Nearly half of the top 200 U.S. insurance carriers are using offshore services, according to Celent Communications Inc., Boston. Among the carriers working with outsourcing firms that provide at least some offshore services are: Guardian Life, Manulife, Sun Life, Fireman's Fund, Farmer's Insurance Group, Allmerica, PacifiCare Health Systems, Abbey Life and Royal & Sun Alliance.But try to get an insurance executive to talk about outsourcing these days--especially offshore outsourcing--and you won't find many takers. Several large insurance carriers declined to be interviewed for this article. And, at a recent Insurance Networking News outsourcing conference in Tampa, Fla., several IT managers from smaller insurance companies said they did not want their employees to know they were attending.
That's because offshore outsourcing is taking a beating in the political arena in this election year. And, like any company in any industry, carriers that outsource-or are even thinking about it-are trying to avoid the bad publicity and employee demoralization that can go along with sending work overseas.
"I've never seen as much (concern) as I've seen (recently) where regions around the world are starting to buck this offshore outsourcing trend," according to Diane Morello, vice president, in the research division of Gartner Intelligence, Stamford, Conn. "This is going on worldwide. It's not just the U.S. that's being affected."
Gaining votes
In the United States, however, those who are among the most affected by offshore outsourcing are IT professionals. They worry about the 3.3 million jobs--from all industries--that will move offshore over the next 15 years, as predicted by Cambridge, Mass.-based Forrester Research Inc. Will those jobs be theirs?
Not surprisingly, presidential and Congressional candidates have jumped on this issue to gain populist votes in the upcoming elections.
In particular, Senate Minority Leader Tom Daschle (D-S.D.) introduced a bill in February that would require companies that lay off 15 or more workers and send their jobs overseas to provide at least three months' notice. Daschle's bill followed comments made by Gregory Mankiw, chairman of the Council of Economic Advisors, in support of outsourcing, in a testimony before the Senate's Joint Economic Committee.
The "Jobs for America Act"-backed by Democratic presidential candidate Sen. John Kerry (D-Mass.)-would also require companies to notify the Department of Labor and state agencies responsible for helping laid-off employees, as well as local government officials.
State legislators are also entering the battle. Indiana, for example, cancelled a contract in November with Indian firm Tata Consultancy Services for processing unemployment claims. As of February, about 80 bills that would limit offshore outsourcing in some way had been introduced in more than 30 states, according to The Wall Street Journal.
"Clearly, the public relations aspect of offshoring is a major concern for carriers," says Celent senior analyst Craig Weber. "As a matter of fact, most carriers label that as one of their major concerns-not just external PR, but internal PR. Employees are justifiably concerned about their jobs going overseas, and the public is concerned about the economy taking a hit."
Futhermore, says Weber, public concern about the issue has not peaked. "We predict offshoring will continue to grow-and concern will mirror that growth." But the cost savings and strategic benefits are simply too compelling for carriers to ignore, he says.
"Carriers will have to deal with this problem, but most of them don't have the luxury of saying, 'We're not going to do this because the public and employees are concerned about it.'"
The primary reason
In fact, Celent predicts offshore outsourcing spending among U.S. carriers will grow from $869 million this year to $1.46 billion by 2006 (see "Insurance Offshore Spending," page 27). The primary reason for this growth is cost savings (see "Top Drivers for IT Outsourcing," page 28). For IT maintenance projects done by offshore firms, savings of 40% are typical, and for application development, savings of 25% to 30% are typical, according to Celent.
A case in point: Guardian Life Insurance Co. of America, the fourth-largest mutual insurance company in the United States, is saving $12.5 million per year with no identifiable loss in productivity due to outsourcing IT work--including some to India--according to a 2004 industry report from New York-based consulting firm Deloitte.
Indeed, when it comes to offshore IT outsourcing, salaries of U.S. workers dwarf their foreign counterparts. While the average annual salary of a U.S. programmer is $63,331, a programmer in India makes $5,880. Similarly, the average salary for a call center agent in India is one-tenth that of a U.S. agent's-or approximately $300 per month.
What's more, the quality of IT work by Indian firms-which currently dominate the offshore IT market-is high.
According to Jim Thomas, vice president of marketing for the North American arm of Tata Consultancy Services, TCS' technology scored the highest among the three final contendors for the Indiana unemployment claims contract, and its bid was the lowest-$10 million less than the next nearest bid.
More than 250 of the top 400 Indian IT services companies are ISO-9000 certified, according to India's National Association of Software Services Cos. (Nasscom). And, more than 40 have been certified at the Capability Maturity Model (CMM) Level 5-the Software Engineering Institute's highest level for measuring an organization's software development and maintenance processes.
Despite the current populist backlash, "I see offshore outsourcing growing," says Eric Miller, senior principal at Highpoint Partners Inc., a Charlotte, N.C.-based consulting firm.
"Companies are trying to get the best value: high-quality individuals at a reasonable cost-whether that's on the technology or service side," he says.
With the Internet and high-bandwidth telecommunications enabling the rapid movement and sharing of data anywhere in the world, insurers are weighing their global sourcing options.
"They're trying to take a very precise look at what makes sense," Miller says. "They're not saying, 'Yes, were doing it-or no, we're not.' Rather, they are becoming more selective as to the functions they'll send offshore. It's more of a blended concept," he says.
Different approaches
Insurers can take different approaches, Miller continues. They can retain internal people to maintain their old IT systems and go overseas to obtain state-of-the-art resources to handle new development. But this may breed discontent among employees. "Employees may ask, 'Why are you letting those people do all the fun stuff and we get stuck doing COBOL?,' " says Miller.
On the other hand, a carrier may send tedious or routine IT maintenance work offshore and use internal employees for their new development. "Ideally, that's the best-because IT development is the value-add," he says. "You're going to have people knocking down your door to work for you."
Indeed, it may make sense for U.S. carriers to consider sending IT maintenance to lower cost offshore destinations--not only to please U.S. employees--but because maintenance typically accounts for the lion's share of an insurer's total IT budget, sources say.
Although Celent research indicates that carriers spend more for new application development than for maintenance done by offshore providers ($382 million vs. $139 million in 2003), "one of the most promising strategies is to communicate very clearly with employees that the intellectual capital of the business will stay local," says Celent's Weber.
For that strategy to work, however, U.S. IT workers need to update their skills, Weber adds. "For example, IT requirements-development is a task that typically stays onshore. So employees who are accustomed to just coding may need to think about adding project management to their skill set."
In addition, keeping application development in-house also may protect a carrier's intellectual property, says Gartner's Morello.
"Insurers ought to be concerned about whether or not they adequately understand the future innovation they may lose as a result of turning over certain activities and processes to other parties-particularly because some areas of the globe have little or no patent or intellectual capital protection," she says.
Moreover, compliance issues are requiring insurers to be much smarter and methodical about their outsourcing decisions in general. Sarbanes-Oxley is forcing boards of directors to demand more insight into these arrangements, sources say. "They need to know what risk you're putting yourself in if you're dealing with companies that are not equally attuned to keeping data integrity in line," says Morello.
"It doesn't matter if your data is in a box in Illinois. If a person offshore is accessing that information, privacy and security issues remain," says Patrick Hatfield, partner at Lord Bissell & Brook LLP in Atlanta. "Privacy is a high-risk issue for insurance companies," he told attendees at the recent Insurance Networking News Outsourcing Forum.
"If you're a life and health institution (that has to comply with HIPAA), this is more significant than for commercial lines. But privacy is a topic that keeps insurance executives awake at night. They're not confident that they have it nailed-so they even have less confidence in vendors' abilities to protect their customers' privacy," says Hatfield.
Although the current backlash against offshore outsouring makes it appear as if the practice is widespread, less than one out of every eight companies across industries is outsourcing any application maintenance or development offshore, according to a 2003 survey conducted by Financial Executives International and Computer Sciences Corp., El Segundo, Calif.
Of those firms that are sending work offshore, only 9% had been using offshore providers for more than one year.
When asked how satisfied they were with offshore development and maintenance, 26% of these companies said they were highly satisfied and 44.2% were somewhat satisfied. Only 6.4% were somewhat or highly dissatisfied.
Generally, companies are satisfied with IT work at offshore firms, says Rebecca Scholl, principal analyst, business process outsourcing, at Gartner Inc. "But when it touches customer interaction, there's a lot more work to be done to ensure process consistency and compliance," she says. "And some companies are not good at managing the offshore relationship."
Communication is a huge issue when companies outsource anywhere, says Highpoint's Miller. "You have to be extremely precise about what you want the outsourcer to do for you," he says.
"We have enough trouble communicating when we sit in cubicles next to each other; getting people to write precise product and systems specifications is difficult. They say, 'This is going to take twice as long as it should.'"
From that perspective, along with costs associated with ensuring compliance, security and privacy, companies are questioning the hidden costs associated with outsourcing, sources say.
"I may be able to obtain a cost savings on per-hourly basis, but if it takes me twice as long, that's not the true cost," says Miller.
In addition, some companies that have sent customer-service work overseas are bringing it back onshore. Carmel, Ind.-based Conseco Inc. brought its call center operations back to the United States from India in 2002, for example.
"We learned we could deliver higher quality customer service here," says Jim Rosensteele, Conseco spokesperson. In 1999, Conseco had purchased exl-Service, an India call center operation, expecting to save $60 million per year.
"People aren't willing to put up with companies that move call center operations offshore," says Miller. "That's the part that the customer sees, and customers are not going to stand for it."
In fact, Round Rock, Texas-based Dell Inc. in November decided to shift corporate tech support for two of its computer lines back to U.S. call centers from India because the company had received complaints from corporate customers about language barriers and delays in getting issues resolved. But Dell's small-business customers and consumers will continue to be routed to India-based tech support.
In the consumer market, people fall into consumer segments, says Mike Hail, CEO of Yankelovich Partners, a Chapel Hill, N.C.-based marketing consulting firm. Some American consumers have a high demand for personalized service and are willing to pay a premium for it, while others are willing to go to a company's Web site, use e-mail, or bear with a scripted response from a call center representative and pay less.
"When you're dealing with that segment of the population that expects customization and a personal response, scripted responses from call center reps don't work," he says. "As a result, you'll see high levels of dissatisfaction."
Furthermore, he says, American consumers make their purchasing decisions based on price and quality. "If Toyota can build a better product, we're going to buy it," he says. "'Buy American' sentiment doesn't alter that scheme."
Offshoring good for the future of U.S. economy, supporters argue
Statements made in February by Gregory Mankiw, chairman of the Council of Economic Advisors, ignited the already-brewing debate over offshore outsourcing. "The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods," Mankiw said in his testimony before the Senate's Joint Economic Committee.
"Outsourcing of professional services is a prominent example of a new type of trade," he told the committee. "The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane."
Indeed, not only does offshore outsourcing help U.S. insurers reduce costs, convert fixed costs into variable costs, spread operational risk, and respond quickly to market opportunities, it may also enable them to establish "beachheads" in emerging markets that will foster their future growth, says Anupam Rajvanshi, a consultant with Andrus Consulting Services, a division of Dwight Andrus Insurance, Lafayette, La.
"Growth has slowed down in the Western world since Western countries have reached an advanced level of economic growth," Rajvanshi says, citing a report from Goldman Sachs & Co., New York, titled "Dreaming with the BRICs: The Path to 2050."
According to that report, over the next 50 years, Brazil, Russia, India and China-the BRIC economies-could become a much larger force in the world economy. In 2003, the Chinese economy grew at an annual rate of 9% and the Indian economy grew at a rate of 8%, compared with 3% to 4% growth in the Western world.
"BRIC nations represent future markets for just about any company in the West," Rajvanshi says.
"And businesses that have the foresight and vision to perceive this--and have ongoing and existing relationships with the BRIC nations--will be in the best position to reap the rewards."
