CIOs Turn Their Attention to BPO
Where Do Employees Go?
Another important part of cost/benefit and risk discussions are options concerning deployment of employee skills. ""There are some real costs associated with the transitioning of employees from in-house to the outsourcing environment,"" says Gartner's Scholl. IT executives must ask themselves, ""What is going to happen to the employees and what am I going to do to redeploy them if they are not transitioning to theoutsourcer?"" Typically, according to Doug McPhie, partner, Ernst & Young (New York), insurance companies want employees—who focused on a business process that is being outsourced—off their payroll. The outsourcing provider, however, often finds these employees useful for continuity of knowledge and culture.
The area of job transitioning or replacement is a very sensitive topic, says John Wright, executive vice president and CIO at Toronto-based Sun Life Financial (CD $386 billion in assets under management). ""Typically with BPO, a carrier would rely on natural attrition and redeployment,"" says Wright. The carrier recently moved 111 IT personnel to IBM as part of its outsourcing contract. ""We try to minimize the impact to the employees,"" he says.
In addition to IT, Sun Life is currently outsourcing parts of its UK operation's policy administration to UK-based Marlboro Sterling. Additionally, Sun Life's Irish subsidiary, Sun Life Information Services Ireland (of which Wright is also the president), handles some claims processing and back-office functions for the company's US operations. Because Wright was involved in setting up Sun Life IS Ireland, he is investigating the outsourcing of various business processes to India, Ireland and the maritime provinces in Canada. In order to take advantage of costs and savings associated with operating in different time zones, Wright is considering setting-up joint ventures or working with third-party administrators in these countries.
Although service providers with locations offshore boast greater cost-advantages compared with near-shore providers, there are disadvantages to managing business processes half-way around the world, according to Ernst & Young's McPhie. Although many global providers have locations in multiple countries, the re-deployment of employees to the provider doesn't always make sense. Progeon, for instance, has not taken on any of its clients' employees, although, says Thakkar, the issue is always specific to a deal. Additionally, says McPhie, if a process outsourced offshore doesn't work out, ""it's hard to re-patriate it.""
In order to combat US-based insurer apprehension about sending business processes far from home, a number of established IT providers that are just getting into the BPO space are pushing trial offers that may, for instance, provide the first three months of service to carriers for free, reports Guardian's Callahan.
Contracts are an important line of defense, especially when it comes to cost/benefit measurements. EDS' Trapp recommends ""outlining guaranteed service levels in a contract. You have to put governance policies in place so the outsourcer and customer know how the process works."" Guardian's Callahan likes to ""go with a long-term contract that has limits on price escalation."" He advises those heading up BPO deals to include an exit strategy so they are protected if something goes wrong.
Another issue that contracts must address is whether or not the technology currently used for particular business processes in-house will be outsourced along with the process. Also, confidentiality must be considered. For security purposes, says Callahan, the Guardian sometimes requests that its business processes be segregated from other companies. The Guardian also includes ""the option to acquire a partnership interest or buy the operation from the vendor if Guardian feels it is in its best interest to handle a process in-house.""
Covering all of the contractual bases in a BPO deal is important to its success. However, the proper in-house management of processes, despite the fact that they are outsourced, is crucial to a BPO deal's success. ""When you outsource you don't lose management responsibility or accountability,"" stresses Callahan. Those heading up BPO deals, says Callahan, shouldn't feel they are losing staff or a department, because processes still need to be managed on a day-to-day basis.
Sun Life's Wright agrees and emphasizes the importance of having ""a governing body to ensure service levels, company interest and brand be represented according to a carrier's wishes.""
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Inaccurate Assessments Lead to Missed Opportunities
Overly conservative estimates of the costs associated with handling business processes in-house can lead to missed cost-saving opportunities, as IT executives opt not to engage in potentially economical BPO deals. And cost and quality assessments of business processes handled in-house are often inaccurate.
""One of the reasons why companies aren't happy with cost reduction achieved through BPO is because they often don't have a really good grasp of how much in-house business processing is costing them today,"" says Rebecca Scholl, senior analyst, Gartner (Stamford, CT). Scholl stresses the importance of an assessment's accuracy, especially when it comes to back-office functions such finance, accounting, and human resources—where there are a lot of hidden costs spread throughout the organization.
""The lack of understanding of internal cost and operational performance leads to the misperception that it costs too much to outsource,"" relates Scholl.
In order to limit assessment inaccuracies, Scholl suggests that carriers invest in the services of companies specializing in benchmarking insurance processes. If that type of resource is not available to a carrier, the quality assessment of claims processes, for instance, should include the time it takes to turn around a claim, the claim's accuracy and the time a policyholder spends on hold during claims inquiry calls.
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