Today's business environment demands that insurers run their operations as intelligently as possible while taking advantage of the latest technologies. New initiatives around telematics, big data analytics, mobile and Web self-service often demand more expertise and capabilities than insurers can provide - which continues to fuel the market for business process outsourcing services as well as information technology.
There's no question that both flavors of outsourcing, IT and business processes, are big business. In the past year alone, for example, KPMG estimates that organizations across all industries signed onto $118 billion in IT outsourcing contracts and $19.5 billion in business processing outsourcing contracts. Overall, total contract values within the insurance sector increased more than 25 percent for outsourcing, KPMG adds, and these were just the high-level contracts. There are also countless smaller-scale outsourcing engagements in which insurers turn to vendors and contractors for assistance in specific areas, such as workflow, content management, security and infrastructure development.
Cost savings has long been the leading reason for outsourcing, but now insurers increasingly are turning to outside service firms for their technology know-how. A survey conducted last year by Deloitte finds 66 percent of insurers look to outsourcing arrangements for technology expertise that they lack on-site, exceeding the 64 percent who saw outsourcing as a cost-reduction strategy.
Such is the case at Farm Bureau Insurance, which is working closely with X by 2, a technology-consulting firm, to enhance its stable of expertise in building a new online customer self-service capability. "They were brought in because we recognized we needed help in determining and delivering to our customer expectations," says Cheri Barnhart, business solutions strategist with Farm Bureau Insurance. "We had some aging systems and challenges."
This pattern is being seen across the industry, as insurers recognize that the technology they need to be more competitive is growing too complex to build, integrate or manage in-house. While adoption of business process outsourcing - in areas such as claims processing or customer service - has remained steady in recent years, there has been increasing activity with IT outsourcing.
"Technology outsourcing is going to continue to be strong, because it's becoming pretty standard practice for companies to go the route of handing over the management of their networks, or exploring and leveraging application maintenance and development, to outsourcing providers," says Mike Fitzgerald, analyst with Celent. "And, as companies push the boundaries into cloud and SaaS, it's going to drag more of the late adopters into ITO [IT outsourcing]."
Functions Being Outsourced
Application development and enhancement is the IT function insurance companies are outsourcing most, the Deloitte study confirms. Additional areas insurers are turning over to IT outsourcing firms include application maintenance and support (75 percent), IT service desk (71 percent), application hosting and support (71 percent), end-user computing (62 percent), data networks (59 percent), and data centers (59 percent).
Zurich North America, for one, is a heavy user of IT outsourcing, particularly for infrastructure, development and quality assurance testing. In 2004, the company began outsourcing IT infrastructure and managed services to CSC, an agreement it upgraded in 2009. The contract covers global data center centralization and server virtualization and was designed to transform Zurich's existing data center environment into a fully modernized, flexible and highly virtualized operation.
"Zurich is heavily outsourced when it comes to IT, including infrastructure," says Subhasis Mukherjee, director of the center of excellence for requirements and architecture in claims, Zurich North America. "Everything we have is infrastructure-as-a-service." Zurich also is contracting with PegaSystems for cloud-based business process management systems, as well as application development and quality assurance.
While outsourcing is not new to the insurance industry, one of the challenges that consistently needs to be addressed is the impact on the organization. For one, there is always a pervasive fear of job losses resulting from outsourcing agreements. But while certain types of jobs may be less essential to insurers that contract out for IT or business process services, such engagements often elevate the roles of in-house staff members.
One of the results of Zurich's expansive IT outsourcing strategy is that it has opened up new roles and responsibilities for IT managers, says Mukherjee. "The roles that we have in IT right now are program and project management, business analysis and architecture," he says. Another in-house role that rose in prominence after Zurich outsourced its IT infrastructure is that of release manager, he continues. "The release manager's role is primarily focused as a quarterback between the app manager and the CSC outsource team. There may be multiple apps and releases, and we want to line up our releases to be very synchronized."
Along with adopting new strategies to retain or build new skills to manage outsourcing engagements, insurance organizations need to take a hard look at their existing management practices, which often don't work well with off-site movement of workloads. Issues that typically arise with outsourcing include weaknesses in client-vendor communications, lack of transparency, lack of reporting and misaligned expectations, according to Sridhar Rajan, principal at Deloitte Consulting LLP's strategy and operations practice. Speaking at the 2012 ACORD LOMA Insurance Systems Forum, he and associate Morgan Davis point to sound project management methodologies that need to be in place during outsourcing engagements. These include joint initiation and planning activities, a detailed master transition plan and collaboration between both the insurer and the service provider as they develop the plan with clearly understood tasks, roles and responsibilities.
Successful IT outsourcing engagements depend on the ability of members of both parties to work tightly as a single team - to the point where it is almost indistinguishable as to who ultimately signs their paychecks. At Farm Bureau Insurance, the customer self-service system development project provided an opportunity for a close blending of the in-house and X by 2 teams, which was unprecedented in the insurer's previous outsourcing engagements, Barnhart says. "We put together a team that has business analysis, testing, data developers and project management," she says. "We even started out, right at the beginning, avoiding use of the term 'vendor.' We called them our 'partner.' We invested in actual team-building time. We talked about how to work to our strengths, how we can build trust, and how we can interact more effectively. That was kind of new to us, to focus on team-building right from the beginning of the project. But it was definitely worth the investment."
The investment in blending in-house and off-site staff tends to have immediate and ongoing payoffs, opening up the clogged or opaque channels of communication that Rajan and Davis warn about. This is no small feat for organizations putting their business in the hands of a service provider that may be from another region, or even another part of the globe. "Managing the vendor relationship and monitoring performance is a full-time commitment," say Rajan and Davis.
Managing expectations - and measuring those expectations - is another key piece of a successful outsourcing engagement. "When you start to outsource, and you say you want something back in 72 hours, the provider may say they can do that if they get x, y and z as inputs," says Fitzgerald. "Sometimes companies can't provide x, y and z. They need to do the rigorous process work and process measurement up-front, no matter what model they're going to with a third party."
The key is to look for benefits from outsourcing arrangements beyond merely cost-savings. "Many insurers are still looking at outsourcing as a cost arbitrage play," says Fitzgerald. The key to a successful engagement is to improve both IT and business processes, and provide expertise that is difficult to recruit in-house. "What we have seen is it requires insurance companies to really understand what they do, who handles it, and document their processes to a level that most of them haven't done yet."
Emerging approaches such as cloud computing are breaking down the traditional outsourcing engagement as well. Many services now can be acquired on a piecemeal or as-needed basis via cloud services and application programming interfaces (APIs), frequently payable with a credit card. Often, these singular services are part of larger outsourcing deals. "The mega deals are starting to be re-negotiated to shorter contracts and fewer dollars," Fitzgerald says. In the IT and business process outsourcing realm, he says contracts are getting shorter and smaller, and cloud is only going to feed into that.
The bottom line is that insurers increasingly may rely on outside partners to stay ahead of the digital revolution that is sweeping the industry. These partners could bring in levels of expertise and experience that are hard to come by in-house. "When you're hiring an expert, let them lead," Farm Bureau's Barnhart says. "Listen to their insights and advice." In Farm Bureau's engagement, such a partnership approach has been critical, she says. "Things never go as planned in the systems world. You have to be able to trust your partner."
Joe McKendrick is a writer and consultant specializing in IT, and a regular blogger for insurancenetworking.com.
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