Outsourcing's Not Growing Older, It's Getting Better
It was perhaps inevitable that the outsourcing boom of recent years would provoke skeptical reactions, and not just of the censorious, Lou Dobbs variety. As the popularity of the practice has expanded over the past few years, rumors of its hidden liabilities flourished. Persuasive arguments that outsourcing was not delivering as promised emerged—that it was proving more costly and more difficult to manage than anticipated.
Persuasive or not, the doomsayers appear to be wrong. A recent cross-industry study by Forrester Research (Cambridge, Mass.) found that only 2 percent of respondents were very dissatisfied with the performance of their primary outsourcer compared with 22 percent who were very satisfied (see chart, page 34). The middle ground of "somewhat" was heavily lopsided in favor of the satisfied (57 percent) over the dissatisfied (19 percent). The study also found that extremely rigorous RFP processes were not the key to success and that insourcing was not making a comeback—like fools who fall in love, even dissatisfied outsourcers were likely to try again, and they were just as likely as previously satisfied clients to look to offshore options.
Profound Change
The news about outsourcing, then, is not that it has revealed its shortcomings, but that it has proven its reliability. And in doing so, it has matured into something beyond a mere cost-cutting play. "The outsourcing model has changed pretty profoundly over the last three years," says Andrew Gibson, director of the global insurance practice for offshore IT services provider HCL Technologies (U.S. headquarters: Sunnyvale, Calif.). "Outsourcing today is now viewed in a far more strategic light."
The success of outsourcing has driven adoption well beyond top-tier companies' use into the much larger pool of middle-tier companies. Building on past success, insurers have become receptive to using outsourcing in more creative ways; at the same time, providers have refined their capabilities and offerings. >>
Not unlike other providers, HCL has built up its insurance domain capabilities by hiring local expertise and investing in educating its offshore employees through U.S. industry programs. "Investments are also being made on the solutions front, with organizations like HCL developing specific tools, technology components and methodologies to help companies improve the overall value of their outsourcing relationship," Gibson says.
From the insurers' perspective, the offshore IT outsourcing option was seen earlier as an opportunity to "send the low-hanging fruit out to India," according to Mike Adler, global leader, insurance, IBM Business Consulting Services (Armonk, N.Y.). "But now, they're taking a step back and saying, 'You know what? That was the easy stuff. How do we really improve productivity or speed-to-market?'"
Combined with the maturity of technology offerings, mature outsourcing practices can provide the support to make needed transformation far more feasible economically both in the short and long term, and—as counterintuitive as it might have once seemed—less risky. After all, ramping up and down highly trained personnel according to need, and engaging proven technology and business process resources is a far cry from the trauma often associated with internal efforts, which often involve investing in systems that turn out to be white elephants.
Business Transformation
IBM has labeled its approach to business process outsourcing (BPO) "business transformation outsourcing," according to Adler. "We do not view it as a cost or expense play; in fact, if we know a client is just concerned with cost, we may decline to bid," he asserts. "From our perspective, it is about, 'How do you transform the process? How do you migrate to newer applications?' Our proposition includes making fairly significant business process improvement, implementing workflow and possibly moving to new applications."
Adler notes that even as outsourcing expands rapidly into the midtier market, it still is met with resistance—though not because of doubt over the approach's efficacy. Many midsized companies, especially away from major financial centers, see outsourcing as inimical to the relationship they have with their local communities. "Typically, you'll hear, 'We're very sensitive to the community.' So historically, the first answer would be, 'No, we're not going to consider it,'" Adler relates. "But market pressures are forcing [firms to outsource] against their reluctance."
When an outsourcer can demonstrate precedents of savings between 20 percent to 40 percent on annual operating costs, it's hard for insurers' boards to responsibly decline to consider the option. "When you put numbers like that on the table, from a fiduciary perspective, they really have to look at it," Adler comments.
Even when a company's leadership accepts the economic rationale for outsourcing, it may still balk at perceived risk, particularly in the case of a lesser-known provider. For example, Fort Worth, Texas-based Hallmark Financial (about $63 million in annual revenue) CIO Gregg Birdsall had a challenge selling an outsourcing solution involving offshore provider 3i Infotech (Edison, N.J.) to his board toward the end of last year. "[The lack of] demonstrated success was one of the biggest issues," he recalls.
Hallmark needed a policy processing environment that could accommodate its growth into more-diverse P&C lines while handling the ongoing demands of standard ISO lines. Functioning as both carrier and managing general agent, Hallmark works in ISO-standard commercial lines and nonstandard auto, and recently announced the acquisition of a book of aircraft whole liability. The solution combines a service and licensing arrangement for 3i's PREMIA policy administration system, linked to ISO Rating Service (Jersey City, N.J.) "The advantage is that we have a single system that can function as our data repository, and we do not have to worry about having one system for ISO business, one for nonstandard auto and one for aircraft," Birdsall explains.
In late 2005, Hallmark began implementing the PREMIA solution, which provides automated workflow and imaging, and agent integration. The arrangement also involves the presence of onsite 3i staff. PREMIA includes its own rating capability as well as a Product Configurator tool that enables Hallmark to make changes on its own—a feature that increases the attractiveness of the solution considerably in Birdsall's view. "If you have to go to your vendor every time an underwriting manager wants a particular change to be implemented, you're going to be 'time and materialed' to death," he comments.
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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