Best Practices For Successful IT And Business Process Outsourcing in the Insurance Industry

The paper is part of a series for Managing My Vendors. This installment will cover: * Introduction * Critical Success Factors * Key Inhibiting Factors.

Future installments will include the following topics:* The Vendor Management Organization * Communication And Relationship Management * Service Levels, Performance Analysis and Improvement * Customer Satisfaction Performance Metrics and Reporting * Issue and Dispute Resolution * Change Management * Transition Monitoring Program Office Structure and Management Process

The insurance industry has had a long history of outsourcing business processes and related technology to third party administrators (TPA's) and outside claims adjusters. And although there is a good track record of successful outsourcing contracts, many times insurance companies' expectations do not align with the outsourcing company's ideas.

IT Outsourcing (ITO) is now a standard, accepted way of doing business in the US and overseas. Business Process Outsourcing (BPO) is growing as well, as the service providers become more efficient and insurance companies (and other industries) get over the emotional hurdle. BPO should overtake ITO in new contractual arrangements in the next few years both in number and in size, as BPO drags along the IT support necessary for that business function. Insurance, often a trailing industry in new management practices (although not in its use of technology) has embraced outsourcing now as well.

At the same time, ITO has had its share of failures some of the most publicized ones being from the insurance industry. In hindsight, these failures have arisen from number of different factors, one of which is the failure to effectively managing the ongoing client-vendor process. The outsourcing selection and contract negotiation process is sometimes the easy part. Once the contract is signed and the chosen vendor comes in the door to begin the transition, the honeymoon is over and the challenging work begins.

The selected vendor always looks good on the sales call, but doesn't always live up to expectations during the transition. This happens partly because there are inevitable cultural differences, process differences and technical language differences that were not evident before. More importantly, no matter how rigorous the due diligence and negotiation process, each side will probably have a different concept of what their respective role will be in the agreement.

Managing vendors can be either a chaotic ad-hoc arrangement or a well-defined organized process. Given the complexity of most sourcing arrangements, it is in the best interests of both company and vendor to have clearly defined Vendor Management processes, pre-defined agreements for managing and administering contract terms and quantifiable measures for success. If both company and vendor are vigilant, they can work together to minimize the impact of their differences.

Critical Success Factors:
* Insurance clients who expressed satisfaction with their sourcing contracts had excellent and frequent communications with their vendors. One of the communication tools that companies use successfully with their vendors is a tiered series of meetings where the company can provide input to their vendors on the services provided. These allow the vendors as well as the company to share information and be on the same page in terms of service expectations. Different meetings are held for different levels of executive and operating management with corresponding agendas. * Clearly establishing the expected level of service has also been found to be critical to successful sourcing contracts. Regular vendor reporting on service levels, employee turnover, staffing levels, disaster recovery, security, customer satisfaction, etc. is important to effective service management. Performance results and issues should be discussed regularly. * Effective vendor management requires that the Vendor Management program clearly defines what the roles are between the company and the vendors. This is most effectively stated as a part of the Statement of Work, as a Roles and Responsibility Matrix prior to contract award.

Key Risk Factors of Successful Vendor Management
* Reliance on a handshake deal (especially between CEO's) or conversely, the lack of enough due diligence on both sides * Lack of trust in the original decision to outsource * Relying on a vendor as a business advisor, strategic advisor, thought leader in new or emerging technologies, unless this is specifically the service they are contracted to provide * Assuming that cost savings will be the overriding benefit and that they will continue for the life of the contract * Significant personnel changes at the vendor or at the client * Outsourcing a problem area * Failure to recognize the effort and expense required to mange a vendor relationship. In our experience companies should budget between two and five percent of the value of the deal for managing the deal.

Future installments of this section will discuss additional issues in successful vendor management and provide more detail on the critical success factors noted above.

This paper was developed to provide general background to assist insurance industry clients in decisions related to implementing vendor management best practices. Please note that this paper presents professional opinions intended to apply generally and that clients must take appropriate care to evaluate them in light of their specific needs. Technology & Business Integrators, Inc. makes no representations, warrantees or guarantees of any sort as to the applicability of the opinions presented in this paper to the specific needs of any client. This paper was developed for insurance companies who are considering or are in the process of sourcing major Information Technology (IT) or Business Process programs to an outside vendor. It talks about the processes for managing vendors in a complex, multi-vendor environment.