Room for Improvement

Reasons for insurers to avoid outsourcing were never lacking, and today they abound. Carriers continue to suffer their perennial discomfort with putting any of their work in others' hands, and election-year hysteria about offshoring has made outsourcing a dirty word. But for now, at least, arguments in favor of outsourcing outweigh those against it - and companies continue to heed outsourcing's call.

DiamondCluster International's (Chicago) cross-industry "2004 Global IT Outsourcing Study" reports that, while the pace of outsourcing growth has slowed from 2002, the overall commitment to outsourcing has grown. According to the study, 64 percent of respondents in 2003 - up from 53 percent in 2002 - expected their use of IT outsourcing to increase over the next 12 months. And, despite fears of political backlash - which concern 85 percent of buyers and 81 percent of providers - the growth of offshore outsourcing will be even more substantial than outsourcing overall, with 86 percent of study participants saying they expect their offshore IT outsourcing to increase during the next year.

Maximizing Benefits

In the insurance industry, levels of near-shore and offshore outsourcing will triple their current levels by 2006, according to Craig Weber, a Boston-based analyst with Celent Communications. But, despite that growth, insurers have some distance to go in maximizing the benefits of outsourcing, Weber asserts.

Larger carriers share a general concern about political issues as well as concerns about provider skills and fear of losing control. "As a result, we've seen mostly timid steps toward application of the outsourcing model to the largest IT budget category, systems maintenance," Weber observes. Smaller carriers either lack the resources or don't realize that the outsourcing model can be scaled down, he says.

"While all these issues need to be considered, we urge all carriers to manage the risks of outsourcing rather than flee from them," Weber says. "We believe that, even among smaller carriers, a dramatic increase in outsourcing activity is warranted - the benefits are simply too compelling to ignore."

Insurers are generally aware of the benefits of outsourcing but fall short in their appreciation of what offshore options have to offer, according to a Celent study. While 69 percent of respondents expected to increase use of outsourcing for systems maintenance, the majority, 56 percent, will increase use of onshore providers for maintenance, while 31 percent will decrease use of offshore options. "Apparently, most carriers feel they cannot address their maintenance costs with overseas resources, which places severe limits on the savings that can be realized," Weber says.

But cost isn't everything. In addition to examining global sourcing opportunities more aggressively and applying outsourcing's benefits to IT maintenance, insurers should look to quality, speed and agility as goals of outsourcing, and use their interactions with provider partners to upgrade the skills of their internal resources, according to Weber. "Best-practice carriers ... actively pursue process improvement as part of the outsourcing relationship - they demand improved systems quality and improved accountability from the people managing their IT investments," he argues. "They seek outsourcing partners who bring together an understanding of insurance, strong skills in current technology and the ability to rapidly develop skills in emerging technologies."

In this respect, outsourcing is not the opportunity for quick-hit gains, as conceived in the past, but as a transformative engine. Carriers that use high-quality resources from outsourcing providers are squandering an important opportunity if they fail to learn from those resources - and thereby demonstrate a fundamental misunderstanding of outsourcing's potential, according to Weber. "The goal for carriers should be to have a process where they can use anybody's resources - their own or an outside party's - but until there's a standardized way of managing projects and staffing them, it's very difficult to have interchangeable pieces," he says.

Process improvement and project methodologies are part of the picture, but they are properly conceived of within a larger understanding of how a business organization uses its resources toward strategic goals, according to Tom Weakland, managing partner, global sourcing practice, DiamondCluster International. In this sense, the development of an outsourcing strategy is subordinate to a broader sourcing strategy. "Whether we're talking about outsourcing IT functions or business processes, an organization needs to think of sourcing as a whole, and as a strategic thread in an organization's overall business strategy," Weakland asserts.

Far from looking at outsourcing as a one-off initiative, or specifically searching for discrete functions to outsource, companies need to perform a sourcing analysis in order to get best results on an ongoing basis. That analysis involves an examination of every organizational silo to identify the resources in play, including various internal sources, consultants and contractors, and onshore and offshore providers, Weakland explains. "The goal is to create the ideal profile, the ideal mix of internal and external resources," he says.

If the internal efficiencies that result from a thorough sourcing analysis are considerable, in terms of managing external resources, they are indispensable. "Unless you do an overall view of the organization, it's hard to prioritize, quantify the benefits and set realistic expectations," Weakland submits. "The two mistakes people make when they don't execute a detailed analysis are, first, they underestimate the complexity associated with establishing an [outsourcing] arrangement, managing that relationship and truly building a partnership. Second, they underestimate the organizational-change component of outsourcing."

Reaching an ideal mix at a given company can mean changing compensation structures to properly motivate employees, retraining current staff and recruiting new people, and altering processes that are ill-suited to work within a refined blend of sourcing. Perhaps most important in today's political climate, integrating internal and external sources "requires retooling or repurposing of employees if you don't want to do an RIF [reduction in force]," warns Weakland.

The overarching sourcing paradigm prevails at Guardian Life Insurance (New York, $34.1 billion in assets), where senior vice president and CIO Dennis Callahan calls outsourcing "one of several tools in the toolkit." When considering outsourcing, Callahan advises, "You want to drill down and look at process and organization, and perhaps draw some conclusions about how you can do some things more effectively without outsourcing - for example, from a workflow process automation perspective. You should also look very hard at your current cost basis, and any suppliers of services, materials or technology that are involved. When you look hard at vendor management and procurement, there are always opportunities to do a smarter job of sourcing."

When outsourcing options are elected, attention should be paid to start-up activities and costs, and how much the vendor ought to provide as a condition of getting into business with a carrier, Callahan adds. When it comes to managing the relationship with the provider, "My belief is that, in addition to taking an active approach to management, you should manage through the same structure you manage your internal line management activities," he says. "In our case, we use our vendor management office, our program management office and our line management on both the IT and business sides."

Outsourcing has proven an effective tool for Guardian, enabling the carrier to maintain or improve its software capabilities in terms of development, integration enhancement and maintenance, according to Callahan. "We're at a steady state of a reduction in our annual run-rate of an eight-figure number," he says. "We've taken that out of our budget and kept it out."

Guardian has also been a pioneer in business process outsourcing (BPO), which is yet to reach the mainstream status of IT outsourcing. Companies are moving cautiously because they perceive BPO as closer to core competencies and less commoditized. That's wise, Callahan says, but carriers shouldn't overlook the opportunity. "Companies see processes as more complex and are therefore less confident that an outside supplier can meet their needs. Obviously, if you don't look, you won't disabuse yourself of that notion," he says. "However, it's been our experience that there are many capable providers, domestically and abroad, and if you work with them, they have the potential to effect knowledge transfer and add value."

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