Gaining the Outsourcing Edge

I&T: What are the areas of opportunity where insurers can better take advantage of IT outsourcing?

A: Brent Rogers, UnumProvident: A company may outsource a non-strategic system or technology to allow its internal IT team to focus on strategic initiatives. It may also lack the necessary skills or competencies to perform a particular function or service. Scale also becomes a factor as utility computing continues to evolve. Potential areas include infrastructure operations, telecom procurement and expense management, platform consolidations or technical conversions.

A: Kimberly Harris, Gartner: Insurers should use IT services providers with both tactical and strategic initiatives. Tactically, ITO (IT outsourcing) providers can be used for staff augmentation when you need additional headcount, skills or accelerated delivery. Resources can be used for legacy system maintenance and other operational projects. Strategically, ITO providers can help with projects that will support competitive differentiation or with new application development for core processes. The most popular reasons companies outsource are: not enough time to do the project in-house, a lack of staff with appropriate IT skills, a lack of staff, and faster turnaround.

A: Bill Martorelli, Forrester Research: Insurers tend to have a significant amount of legacy applications that require substantial amounts of work. That is why most of the leading insurance suppliers are pursuing offshore strategies for applications maintenance, if not development. Insurance providers also are good candidates for business process outsourcing in policy administration. We're seeing a number of providers, including RBC Liberty Assurance, CSC and some offshore players, in this space.

A: Mike Nemeth, Cognizant Technology Solutions: Some insurers sub-optimize their outsourcing efforts by limiting their sourcing partners to non-mission-critical applications and to the coding and unit testing portions of project life cycles, believing they are mitigating risk. While this approach may reduce labor costs, the benefits of an offshore outsourcing provider's process discipline, domain expertise and 24x7 work cycles are lost. Major offshore outsourcers now have refined delivery models and deep insurance industry expertise that can be applied to all phases of the project life cycle and to mission-critical insurance applications. The high-value and high-cost portions of the project life cycle - business analysis (BA) on the front end and quality assurance (QA) on the back end - form the next frontier for offshore outsourcing. Enhancements in BA and QA capabilities, delivered by the outsourcing firms, will have a much higher value-added impact on insurers than cost savings alone.

I&T: What advantages can insurers gain with business process outsourcing (BPO)? What challenges do they face?

<A: Rogers, UnumProvident: The BPO landscape is still immature within the insurance industry as compared to IT outsourcing. Insurers' experience with BPO seems to be more at the task level rather than within strategic functions. For example, a company may outsource the HR benefits administration function versus the entire HR function. The issues and reasons to consider are very similar to IT outsourcing. Key reasons to consider BPO include operating cost reductions, freeing internal resources to focus on core competencies and accelerating the acquisition of a desired business function.

A: John Sarich, FileNET: Carriers should look at whether outsourcing will truly accomplish their objectives. It is also critical to know the long-term viability of the outsourcer and its ability to deliver. The long-term view is essential because it's very difficult to take back the outsourced function. There is also the very real danger of loss of intellectual capital and skills. In addition, when outsourcing to developing nations, there is limited legal recourse. One of the biggest misconceptions is that there is an unlimited supply of cheap outsourcing capabilities. Indian companies don't have an unlimited supply of technical talent, so they are outsourcing to firms in China or Bangladesh, effectively engaging in wage arbitrage. Insurers should make sure they have the technical infrastructure that enables outsourcing.

A: Nemeth, Cognizant: The general BPO situation is similar to that of IT outsourcing. Most insurers have outsourced low-value/low-impact tasks, such as call center management, and are missing the process improvement benefits that outsourcers can deliver. The applications and systems expertise that insurers increasingly require from their services providers can be extended to BPO.

I&T: What criteria should insurers use to select an outsourcing partner?

A: Rogers, UnumProvident: Insurers should conduct their due diligence by checking references and evaluating experience in the insurance sector as well as cost, technical expertise and service-level agreements. It is also important to partner with a company that can quickly scale up or down as business needs or financial considerations change.

A: Harris, Gartner: Outsourcers should be viewed as a strategic partner, rather than a service provider. As projects become larger in scope and more strategic, outsourcing providers should play an integral part in business and technology planning. They should be included in vision discussions and be used to support both tactical and strategic projects. Insurers should also commit more resources to the management and policing of outsourcing. They need to dedicate appropriate resources to ensure outsourcing success.

Careful evaluation should be given to the selection of an outsourcing partner. As projects become more business-oriented, it is important to find a partner who has industry-specific knowledge. They should understand the process and regulations of the industry that you operate in. This will help with building strategies and understanding integration and interface issues. Outsourcers should have a positive track record and reference-able clients.

A: Sarich, FileNET: They should look for references, success stories and IT infrastructure, and understand what will happen when the outsourcer takes the work. A start-up is unlikely to be able to take on outsourced work of the order of magnitude of a large insurer. Also, insurers should avoid surprises by asking how the outsourcing contract is priced, for what duration, and making sure when it runs out, they are not suddenly paying twice the freight.

I&T: How should insurance carriers weigh political risks when considering offshore outsourcing?

A: Martorelli, Forrester Research: Political risk should certainly be considered in evaluating alternative geographies, but with the understanding that there are limits on the ability of most companies to fully understand the political landscape, much less to predict the future course of events. For example, recent trends in relations between India and Pakistan are extremely promising, but can future tensions be ruled out as so many seem to believe? One way to approach the question of political risk is to seek transparency in the form of suppliers with broad geographic coverage that can shift work to alternative locations in case of contingency. Some of the larger suppliers, including IBM, Accenture and others, possess delivery capability across the globe. Some of the leading Indian suppliers, notably TCS, also have broad geographic range. Another tactic is to embrace near-shore alternatives such as Canada and Mexico (for North American customers), which will present a lower risk profile, but potentially at the cost of less overall savings.

A: Nemeth, Cognizant: There are two kinds of political risk at the present time: domestic political risk in the heat of a presidential election, and geopolitical risk. Geopolitical risk can, and must be, mitigated through comprehensive business continuity planning - e.g., backup networks, travel-ready staff, hot and warm sites, etc. On the domestic front, the focus should be on moving work offshore rather than jobs, to exploit the offshore outsourcers' capabilities to stretch U.S. companies' budgets and make U.S. companies stronger and healthier as they compete in a global economy.

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This Month's Experts

Kimberly Harris
Research Director
Gartner, Stamford, Conn.

Bill Martorelli
Principal Analyst
Forrester Research, Cambridge, Mass.

Mike Nemeth
Vice President, Insurance Practice Leader
Cognizant Technology Solutions, Teaneck, N.J.

Brent Rogers
Senior Vice President, IT Operations and Sales Technologies
UnumProvident, Chattanooga, Tenn.

John Sarich
Industry Market Manager - Insurance
FileNET, Costa Mesa, Calif.

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio