Carriers operate in a complex environment that challenges their ability to do business efficiently and cost effectively. As regulations become more complex, customer needs, behaviors and demographics, distribution channels, product design and service delivery models are changing. Although technology is key to product and service delivery, most insurers struggle with outdated applications and infrastructures, while facing the looming brain drain as baby boomers retire.Once IT outsourcing was considered merely a method of reducing cost through labor arbitrage. Now the situation is more complicated, with other factors, including regulatory compliance, weighing heavily in many outsourcing decisions. Business continuity-that is, how to stay in business should a major event such as a natural or man-made catastrophe or a pandemic occur-is an emerging reason for outsourcing or distributing some business functions or support facilities across geographies. Each insurer organization is different and the reasons for determining what and when to outsource vary within industry sectors and by business model.

There is an odd notion in some insurance companies that things are moving so fast today that strategy is an obsolete idea, and that all an organization needs is to be flexible, adaptable or "agile." However, agility is no substitute for strategy, especially when making decisions about where, how and why to do business. After all, outsourcing vendors have a strategy: to move as much of your business as possible outside of your organization and into theirs. Without a plan, an insurer may become part of the vendor strategy.

Before speaking to a single vendor or launching a hunt for the lowest-cost alternative, decide what role outsourcing can play. Common responses to an IT off-shoring question are "we need to use our in-house resources for more strategic work" and "we need to focus on our core competencies." These responses generally indicate that the insurer has not yet thought through the outsourcing issue.

Some questions to ask:

* What capabilities are needed that are not present today? Is outsourcing a viable avenue for gaining them?

* What are we attempting to achieve? Can we quantify the cost savings or process efficiencies or project execution level we are seeking?

* Have we ever done something similar (e.g., used a TPA)? If so, what contributed to its success or failure?

* Are we attempting to facilitate change or thinking about outsourcing "keep the lights on" activities? If we are seeking change, how receptive is the organization?

* Are we willing to actively participate in the outsourcing relationship to ensure success?

After formulating business objectives, insurers must perform due diligence with the outsourcing vendor community. While some forms of IT outsourcing are mature enough to be considered commodities, vendor organizations are not commodities and differ as widely as insurance companies themselves. The lowest-cost provider may not be the right partner. In service relationships, as in retail, you often get what you pay for.

ASK THE HARD QUESTIONS

In selecting an outsourcer, a company needs to separate "table stakes" capabilities (e.g., CMMI Level 5 certification) from the differentiators that will govern the quality of the relationship. All vendors have standard capabilities presentations that must be supplemented by some hard questions. Outsourcing is not a one-size-fits-all business.

Things to understand about the vendor include:

* What is the depth of their insurance domain expertise? What is their level of technical, project or infrastructure management experience?

* Where is their main focus (e.g., cheapest transactional processes, optimized cost structures, exception management)? How successful are they at pursuing this strategy? Most vendors claim to do most types of outsourcing. Find out what they mean when they claim to have a specific practice. It may mean they have done a similar project.

* How would they manage your account? How accessible are they? Would you have access to key executives within the firm?

* How does customer satisfaction fit into their business? What information will they share? Do they regularly meet the terms of their Service Level Agreements?

As in most relationships, it's critical that the parties feel comfortable with one another. As outsourcing moves from tier 1 insurers to tier 2 and mid-tier organizations, the smaller or niche players are becoming increasingly competitive with the large, multi-national outsourcers.

Insurers must understand their own strengths and weaknesses as well as those of the vendor to build a successful outsourcing relationship.

Judy Johnson is vice president and principal solution architect in the Insurance Business Unit at Patni Computer Systems Inc., Princeton, N.J.

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