IT outsourcing used to be so clear-cut. You identified a function that wasn’t being effectively delivered by your own organization, and contracted with a service firm to provide that service.

Insurance companies are major consumers of IT outsourcing services. Novarica estimates that outsourcing typically consumes around 20% of insurers’ IT budgets, and represents between 20-40% of IT headcount. Novarica’s survey of 95 insurance companies, conducted last year, found 85% outsource application development, 64% seek infrastructure support, and 62% outsource to gain access to specialized skills.

Interestingly, the consultancy also hints that many insurance CIOs are rethinking their outsourcing strategies. While outsourcing remains “an important part of insurer CIOs’ toolkits, and usage is widespread,” there may be a retrenchment underway. “While many of those that currently outsource at a moderate level are planning to expand their use of outsourcing, some heavy users are planning to cut back,” Novarica analysts note in their report published last year.

It isn’t just insurance CIOs who are rethinking their IT outsourcing strategies and approaches, A new report by CIO’s Stephanie Overby suggest that CIOs are getting restless, “Rapidly changing business and technology needs are forcing IT leaders to renegotiate their IT outsourcing contracts and rethink their sourcing portfolios sooner rather than later,” she writes.

There are a number of variables at work that are reshaping outsourcing. Cloud is the biggest game-changer, enabling IT leaders and professionals to access services and technologies on an incremental, pay-as-you-go basis at the moment it is needed, versus sifting through vendors and signing one or two-year contracts. The drive to data center automation and consolidation – built on software-defined everything – is reducing the scale of things that need to be managed. There’s even the rise of IT being procured and managed outside of IT departments – it’s being said that marketing executives have bigger technology budgets than CIOs. .

Overby’s report provides a perspective from Mayer Brown’s Dan Masur, who singled out the insurance industry as an example of the “new outsourcing”: “Insurance companies are moving from agreements structured based on the number of IT devices or FTEs required to perform back-office work and moving to agreements where they pay by the number of annuity applications processed or claims administered. They’re moving to the things that are important to the client, not the provider.”

The movement seems to be in the direction of chunking – IT services and tasks absorbed into the business, and broken down into smaller increments. Again, this is also an area where cloud is making a difference.

In the CIO interview, Masur identifies several trends that are part of the new outsourcing:

Re-Solutioning. Outsourcers are focusing on offerings targeted to the business – not just selling compute cycles.

Re-Sourcing. Thanks to cloud, there are now a multitude of services covering all aspects of IT, from security to data analytics.

Restructuring. Outsourcing arrangements should focus on solving business issues, not technology issues.

Retrofitting. Many existing outsourcing deals have missed out on the new generation of IT – such as mobile, data analytics, social, Internet of Things. These need to be part of outsourcing.

Reconciling. Businesses and requirements change – sometimes from month to month. Outsourcing agreements need to be more adaptable to changes on the customer end. 

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