Insurance CIOs across the industry are embracing outsourcing and blended staffing strategies in order to enhance productivity without increasing fixed overhead.

In Novarica's recent survey of 111 insurer CIOs, 85 percent reported outsourcing at least some IT work through variable staffing and staff augmentation, legacy application maintenance, or data center or infrastructure management. Notably, few companies outsource a majority of their work in any of these areas. Rather, they work as blended organizations, sharing tasks and projects between internal and external staff.

Not surprisingly, large insurers are more active outsourcers than small and mid-size ones, but a majority of insurers of all sizes are leveraging outsourcing for some aspect of their IT operation. Staff augmentation is the most common type of outsourcing and is widely perceived by survey participants to deliver high value.

As the need to enable new business capabilities has grown at a much faster pace than IT budgets, CIOs are finding that they can reduce the burdens of baseline maintenance and supporting legacy applications infrastructure while increasing flexibility for new development through external services partnerships. Through careful management and planning, insurers are leveraging these relationships as "force multipliers."

The days of pure labor cost-arbitrage that make "outsourcing" a bad word are coming to an end. And external providers that haven't evolved beyond serving as low-cost "body shops" are under pressure. CIOs are increasingly turning toward external providers that offer expertise to the insurance industry in project management, development methodologies and other critical areas. Especially for smaller insurers whose IT departments may not be as mature and sophisticated, external partners can raise the overall skill level as well as increasing flexibility and agility.

Outsourcing for the Greater Good

From an earlier simplistic focus on outsourcing as a means of reducing costs, insurers are realizing the greater usefulness of outsourcing in shifting to a variable cost/resource basis. In Novarica's research and conversations with insurers, several are benefiting from access to as-needed skilled resources beyond the cost savings involved. While many insurers still prefer to retain accountability and control of key IT functions, there is a transition to a managed services model underway, especially in larger organizations.

However, insurers embracing a blended staffing strategy should plan carefully for success. This planning goes far beyond selecting a vendor or carving out a few IT functional areas. Insurers looking for maximum value from blended staffing strategies should consider the following areas as well:

Organizational redesign. Adopting blended staffing often requires organizational changes, beyond the potential elimination of redundant expertise. New vendor and contract management functions are needed, and requirements/testing teams and processes must often be modified. Gaining access to new skills presents an opportunity to re-evaluate organizational models. Just like many insurers have operating models that have been developed in reaction to limited availability of technology, many IT groups have operating models designed to maximize the value of scarce expertise.

Adoption plan. Many insurers slowly migrate to the end state to reduce risk and gain comfort with their external partner, while others take a more aggressive approach in order to gain the benefits as early as possible. Whichever path is taken, insurers must consider change management-not just within IT, but within the organization at large. The strategy and potential impacts must be clearly communicated in advance as well as throughout the adoption process. Active management and early identification of challenges or bumps in the road can make or break a strategy.

Accountability. Many insurers lean heavily on external providers for development or testing work but retain management and accountability, while others place full accountability on their partner, with contractual incentives and penalties for enforcement.

With the value of blended staffing moving from cheap labor to high expertise delivered on a variable cost model, the methods that insurers use to evaluate their partners needs to change as well. Insurers need to consider the skills and abilities of their individual relationship managers and the senior leaders that will be assigned to their accounts. They need to understand staff retention, continuity history and guarantees for the core blended staff, as well as the relationship of these leaders to the variable labor that may be assigned to their accounts in times of peak need.

With blended staffing taking a more strategic role, insurers' methods in evaluating and selecting partners need to shift as well. In effect, selecting a blended staffing partner is similar to a merger or acquisition. Formerly separate teams will work together. The insurer must perform sufficient due diligence to ensure the blended organization will serve the company's strategy effectively.

INNSight is exclusive commentary from Novarica. Matthew Josefowicz is partner and managing director at New York-based Novarica. This column was adapted from several recent Novarica reports on insurer outsourcing.

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