual Financial Network (OMFN) a calculated, "domestic alternative" approach to improve service levels is paying off.
OMFN is part of the U.K.-based Old Mutual group of companies that date back to 1845, and although Old Mutual plc maintains its primary listing on the London Stock Exchange, the $4.1 billion OMFN now works through its network of U.S.-based acquisitions: Baltimore-based Fidelity and Guaranty Life Insurance Co. and Americom Life and Annuity Insurance Co., and Fidelity and Guaranty Life Insurance Co. of New York.
When Dave Smith, OMFN's vice president of operations, joined the organization seven years ago, the company's service platform was the result of a grandfather clause that endorsed a single third-party domestic administrator (TPA), that provided both IT and business process services, such as new business, policyholder administration, underwriting, and more.
Coming from GE, Smith brought a formulaic approach to his job-and a homegrown, multi-source philosophy that allows all players to benefit.
"I looked at my options for outsourcing overseas," Smith says. "It's hard for me to beat the price of the Midwest's moderate-to-low income. By the time you add up all the costs associated with offshore arrangements, setting up shop, dealing with exchange rates, etc., it's not worthwhile.
"Plus my philosophy is that if you are going to outsource anything that's offshore (language, cultural differences) it most likely should be a 'heads down' kind of a role."
Smith maintains that, although OMFN's domestic outsourcing decision produces infrastructure costs below industry average, the company's top-down strategy was less about choosing domestic vs. offshore support, and more a matter of contracting the best possible service model.
Contracting The Best
From the start, OMFN's revised multi-source, domestic alternative service model was put to the test.
As Smith and his team began working with Transactions Applications Group (TAG), one of its main technology service providers in Lincoln, Neb., OMFN's parent, Old Mutual, began phasing in more capital, and the economy was on the upswing.
With 30,000 of its 120,000 licensed independent agents generating business on a daily basis, the companies began experiencing two and threefold growth.
"We went from selling 1,000 to 5,000 annuity apps a week at the same time we were migrating all the annuities business (to TAG)," Smith recalls. "The next year when we focused on migrating the life side of our business, we were selling 2,500 apps and then our life/mortgage side took off. This quickly escalated to 6,000 a week."
Smith recognized early that OMFN needed to identify its strengths. "What are we good at? We're good at building and making product," Smith adds. "We want to focus on the differentiator and outsource the commodity, so for us, outsourcing the service platform makes the most sense."
Smith's management style, which differentiates between basic outsourcing relationships and valuable partnerships, helped the company survive its growth spurt. And both parties credit a win-win contract, which called for OMFN's phasing in new business processing to TAG.
"We earned each piece of it," recalls Mike Kerry, Transactions Applications Group executive vice president.
"When we began working with OMFN five years ago, it was shortly before Old Mutual acquired Fidelity and Guaranty Life Insurance Co., so we got a tiny piece of that business. Over eight more transitions, as we performed as we said we would, we'd acquire another piece," he says.
TAG also acquired $3 million in OMFN financing to develop a workflow underwriting system that could be spun forward for use with future new products as well as by OMFN's other outsourcing partners. If TAG takes the software to market, OMFN shares in the earnings.
"That's been our business model from the beginning," notes Kerry. "Any time we bring service out the client pays, so we offer the same service for all 30 clients-rather than have the company be on a stand-alone version. We don't sell the software, we sell the service. Our job is to build a service factory."
In response to OMFN's ongoing forecasts, TAG's "service factory" pumps out several software technicians annually, adds Kerry, all of whom are motivated to get a white collar job-and are trained on the same service platform. TAG, which has grown to more than 900 strong, does all their own local recruiting, and acquires many of its candidates from the University of Nebraska's actuarial program.
Smith maintains that it's not merely a question of whether local IT talent is up to the job, and more a question of accountability. "We are ultimately responsible, he says. "We have just as much skin in this-even though we outsource it we have to manage it appropriately."
Kerry recalls early contract negotiations that included brainstorming with his client about all the potential pitfalls, including the potential acquisition of either company, then collaborating on the business rules of the road.
"We let the lawyers do the rest," he said. "The contract is set up so we both reap the benefits of each other's success. We made sure there was nothing in there that would incite us to hurt Old Mutual and vice versa. It was actually fun aligning the businesses."
Ironically, long after the contract was signed, TAG was acquired in July, 2005 by Plano, Texas-based information technology systems company, Perot Systems, which has both an offshore and onshore business model.
"In my situation if TAG had been purchased by someone we didn't want to do business with, we could walk away with their people, their system, even their building, and I have to have that protection in place on the contract. I have to have that leverage."
The key to any contract is to agree to a practical divorce before you get married, Smith adds. "You have to understand how to end it before you begin, because there is a huge financial impact at stake."
The contract also identifies schedules of service level agreements covering cycle times for administrative processes such as data entry, call center response times, and overall IT service levels.
With a predictable pricing approach, specified service levels and expert management of volumes, Smith knows the costs for every component aspect of the new business and policyholder service process. "I pay by the widget for the most part," he says.
The onus is on TAG to report, via daily, weekly and monthly dashboards on agreed-upon metrics.
A monthly service level meeting that includes an oversight team provides baselines for further quality discussions.
"Coming from GE, I live and breath metrics that can be applied to a myriad of things, including internal audits," admits Smith.
Although OMFN does manage its own critical claims functions, (commissions, contracts, and licensing) for the other two companies in Baltimore, since implementing the TAG partnership, Smith has spread the wealth. Contracting with additional local service providers, he placed Americom's annuities IT and BPO requirements with another domestic outsourcing firm.
And using the system that TAG built, risk selection services provider Mid-America Agency Services manages underwriting for both F&G and F&G New York in its Omaha home office as well as in Des Moines and Holland, Iowa.
In all, six key employees, including OMFN's CLO, manage all domestic outsourcing relationships.
"Based on making the right outsourcing decision, there should be three key winners," Smith says. "For us, it's the ability to grow and focus on what we do best. For the outsourcer, the win is revenue and an opportunity to grow, and for our customers the win is in receiving exemplary service."
A Niche Within a Niche
Insurers forming partnerships with outsourcers to obtain local talent from underserved cities with rich, yet untapped labor pools probably isn't revolutionary. But carriers that create subsidiaries specifically to extend, via successful outsourcing partnerships, its service platform to other insurance companies-is notable.
In 1993, BlueCross and BlueShield of South Carolina, through its wholly owned subsidiary Companion Technologies Corp., did just that. The carrier teamed with TM Floyd & Co., Columbia, S.C., to form Companion Services Inc., d/b/a TMF to offer consulting services to other health insurance organizations.
Glenn Hedgecock, director of T. M. Floyd's P & C division, says TMF finds its technical talent right in its own backyard, at the University of South Carolina, Georgia State, and Midland Technical College, where the company helps support internships. "We provide a great local training program," he says, adding that TMF typically places a senior business analyst with 10-30 years of experience, a junior analyst and a host of technical support people at the client's site.
TM Floyd's 30-year history as a consultant, along with its experience as prime contractor to BCBS S.C., continues to pay off. It's work with the carrier, which is known to have the largest Medicare claims processing center in the U.S., gave the company exhaustive knowledge and expertise of both the provider and payer sides of the healthcare transaction process, specifically in the areas of technology-based solutions to such issues as coordination of benefits, remittance advice, and claims adjudication.
Hedgecock says collective health insurance knowledge within BCBS S.C., combined with TMF's consulting experience, makes the new organization uniquely qualified to provide organizational and systems solutions to healthcare and health insurance entities
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