Insurers Explore BPO: I&T Talks to Accenture’s Keith Johnson

IT outsourcing may have reached the mainstream, but insurers are still more tentative in their approaches to business process outsourcing (BPO). The complexity and peculiarity of insurance processes make insurers wary of moving what feels more like a core competency into other hands. Nevertheless, economic forces similar to those that drove IT outsourcing are pushing insurers to explore BPO. Insurance & Technology editor Anthony O'Donnell talks to Keith Johnson, Accenture's lead partner for BPO in North America.

I&T: What is driving the current growth of BPO among insurance carriers?

Insurance companies have experienced a tough market with a string of serious underwriting losses, poor investment returns and several years of generally difficult trading conditions. This has put them under intense pressure from shareholders to improve their earnings, and from customers to contain their prices and improve their service. Globalization and the growth of the Internet have resulted in an escalation of competition, including new rivals that have been emerging from unexpected quarters, often using innovative lower-cost channels. In addition, it has become easier than ever for customers to compare offerings, service levels and prices, and to switch from one insurer to another. Then there is the growing complexity and potential of IT. To keep pace with new developments requires a level of investment that few insurers can afford, and a depth of expertise that few can attract and retain. Finally, all of this is happening at a frenetic pace, with only the fleetest of foot managing to keep ahead of the waves of change that are sweeping the industry. With agility and speed to market becoming ever more important, insurers have recognized the need to scale down, streamline and focus on those activities that differentiate them and are decisive to their success. BPO, done properly, provides all of these benefits.

I&T: Despite growing interest in BPO, is it nonetheless true that many insurance companies are hesitant to embrace its benefits? KJ: Outsourcing has been around for quite some time, but it has mostly been used to help the organization get more out of its IT function -- an area that is a mystery to most managers and that is subject to the greatest volatility. In contrast, the business processes are usually regarded as the heart of the insurance company. Handing them over to a third party, even if it makes rational sense, can be a tough decision. It changes the structure of an insurance company, and the way it sees itself -- the old attributes of size, stability and solidness give way to a more streamlined, agile and innovative organization. So it's not a decision taken lightly. Of course, as with any form of outsourcing, the company needs to be confident that the service provider has a deep understanding of insurance processing and of his particular needs; the proven operational expertise that will deliver the promised benefits; and the consulting and IT skills and resources that are essential to successful back-office processing. Given the impressive results achieved by those who have opted for BPO, it is likely that the strategy will be adopted by many leading insurers before long.

I&T: Might insurers also be concerned about their own ability to manage BPO arrangements?

KJ: One of the important lessons learned from outsourcing is that the management of an outsourcing relationship is a critical and particular skill. Clients have used their experience to become more adept at extracting value from the relationship; outsourcing service providers have too, and in addition have learned how to help new clients manage the relationship successfully. The ideal BPO partner is one that has a long and successful outsourcing track record. If, on top of the attributes one demands of a BPO provider (deep industry knowledge, appropriate skills, proven solutions, a robust BPO and IT infrastructure, financial strength, etc.), it is prepared to link its remuneration to the attainment of the promised benefits, then the chances are you have found someone who knows they can deliver the goods. Accenture, for example, has 30 years' experience working with clients in the insurance industry and 100 claims experts who have provided support for 10 of the top 20 P&C insurers in the U.S. Offering benefits of 20 percent to 30 percent reduction in the cost of claims management as well as a 50 percent to 75 percent reduction in avoidable overpayment -- backed by our proven software assets, deep process expertise, transformation skills and methodologies and global network of call, processing and delivery centers -- we offer a highly reliable option for carriers considering outsourcing their express claims function. I&T: How can insurers with experience in IT outsourcing profitably apply that experience to BPO initiatives?

KJ: Experience in IT outsourcing should help the insurer in a number of ways: by identifying the processes that can most profitably be outsourced; through the insurer's ability to select a suitable BPO partner; being able to craft an agreement that ensures the required benefits are received, not only in the short term but on a sustained basis; knowing what to measure, how to measure it and what to do when the target metrics are not achieved; and knowing how additional value can be extracted from the relationship without jeopardizing the balance of the partnership. I&T: What business process can an insurer safely outsource, and which ones should be kept in-house? How do you tell the difference?

KJ: The most promising candidates for outsourcing are express claims (including first notice of loss) and policy-owner services. High volume, low severity claims are ideally suited to the standardization and automation that BPO offers, and benefit from the increased speed and accuracy of settlement. Another advantage is that by outsourcing express claims, experienced claims handlers are freed to concentrate on the more serious, higher-value claims. Similarly, policy-owner processes benefit from shared facilities that introduce best practices and utilize the latest technology.

I&T: You have said that BPO is no longer an optional strategy. How do you back up that contention?

KJ: BPO has demonstrated its ability to reduce insurance back-office costs by 30 percent to 50 percent. In the claims area, it typically cuts leakage (avoidable overpayment) by 50 percent to 75 percent. It provides a number of other valuable financial benefits, such as reducing the need to invest in the latest processing technology and skills, which are often under-utilized and quickly become obsolete, and switching from fixed to variable (i.e., per transaction) pricing, which provides greater financial predictability and the cost transparency needed for accurate pricing. BPO also has the potential to improve customer service " it enhances the quality of the interface with customers and intermediaries, makes information more accessible, and generally improves the speed and accuracy of the processing. BPO also streamlines the organization, allowing the management to concentrate on its core activities. This is not a wish list, it's the competitive advantage that is currently being used by the front-runners in the insurance industry to grow revenue and capture market share. If it is an optional strategy at this time, but we do not believe it will remain that way for long.

I&T: Isn't there a danger that carriers can lose control of important functions when they outsource business processes?

KJ: A properly qualified and experienced BPO provider, together with a carefully drafted service agreement, will in fact give the insurer greater control over his processing than when he handles it himself. This is because the focus of the relationship is on an agreed set of deliverables and an agreed price. Changes in technology, shortages of skills, volume fluctuations, input cost increases these and most other risks that confront the in-house processor are taken out of the equation by BPO. At the same time, the insurer retains the right -- and the ability -- to make any changes needed to accommodate his evolving business needs.

I&T: What would a carrier enjoying optimum outsourcing look like?

KJ: Every company has a different view on which of its functions are core to its future prosperity and which, although critical, provide no meaningful differentiation. We believe it makes sense for every insurer to explore the potential of outsourcing all of its non-core processes; to take advantage of shared, best-practice resources to improve service quality, reduce costs, grow revenue and ease the financial burden of in-house processing. If successfully implemented, BPO will transform the insurer into a slimmer, more focused, more responsive, more efficient organization that is better equipped to cope with the challenges facing the industry. I&T: Would you look to outsource different kinds of work to different geographies? If so, what are the differences among options in, say, Western Europe, Eastern Europe and the Far East?

KJ: Accenture has a global network of BPO facilities, allowing it to offer insurers a combination of onshore, near-shore and offshore services based on their specific needs. The assignment of processes is decided based on the requirements of the client. Factors such as the mix of skills, technology and costs offered by each facility are taken into consideration. Accenture's insurance BPO strategy is to build a comprehensive network of facilities " each managed in line with strict insurance-industry best practices, as well as ISO and Six Sigma guidelines " that allow insurers to benefit from the best of all worlds.

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