When one of its Web or application servers crashes, executives at Fireman's Fund Insurance Co. may have to cope with business down-time, but they can at least eliminate one major headache-they won't have to repair it.That's because the Novato, Calif.-based property/casualty insurer inked an agreement in October that some consider a watershed event-an outsourcing pact involving an internally operated information technology division.
Under the terms of a 10-year agreement, Fireman's Fund, a subsidiary of Munich-based Allianz AG, plans to farm out its entire IT "help desk" responsibilities to Montreal, Quebec, Canada-based CGI Group Inc. (CGI).
CGI, which provides end-to-end IT services and business solutions, will assume control of Fireman's Fund's 40,000 square-foot data center in Phoenix. In the process, more than 300 Fireman's Fund IT employees will convert over to CGI.
Upside potential
From the Phoenix center, as well as from its own Canada-based data centers, CGI will be entrusted with ongoing maintenance of 500 Microsoft NT servers and large Unix platforms that support more than 11,000 desktops, laptops and printers of Fireman's Fund. All told, CGI will provide around-the-clock services to some 80 Fireman's Fund offices across the United States.
Valued at $380 million, the agreement is expected to save the insurer, which generated gross premiums of $4.5 billion in 2000, about 25% per year of what it had typically spent to keep its IT hardware humming, says John Kozero, a spokes-man for the company.
The deal does not affect the maintenance or upgrading of software and databases, which the carrier will continue to maintain.
An agreement of this magnitude can be viewed two ways. On the downside, Fireman's Fund loses control of a core internal IT function. But that may be the only negative.
With profits of many insurance carriers lagging, identifying cost-cutting measures has become essential. Many carriers consider the maintenance of IT resources no more than a liability.
"We looked for flexibility in service delivery, technology and business structure," says Billy McCarter, senior vice president and chief information officer of Fireman's Fund. "CGI's in-depth knowledge of the insurance industry coupled with their systems mastery and technical experience will enable us to dedicate more resources to core insurance business needs."
At least one industry analyst confirms that outsourcing this type of IT function makes considerable sense. In fact, Fireman's maneuver could serve as a precursor to similar outsourcing ventures by carriers next year and beyond.
"This is a low-risk approach and a good first step toward improving their operating efficiencies," says Todd Eyler, senior analyst with Cambridge, Mass.-based Forrester Research Inc.
Logical approach
It's not been uncommon, Eyler adds, for a third-party consultant to have a hand in improving a carrier's IS functionality, including better techniques to maintain and upgrade servers. But these agreements typically don't involve the wholesale takeover of a carrier's IT operation.
"This is a logical undertaking because an insurance provider like Fireman's Fund shouldn't have to burden itself with putting an application server back in service. Rather, it should be devoting IT resources to establishing a business strategy," Eyler explains.
Indeed, Fireman's Fund can wash its hands of what's become a major crucible, and in turn devote resources to IT applications centered on business strategies and underwriting.
Presently, 65% of Fireman's Fund insurance reflects business lines. "Many of these lines require a coherent set of information processes," Kazero explains. "Underwriting, reporting, and state regulations all make it complex. And when you have complex products, you need IT tools to make your operations more controllable," he says.
