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Insurance Outsourcing Reaches New Levels of Maturity

While many insurers are still struggling with the management of offshore resources, industry leaders are crafting long-term global sourcing strategies for strategic competitive advantage.

When the difference between domestic and foreign labor costs is great enough, offshore outsourcing is an offer that an insurance company can't refuse. Historically within the industry, as insurers accepted that offer in increasing numbers, the practice became necessary in order to stay in the game. And yet, carriers have struggled to realize the benefits that they expected from outsourcing. For many, initial enthusiasm has given way to a sober review of hard lessons learned as hidden costs and difficulties have emerged within their partner relationships.

Those lessons include an appreciation of the increasing difficulty of outsourcing more-sophisticated work. Some processes simply are more amenable to outsourcing, counsels Aidan McManus, SVP and CIO of New York-based Tokio Marine Management (TMM; $442 million in gross written premium). Since 2000, TMM has outsourced a significant portion of its IT operations to Fujitsu United States (New York), including both service level agreement (SLA)-based outsourcing and staff augmentation. TMM also has outsourced intrusion detection to Redwood Shores, Calif.-based Qualys since 2005. As a good rule of thumb, McManus advises, "If you can spec out a system tightly enough -- if you can put together requirements and functional specifications with enough detail -- then it can be outsourced."

The problem is that the requisite skills for crafting such requirements are beyond the ability of many technology managers. And while that deficiency can be overcome during internal engagements through face-to-face discussions with business analysts and users, the same is not the case with offshore relationships. Because of the distances involved -- spatial, temporal and cultural -- McManus says, "You lose the ability to fill the gap with real-time interaction and iterative information-sharing processes."

TMM eases such distance concerns through the use of videoconferencing, which McManus says enables an immediacy of communication that otherwise would be difficult to attain. Such solutions, however, point to another important lesson learned from recent offshoring experience, according to McManus -- namely, unanticipated infrastructure costs.

But such dangers shouldn't overshadow the potential benefits of outsourcing, McManus insists. Rather, they simply should counsel insurance companies to pursue offshore options with open eyes, both through the upfront benefit of past experience -- one's own and others' -- and the back-end security of well-crafted service level agreements (SLAs). "You need to be fair with your vendors and flexible enough to renegotiate," McManus acknowledges. "But that doesn't mean you can't still have metrics."

Russ Pass, a partner at Chicago-based management consulting firm Bridge Strategy Group, takes the point even further. He argues that while narrow, legalistic uses of SLAs can be destructive to a partnership, it is impossible to have open and useful discussions with outsourcing partners without metrics.

The unique circumstances of every outsourcing partnership require such discussions, in which both parties work in an honest give-and-take toward shared success, Pass says. Unfortunately, he adds, "Even in companies that are forward-thinking about the competitive advantage outsourcing can gain them, the vendor management capability is far from where it needs to be."

As a consequence, the gap between where even the most visionary companies are today and where they see themselves headed is enormous, Pass laments. Still, the destination they envision is no mirage.

Among the trends resulting from the maturing of the outsoucing proposition, Pass notes, is the increasing extension of outsourcing to processes considered closer to core capability within the insurance enterprise. IT leadership is beginning to function more as an IT consultant to the business, and as part of that process, IT organizations are rapidly reconfiguring, Pass asserts. CIOs, he says, are disaggregating functionality and strategically sourcing it to different vendors to take advantage of greater specialization and the specific competitive advantages of different parts of the global workforce.

While differential labor costs remain an integral part of the offshore proposition, Pass continues, they are not the key to optimizing global sourcing strategy. "Wage arbitrage is the crack cocaine of the outsourcing world," he cautions. Rather than chasing wage arbitrage from one country to the next as conditions evolve, "Companies need to focus on the long term, and on locations where expertise and competitive advantage is being built," Pass advises.

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

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