It seems that every day there's news of a company in the insurance industry experiencing massive layoffs or making extreme adjustments. Yet, the business still must be productive. So who's going to do the work? At first glance, IT and/or business process outsourcing may seem like the answer.

However, many experts caution not to blindly dive into outsourcing as a quick fix. It needs to be approached with a solid outsourcing strategy, internal support and clear contingency plan in case the acord, formal contract and ultimate service-level agreements do not live up to their promise. Here's a look at what some insurers are doing to better the odds their outsourcing efforts will succeed.

Outsourcing is by no means going away, but for the time being, it is at a standstill. Many industry experts agree that the state of the U.S. economy is affecting insurers' outsourcing strategies, but whether it's having a negative or positive effect is up for debate.

Now, more than ever, CIOs face pressure to scale back costs, while maintaining efficiency and quality. Some will contend that outsourcing will accomplish that, while others aren't quite sure the cost-savings are worth the risk. More than 22% of respondents to a 2008/2009 survey from Wayne, N.J.-based Harvey Nash Plc expect their outsourcing spend to decrease in the next 12 months. The number of respondents, which includes the IT, insurance and banking/finance industries, who predicted that their outsourcing spend would increase, fell 5% over the previous year to 38% - a number that is also down a full 10% from 2006 when nearly half of respondents expected their outsourcing spending to increase.

While outsourcing spending may decrease over the next year, experts predict this is just a phase. Boston-based analyst firm Celent estimated the global insurance business process outsourcing (BPO) market for core insurance processes at $5.2 billion in 2008, and further predicts that the market will grow over the next five years to $8.7 billion in 2013, according to the firm's March 2009 "Insurance Business Process Outsourcing: A Global View." The report stems from a survey of systems integrators and global service providers. Reported deals were fairly evenly split between P&C (43%) and life (41%), and multi-line carriers represent the balance (16%).

Sumer Shankardass, SVP of insurance for India-based outsourcer WNS Ltd., has seen a difference in uptake between lines of business. "On the P&C side, we've seen from August to September of last year, insurers that already had large outsourcing programs continue on that path," he says, referencing a large insurer, with which WNS works. "That's because they have a mature outsourcing strategy in place, and teams that support outsourcing."

Shankardass points to the economy as a reason insurers are hesitant. "Decision-makers are uncertain of where the future is and justifiably so," he says. "The people we reached out to essentially pushed it back quarter by quarter, but I think this is a temporary phenomenon. Between June and August we will see more interest and RFPs in the market."

The reasons insurers will outsource now? Cost reduction and being better able to meet the needs of the business. Those were the top two reasons given by respondents to the Harvey Nash survey. Cost reduction ranked highest, with 44% of IT leaders, followed by 29% who said being better able to meet the needs of the business was most important. Last year both "cost reduction" and "better able to meet the needs of the business" were selected by 37% of respondents as top reasons for outsourcing.

GEOGRAPHICAL CONCERNS

Pharmacists Mutual Insurance Co., Algona, Iowa, has put outsourcing to use to meet the needs of the business.

"Here in a small rural area, it's difficult to attract specialized talent," says Barrie Parker, CTO at Pharmacists Mutual. "To acquire specialized talent, you spend a lot of time and money on the search and acquisition of that talent, and then you have to keep it here. Because of this, we are uniquely suited for some kind of outsourcing capabilities."

Parker hired a contract programmer rather than trying to hire in-house for the maintenance of the company's COBOL applications. "On the infrastructure side, to have the talent resident here - or even remotely - to support a virtualized network, and all the port scans we'd have to do for all the disaster recovery components that we need, it would be very difficult to get that expertise."

Parker believes his strategic plan relative to outsourcing is pretty typical to other people in senior IT management. "It really comes down to efficiency and ROI."

However, results from the Harvey Nash report reveal that most organizations today do not have a formal sourcing strategy in place. Of respondents, only 44% said their businesses have a formal sourcing strategy, while the majority (56%) said they do not.

CHAOS

Like Pharmacists Mutual, Conseco Services LLC does have a formal sourcing strategy. About 20% to 25% of overall IT delivery is done offshore with one-third performed by Infosys and two-thirds by a captive, Conseco India - according to Russ Bostick, EVP, Technology and Operations at Conseco. The Indianapolis-based provider of financial services products to the consumer middle market selects which of the two to work with based on its intellectual property restrictions on the software being maintained.

"Many vendors in the insurance space are hostile to potential competitors seeing their source code," he says. "When we can't secure adequate permissions, we support the software out of Conseco India."

The insurer does other work out of Conseco India: maintenance of other applications and actuarial services - calculations, models, etc. Bostick sees opportunity in both offshoring and onshoring, but approaches them in different ways.

"If the number of people it takes to support the scope is small, it's really not suitable for offshore," he says. "You don't want to put small pieces of work offshore, where communication isn't frequent enough to develop a pattern of understanding."

Bostick is comfortable with Conseco's amount of offshoring and onshoring. "About half of the business operations I manage - if you count bodies, not budget or transactions - is outsourced (not all offshore). I wouldn't go any deeper than that. We don't feel we have the scale on any one system [that we're programming support for] to increase the level of outsourcing and get quality results back."

Conseco is looking at optimizing its current offshoring and onshoring.

"That means getting better value from it by managing how we hand off work, being very rigorous about managing to the service level agreements and evaluating whether some of the relationships are large enough," Bostick says. "We are thinking, 'does consolidation fit in at all?' but it's not a pedal-to-the-metal strategy because there's too much risk to change without a clear vision for the results we want to achieve."

Pharmacists Mutual's Parker agrees that you have to approach outsourcing changes, whether increasing or adjusting, carefully. "Outsourcing sounds good most of the time, but once you look under the covers and see issues around time zones, language barriers, and control and management, you really have to form a good partnership with the outsourcing solution provider, and feel like it is going to be a win/win both ways."

Those issues, combined with current global economic and business environments, are enough to cause chaos, says Bostick. "The chaos [outsourcing can cause] is more a world economic state as opposed to the chaos within our company or chaos among suppliers," he says, referring to Mumbai, India-based Satyam Computer Services Ltd.'s fraud scandal involving the vendor's chairman.

OFFSHORING CHANGES

With the fallout from Satyam, many insurers are seeking quality suppliers in order to move their business quickly, Bostick says. "[The Satyam scandal] removed from the scene a player who'd been aggressively pricing their product. There is a flight to quality in outsourcing and offshoring because of uncertainty about the financial vitality of their partner. There's good demand for offshoring to quality firms right now."

The offshoring market players change in response to each country's changes in security, technical infrastructure and economic and political stability, making the practice risky. But insurers continue to bite. Why? Cost savings.

"If you're only offshoring because of the cost, you have to be prepared to go to the next country that isn't as well developed," Bostick says. "The irony now is I can't tell which end is up on exchange rates. This is not a good time to be expanding offshoring from my perspective in part because our country is issuing so much debt. At some point the dollar has to start falling. And given that the timeframe used to evaluate offshoring is a strategic one-five to seven years-I can't project now what the exchange rate or the local wage conditions will be in the countries I might select five to seven years out."

For now, India dominates the market, according to the Harvey Nash survey. India's offshore dominance (81%) was followed distantly by Malaysia (4%) and China (3%). Numerous other countries, such as Brazil, the Philippines and Mexico also were utilized, although to a far lesser extent.

Pharmacists Mutual's Parker has experiences with some of those countries. "We've outsourced programming to Puerto Rico, India and Ireland, and some worked and some did not," he says. "You have to spend time understanding the other side of the equation and how they're going to control and monitor, and give you what you want."

Bostick agrees that more management attention must be paid to selecting and managing the vendor relationships and developing contingency plans to address the volatility among countries. "The plan might be splitting the business between two countries," he says. "If you're large, you're probably splitting it already. If you're a mid-market company, like us, you really don't have the volume to be consciously splitting the business and running with lots of outsourcers. You're not going to get good pricing, which includes the extra overhead of managing two outsourcing relationships, that compensates you for the quality risk." In other words, it's not warranted for a mid-market insurer.

SOFTWARE-AS-A-SERVICE'S ROLE

As with outsourcing, insurers may look to Software-as-a-Service (SaaS) to aid in their costs-cutting battle. However, Bob Lasher, founder and CEO of Alpharetta, Ga.,-based on-demand business intelligence (BI) and management reporting provider iPartners, says recent SaaS uptake has been driven by efficiency and need, not by cost-savings. "We haven't seen people come to us, saying 'it's costing us X in-house, so we'd like to move it to SaaS and reduce costs.' Insurers are approaching us with the business need in mind."

In SaaS, as is the case with outsourcing, the relationship is key, Lasher says. "On-demand BI is something that can be built, and then is done. It's constant. So we need someone who champions that on the client side."

Pharmacists Mutual Insurance Co., Algona, Iowa, ventured into SaaS using Insurance Scorecard from iPartners. Pharmacists provides a schedule flat file upload of enterprise data to iPartners, which then maps it to its data model and provides the reports via browser.

"One of the key things in running any business is getting good summary reporting about your operations - how you're doing relative to financial issues and, from a trending perspective, how things are going," says Barrie Parker, the insurer's CTO. "IPartners was chosen to provide management reporting, build a data warehouse and, on a monthly basis, provide the operational financial reporting we needed to see how we're doing, and what areas need attention.

"The more I worked with iPartners and got more of an understanding of their environment and how they handle data and what they do," he continues. "I realized that for me to do it here - build the data warehouse with all the star schemas and all the reporting capabilities that iPartners has, and also to build in the requisite security - wouldn't be as cost-effective."

BPO MARKET ESTIMATES

According to Boston-based analyst firm Celent, many regions will see an uptake in BPO usage over the next five years:

* Asia-Pacific. The insurance BPO market in 2008 was $206 million. Celent expects the market to grow at 13% rate over the next five years to $379 million.

* Latin America. The insurance BPO market in 2008 was $318 million. Celent expects the market to grow at 8.9% rate over the next five years to $484 million.

* South Africa. The insurance BPO market in 2008 was $84 million. Celent expects the market to grow to $128 million over the next five years.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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