Outsourcing is still very much alive as a tried-and-true strategy for insurers hoping to increase productivity without increasing overhead. Such is but one of the findings of a new report issued by New York-based research and consulting firm Novarica.
In its recent survey of its Technology Research Council, Novarica found that 85 percent of insurers are outsourcing at least some work through variable staffing and staff augmentation, legacy application maintenance, or data center or infrastructure management.
Conducted in December 2011, queried 111 members from small- to large-sized companies that comprise the 350-member Council, to determine how much IT work is being outsourced as well as plans for changes to strategies in the future. In all, 36 large-sized insurers (more than $1B in premium) participated in the survey, along with 56 mid-sized insurers (between $100M and $1B in premium), and 19 small carriers (less than $100M in premium). Thus, the insurers that participated in the survey represented a broad cross-section of U.S. property/casualty and life/annuity insurers.
The survey targeted three areas of interest: staff augmentation (also known as “body shop” workers or contract employees), legacy application maintenance, (support contract for either a certain number of full-time equivalent staff (FTEs) or a set number of man-hours/month to support legacy applications), and data center or infrastructure outsourcing, (usually a contract to maintain and support hardware or a physical data center environment).
Not surprising, more large insurers currently choose outsourcing as a technology strategy than do their smaller peers; with large companies currently outsourcing more than 25 percent of their IT work, while small and midsize companies typically outsource only 15 percent of their IT work.
Further, according to the survey sample, more than a quarter of large insurers report plans to increase reliance on outsourcing in variable staffing, legacy application maintenance and data center/infrastructure areas.
Alternatively, small and midsize insurers are half as likely as their larger counterparts to plan any increase their usage rates of variable staffing and legacy application maintenance, but are closer in their likelihood to plan to increase data center or infrastructure management outsourcing.
Although the survey did not reveal the etiology behind insurers’ tendency to support certain types of outsourcing, one focal point that remains fairly constant among insurers of all sizes—the project management aspects of core systems modernization—may help explain why small- mid-sized insurers are moving in a certain direction.
Matthew Josefowicz, Novarica partner and author of the report, references previous Novarica surveys that revealed that smaller carriers use external resources on a project basis more frequently than they do on an ongoing basis.
“The projected growth in external resource usage among smaller insurers might be correlated with more strategic projects,” he told Insurance Networking News.
Not surprisingly, larger insurers were more enthusiastic about the value created by their outsourcing strategies than midsize and small insurers in general. But in particular, more insurers of all sizes reported that outsourcing for staff augmentation or variable staffing delivered high value than in the other two areas.
Large insurers are more likely to increase staff augmentation over the next year while small and midsize insurers are considering an increase in infrastructure outsourcing.
Midsize and small insurers are twice as likely to see a high value in data center and infrastructure management outsourcing than larger insurers are. About a third of the survey participants plan to increase infrastructure outsourcing, regardless of company size.
In light of these results, Novarica strongly recommends that insurers review their outsourcing options when developing technology and staffing plans. The firm also offers insurers a checklist to follow as they contemplate and execute on their outsourcing strategies:
- Is there a benefit to keeping the outsourced function in-house?
- Is it a core competency or customer-facing component?
- Would the knowledge transfer from the outsourcing provider back to the carrier (in-sourcing) be difficult?
- Is it better to build the capacity in-house in order to build up talent from entry-level positions?
- Is the function strategic to running the business, or is it a commodity? - If the function is strategic, it should not be outsourced.
- Is the function large enough to warrant outsourcing?
- If the function is too small, the company may not get enough leverage from the outsourcing relationship.
- Are there wide variations in demand between peak and slow periods?
- If the demand is constant, it may be more effective to retain the function internally.
“When an outsourcing strategy is designed to best leverage internal strengths, minimize risk, and meet organizational goals, insurers may reap major benefits, such as reduced cost, flexible resource levels, higher availability, specific technical expertise, and better IT/business alignment,” notes Josefowicz.
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