Economy Drives Exploration of New Outsourcing Opportunities

Economic concerns will trump political anxieties when it comes to outsourcing decisions in the near future. And while some carriers may balk at offshore options, all insurers will explore alternative software delivery models, including software as a service.

Until insurance carriers have clear reason to believe the economic situation is going to improve, they are likely to explore further ways to control costs -- even if they continue to pursue strategic systems initiatives. Past experience and current concerns are shaping debate about resorting to offshore outsourcing, but emerging hosted solutions are giving insurers an expanding menu of options.

The need to find cost advantages is especially acute at insurance carriers burdened by legacy mainframe systems, notes Scott Mampre, VP of New York-based Capgemini Financial Services' insurance practice. "The high costs of legacy systems tend to stand out more on the balance sheet during a downturn," he comments.

Outsourcing remains an important avenue for carriers to take advantage of specialization and labor arbitrage for non-core functions, Mampre asserts. In addition to IT outsourcing, he says, carriers are continuing to farm out business processes, such as HR, billing, accounting, call center and claims.

Now is an especially good time to leverage outsourcing services because insurers enjoy a buyer's market for solutions, suggests Akhil Tripathi, SVP and CIO of Harleysville Insurance (2008 total net written premium of $1.1 billion). "There is a greater opportunity to negotiate better services and pricing because there is greater availability of offshore resources and outsourcing in general, and because providers are also facing the economic downturn," he explains. Tripathi adds that the Harleysville, Pa.-based insurer has not altered its attitude toward outsourcing and will continue to leverage both IT and BPO opportunities for activities that can be handed off without impacting strategic initiatives.

That view is not universally shared, according to Dirk George, insurance practice lead, BearingPoint (McLean, Va.). While the life and annuities business is more motivated to seek offshore outsourcing solutions, the P&C industry in both the United States and Europe is showing some reluctance to embrace offshore as heartily as it has in the past, he relates. The Satyam scandal on its own did not make a decisive impression on the consumers of offshore services, but combined with worries of terrorism related to the Mumbai attacks and domestic political concerns, the industry is eyeing outsourcing with somewhat less favor, George suggests. "There is a more dramatic pullback in the European Union with regard to offshore use, fostered by political concerns on a country-by-country basis, as well as concern about the security of data from a terrorism perspective," he comments.

Within the U.S., there is greater sensitivity about outsourcing as business leaders and the general public recognize its possible counter-stimulant effect on the American economy. "Buyers are starting to recognize the effect that [outsourcing] has had by eradicating jobs that fuel the economy domestically," George says. "I have heard several business people say, 'What are we doing to ourselves from an overall economic perspective?' "

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio