At this time of economic and operational uncertainty, many global insurers are scurrying to identify-and then rectify-vulnerable components of their operations.In April, executives at Boston-based John Hancock Financial Services Inc. believe they made a key decision to help restore stability to the operation when the carrier inked a multi-year agreement to implement IBM Corp.'s e-business on-demand solution.
Introduced in December and offered within IBM's Insurance Transformation Solutions (ITS) unit, on-demand is an integrated end-to-end and enterprisewide solution lauded for its ability to create a flexible IT infrastructure for insurers-a capability that enables quick response to computing demand fluctuations. On-demand enables insurers to invest only in what they need from an IT standpoint. With IT budgets greatly scaled back, on-demand computing is viewed as an ideal alternative, since most insurers aren't equipped to invest in a full suite of IT solutions.
Under the terms of the agreement, Armonk, N.Y.-based IBM will overrsee several functions presently being performed by Hancock's Infrastructure Support Services (ISS) department, a unit housed within Hancock's Information Technology Services sector. ISS currently maintains the company's mainframes, servers, networks, desktops, help desk and around-the-clock operations.
The carrier expects to sign a contract with IBM in the second quarter, with the functions to transition over the following four months.
In a prepared statement outlining the IBM initiative, Tom Maloney, senior executive vice president and chief financial officer for Hancock, says the outsourced services will allow the carrier to reallocate its personnel to better focus on core financial business programs. This in turn will enable Hancock to become more adaptable to changing market conditions and be better equipped to squeeze value from its business processes.
Hancock will continue to directly manage all other IT functions, including development and maintenance of its application systems. Hancock expects the transition to be seamless and the change unnoticeable to the business units supported throughout the company.
As to why it chose IBM for these services, Hancock cited a combination of IBM's competencies to deliver results and the desire to reduce expenses without diluting quality of technology support that ISS must provide to the company. Hancock is projecting a savings of more than $90 million over the contract period, according to a statement released by the company.
Roy Andersen, a spokesman for John Hancock, says that due to the pending nature of the agreement, the company could not reveal additional details, including the length of the deal, beyond what was provided in the company's prepared statement.
Do more with less
Although the Hancock-IBM deal is just one of an increasing number of outsourcing partnerships that carriers have pursued in recent years, it is set apart from many others in terms of overall scope and scale.
The pact is similar to one forged in the fall 2001 when Novato, Calif.-based Fireman's Fund Insurance Co. and Montreal-based CGI Group Inc. signed a 10-year, $380-million IT outsourcing agreement. Over that time, CGI has also performed end-to-end IT services that encompass ongoing maintenance of 500 Microsoft NT servers and Unix platforms supporting 11,000 desktops. CGI is also providing around-the-clock services to 80 Fireman's Fund offices across the United States.
As the scale of these outsourcing deals grows, so do the risks to carriers, industry analysts say. But of all outsourcing arrangements that insurers can explore, outsourcing of IT infrastructures might be the most failsafe.
"These large-scale outsourcing projects can be fraught with challenges," says Michael LaPorta, senior partner for insurance, New York-based Braxton (formerly Deloitte Consulting). "If this were a project that involved maintenance of legacy systems, it would have more uncertainties. Taking over IT infrastructure has fewer challenges."
Clearly, IBM will use the Hancock initiative to demonstrate its ability to perform more with less. In the Fireman's-CGI deal, 300 Fireman's Fund employees were converted over to become CGI employees, and over time, CGI was expected to be able to whittle that workforce down further.
Similarly, Hancock has about 300 people in its affected groups, of which about 180 are expected to transition to IBM as part of the deal. Hancock will retain an additional 20 employees to oversee the new arrangement, and offer severance packages to those employees who are not offered positions.
"IBM is going to try to demonstrate that it can do more with fewer resources," LaPorta adds. "The kicker is that the 180 people IBM is inheriting are the same ones that were employed by Hancock. To take the same personnel and churn out significant results is a credit to IBM's competencies with on-demand e-business solutions."
One way IBM might be able to leverage this initiative, LaPorta says, would be if it had an opportunity to migrate other insurers to the Hancock IT infrastructure, which in turn could serve as an additional revenue stream for IBM.
Overall, IBM is using its name equity to get financial services firms familiar with the dynamics that drive on-demand e-business computing. "IBM is still trying to get the message across about on-demand computing," LaPorta says. "In simple terms, you can explain it by saying: If you reduce your reliance on IT infrastructural needs, you save money. But if you increase IT capacity it will cost you."
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