Just when you thought you'd mastered the art of IT outsourcing, your CEOimpressed with how you've gained unprecedented efficiencies by cutting IT expensesasks you about outsourcing business processes. But how much could a CIO possibly know about business functions such as payroll and human resources? Plentyif, like most senior tech executives, you help solve business problems every day. And won't your CEO be impressed when you cut up to 30 percent of annual operating expenses for a higher service level than is now being achieved?
But before you start basking in all that glory, there are a number of important factors to consider before embarking on business process outsourcing (BPO). One of the most costly of these is the sobering human factor. When business processes are moved out of housewhether skills of employees are reallocated within the carrier, moved to the provider or laid-off completelyemployees who once worked on a specific business function will undoubtedly be uprooted.
An accurate assessment of cost and service levels that are being realized in-house must also be weighed. Many times, savings expectations are not met because the cost of in-house management of outsourced functions is not figured into the BPO cost equation. Also, depending on the process that is outsourced, ROI can take a long time to achieve.
Despite the hurdles, more companies are trying to make sense of the practice and the trend towards BPO is expected to grow in the future. A Gartner Data-quest (San Jose, CA) study projects that BPO in financialservices will reach $58 billion by 2005. The popularity of BPO in insurance specifically has picked up within the past nine months, according to Faith Trapp, managing director global insurance strategy, EDS (Plano, TX).
"Insurers are having to drive down costs and develop products faster," she says. "BPO can help eliminate capital costs, launch new products, build systems and train people." Specifically, the ability to turn a fixed cost into a variable cost, gain higher service levels and reallocate much needed resources are spurring the trend, reports Gary Venner, senior vice president, Technology & Business Integrators (Woodcliff Lake, NJ).
There are a number of providers, both on and offshore, specializing in everything from accounts payable and human resources, to the more technologically intensive policy and claims administration activities. And because of the recent growth in demand, areas of expertise are expanding every day. For example, this past April the Infosys subsidiary Progeon (Bangalore, India) was formed in response to BPO demand. According to Guatum Thakkar, client relationships, Progeon, claims processing, product development, customer contact centers and policy-owner services are some of the services Progeon provides.
Although there are a variety of services available, CIOs and business heads must be careful when choosing functions to outsource. Most first-time business outsourcers are steering clear of functions that are business differentiators, in order to manage risk. Additionally, they are staying away from outsourcing customer-facing business processes until the success of outsourced non-customer facing-functions is proven.
Dennis Callahan, senior vice president and chief information officer, Guardian Life Insurance (New York, $32 billion in assets)an early adopter of BPO in insurancerelates that he has customer-facing functions on his list of processes to outsource, but they will probably be done later rather than sooner. "It's important to get a toe in the water and have people feel comfortable," says Callahan. He suggests that, before outsourcing processes that face policyholders, carriers test the waters by outsourcing a business function where the customer is a company employee. Among the business processes that Guardian currently outsources, says Callahan, are event planning, travel services, cash management, legal work and administration of 401(k) plans.
What To Outsource?
Guardian's CEO, Joseph Sargent, recently added the exploration of business processes appropriate for outsourcing to Callahan's list of responsibilities. Processes worth looking into, advises Callahan, "are those where you are not as happy with the quality or you think you can get a better economic deal, or both." He is considering outsourcing claims, billing, accounts receivable and payable, payroll and cash management.
Once appropriate processes are discovered, Callahan sits down with business heads and discusses the cost benefits and risks of outsourcing particular processes. He says he is careful to approach the topic of outsourcing objectively. "It's important to position yourself in these discussions so it's not IT ramming the 'O word' down peoples' throats," stresses Callahan, who suggests that IT leaders "work with profit centers to set priorities."
And as more insurers look to BPO to cut operational costs, the speediness of the potential ROI is an important topic of discussion. Even if a function is being outsourced to improve service levels, cost benefits must be presented in order to sell the CFO on the idea, according to Rebecca Scholl, senior analyst, Gartner (Stamford, CT). The length of ROI varies and is dependent upon how complicated the process is. For instance, at Guardian payroll is a complicated process. "We have customized compensation for field forces selling products," says Callahan, who explains the ROI length for this function will be a couple of years. Although Guardian has only conducted RFPs for clerical outsourcing providers, Callahan expects a return realization "very quickly and in a matter of months," he reports.