When politicians earlier this year were taking pot shots at offshore outsourcing, some insurance industry experts suggested that the backlash could have a "chilling" effect on potential deals, at least in the near term.However, that notion was laid to rest with the announcement in July that Zurich Financial Services had agreed to a seven-year applications sourcing contract with Computer Sciences Corp.
The deal, which is valued at $1.3 billion, represents the largest insurance IT outsourcing contract ever and could be a harbinger for future outsourcing arrangements in the insurance industry, experts say.
"I have been involved in outsourcing for 15 years, and I have seen how a landmark deal of this magnitude has changed the face of sourcing," says Carl Esposti, a partner with Technology Partners International (TPI), a sourcing advisory firm based in The Woodlands, Texas, that advised Zurich on this deal. "As a result of this arrangement, I think a lot of insurance companies will be forced to investigate the sourcing option."
Indeed, a TPI report in July notes that worldwide, six outsourcing deals with a combined value of $11.2 billion were signed in the first half of 2004, including five worth $9.2 billion in the second quarter. The surge in outsourcing deals follows a nine-month decline, according to the TPI report.
The Zurich agreement calls for El Segundo, Calif.-based CSC to assume responsibility for all applications development and maintenance for Zurich's operations in the United States, the United Kingdom, Switzer-land and Germany. The more than 4,000 applications that CSC will oversee support all Zurich's insurance lines and business processes, including underwriting, customer service and claims.
As part of the agreement, 1,600 Zurich IT employees, including approximately 650 in the United States, will be transferred to CSC. The transition of U.S. employees is expected to be completed by the end of the year.
Zurich's decision to seek out an application service provider (ASP) was dictated in large part by the global financial services firm's strategy to structure its operations around its lines of business and to manage IT resources centrally, rather than geographically.
"Last year, we went through a fundamental shift in our business model, so we needed the flexibility of shifting IT resources to the right places at the right time," says Michael Paravicini, CIO of Zurich Financial Services, based in Zurich, Switzerland. "For example, we have large issues of shifting supply and demand with our U.K. life product when we implement price changes in the summer, so we need the flexibility to implement IT resources quickly for the P&L impact, and this will help us to achieve that."
In fact, in an effort to reduce expenses and manage peak demand without supporting overcapacity, Zurich last year consolidated several U.S. data centers into one, and created a single data center to support its European and Asian businesses.
Paravicini notes that the "blended" arrangement with CSC ensures that Zurich executives will retain the responsibility and control over managing IT application strategy. "We didn't give the task of judging our applications to CSC, but we will use CSC's tools and expertise to develop applications more quickly and more efficiently," he adds.
Although Zurich has been actively reducing redundant applications and systems since it announced its global IT strategy in May 2003, Paravicini says CSC's expertise will accelerate that process.
"By using CSC as our global partner, we will implement uniform business processes across our business, streamline our applications, and reduce the number of systems and platforms, which will significantly improve our productivity," he says.
The arrangement is expected to reduce Zurich's IT costs by as much as 20%, but Paravicini is quick to note that "if we had done this just to reduce our costs, it would have been a huge mistake. We were more concerned about getting the right resources to the right places, improving our speed to market and implementing uniform applications across our business lines."
CSC intends to leverage its global capabilities in India, Eastern Europe, South Africa and elsewhere around the world as it implements what company officials call "global best practices for application maintenance and development."
"We estimate that one-third of the work will be maintenance, and two-thirds will be application enhancement, new projects and compliance," says Paul DeFuria, CSC's financial services chief technology officer. "The idea is to free up more resources to do development work versus IT maintenance."
Zurich intends to closely monitor the progress of this arrangement--the carrier worked closely with TPI to develop stringent service level agreements, Paravicini explains.
"We put a lot of focus on this because deals of this magnitude have had a history of many failures," he says. "There are very clear productivity measurements, solid benchmarking built into the agreement and reasonably strong service level agreements that will measure key processes and services that CSC will deliver." He declined to describe specific details.
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