U.S. financial service providers (FSPs) are expected to spend $65.7 million on IT services in 2005. However less than 30% will outsource any strategic projects by the end of 2006, according to Gartner Inc., Stamford, Conn."Most FSPs currently use outsourcing tactically to augment staff for faster project turnaround or to reduce operational costs, rather than for strategic value," says Kimberly Harris-Ferrante, research vice president at Gartner. "FSPs should now begin outsourcing strategic projects in order to gain larger-scale, enterprisewide value."

"Strategic projects have different dimensions than normal, tactical projects," Harris-Ferrante says. "They are more complex in that they focus on blending the use of IT outsourcing and business process outsourcing to enhance and transform the organization. The nature of the project requires a different structure of contracts, relationship model and metrics."

For outsourcing projects to be successful, Harris-Ferrante claims, outsourcing must be part of the corporate culture. The company must embrace its use and develop strategies on when and how to use outsourcing effectively.

"Outsourcing success is based on risk mitigation, so FSPs must build a strong strategy to facilitate the use of outsourcing for strategic projects," Harris-Ferrante says.

"FSPs should develop strategies that stipulate how and when outsourcing should be used across the enterprise. Then, proper governance of the outsourcing projects should be established by designating and empowering leadership of the outsourcing project," she says.

To gain maximum benefit from outsourcing, FSPs must fully understand the opportunities and challenges associated with IT outsourcing and business process outsourcing.

FSPs should know: when to use outsourcing; how to use outsourcing tactically and strategically; what the best types of projects and processes are to outsource; how to balance onshore, nearshore and offshore alternatives; and how to select the best sourcing partner based on project scope, pricing model, risk tolerance and business outcome.

"If used properly, outsourcing can be a strategic tool to help FSPs transform their organizations, gain operational efficiencies, respond to shifting industry conditions and better meet top-level business objectives, such as increased profitability," Harris-Ferrante says. "However, if outsourcing is used incorrectly or not properly managed, it is a risk endeavor and can lead to wasted time, money, project failures and business failures."

Majority use BPO

In a recent survey of 87 U.S.-based insurers with more than $100 million in annual premiums in life and P&C, Gartner Inc., a Stamford, Conn.-based research company, found that 84% of life and 72% of P&C carriers were already using business process outsourcing (BPO) services.

Of those that use BPO, only 8% of P&C companies were using BPO end-to-end claims processing. Of the life carriers, none were using this feature. However, 22% of life carriers and 40% of P&C companies are using BPO for other specific functions in claims.

For call center and customer service initiatives, life and P&C were closer in results: 18% of life and 13% of P&C are currently using BPO for these services.

Life insurance companies are taking advantage of BPO for policy servicing and administration, with 36% of respondents reporting initiatives underway; only 8% of P&C carriers are using this feature.

Among P&C carriers, 17% use BPO for human resource and accounting efforts, while 11% of life carriers currently have engaged BPO HR or accounting services.

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