The outsourcing of information technology is proving to be popular with carriers these days, reversing the industry's historical apprehension of working with third parties. But experts caution that time will tell how widespread the concept becomes.In January, PacifiCare Health Systems Inc. became the latest insurer to chart this course by completing a 10-year, $1.2 billion venture with Armonk, N.Y.-based IBM Corp. and Boston-based Keane Inc.
The Santa Ana, Calif.-based insurer actually approved two separate but related ventures. Under the terms of a $761 million outsourcing plan, IBM Global Services will manage PacifiCare's data center operations-including its voice and data network and approximately 380 computer servers-and provide IT help-desk and support services for all of PacifiCare's workstations.
Keane, meanwhile, assumes responsibility for managing and enhancing PacifiCare's application software environment within a $500 million, 10-year agreement. PacifiCare is confident that Keane can apply its proficiencies to improve project management processes and enhance existing software assets of PacifiCare.
PacifiCare IT employees are also involved in the shakeout as about 650 individuals will become full-time workers of either IBM or Keane.
First foray
By freeing itself of these responsibilities, PacifiCare hopes to reduce internal costs by $380 million to $400 million over the life of the contract.
The outsourcing IT arrangements will enable PacifiCare-an eight-state provider of life and health insurance, dental and vision services to approximately 3.6 million members-to concentrate on "strategic" IT development programs, says Maria Fitzpatrick, senior vice president and CIO of PacifiCare.
"With rapid change in technology, ever-increasing costs and the demand for greater effectiveness and agility, we needed a solution that would meet these challenges," Fitzpatrick explains. "These agreements enable us to manage our outsourcing relationships while focusing on IT strategy, planning and architecture and help us reposition IT from a traditional support role to a strategic asset for the company."
PacifiCare hired a consulting firm to study the overall magnitude of an initiative like this one. When all the specifics were ironed out, PacifiCare performed significant due diligence throughout 2001 before selecting IBM Global and Keane.
Fitzpatrick could have also surveyed some of her contemporaries because several carriers recently have embarked upon major IT outsourcing ventures.
Allmerica Financial, a Worcester, Mass.-based provider of variable annuities, variable life insurance, and property and casualty insurance, recently inked a seven-year application development and management outsourcing contract-also through Keane Inc. And, in February, Toronto-based Manulife Financial signed an agreement with IBM Canada Ltd. for IBM to manage Manulife's data centers, help desk, desktop computers and voice and data networks.
Giving IT up
Ceding control of a significant internal function such as IT isn't easy for any major corporation, including insurance carriers.
So it bears watching how substantial this brand of IT outsourcing becomes. Many signs point to increased IT outsourcing activity. Needham, Mass.-based e-business consulting firm TowerGroup reports that outsourcing will be one of the most, if not the most, rapidly growing category within IT spending in the foreseeable future.
But as financial providers such as Allmerica, Fireman's Fund and PacifiCare will attest, outsourcing a large chunk of an IT function is a concept fraught with ramifications.
"It's a tradeoff. You give up controlling your own destiny with internal IT functions and in return you hopefully improve your internal efficiencies," Fitzpatrick says. "Giving up this amount of autonomy was a major sticking point as we explored our options."
