Transition of Alternative Sourcing Strategies: Making The Move to Value

By John P. Varricchio, Ernst & Young

Over the years, academic studies have found that all types of projects - corporate re-organizations, new technology implementations, process re-engineering - fail to deliver the expected ROI. Depending on the study, the percentage of subpar projects is 50 percent to 70 percent - a huge number. Certainly, alternative sourcing initiatives in the insurance industry belong in this disappointing category.Learning from early adopters The common challenges are well known: inappropriate sourcing structures, substandard infrastructure in low-cost countries and insufficient cost and risk modeling, to name just a few. Weak program management, poor cultural fit with vendors and insufficient training are also recurring themes. When insurers overlook these potential issues in their haste to reduce labor costs, they are more likely to end up "backsourcing" outsourced processes or pulling back from low-cost countries. Still others end up with bloated, low-performance captive centers that resist attempts at optimization and never deliver the promised value.

A well-planned, skillfully executed transition can alleviate many of these issues. Building on the strategic concept and a thorough plan, an effective transition smoothly and non-disruptively establishes the new operating model and lays the foundation for long-term success.

Right model, right approach Effective transitions uniquely fit the specific sourcing model chosen by insurers. For instance, when basic accounting functions are outsourced to a third party, companies must ensure that the vendor understands basic data specifications and system integration points, as well as corporate policies for paying vendors, matching purchase orders and the like. However, much of the work will be automated and relatively little training will be required. Insurers moving more complicated processes such as claims or customer service functions will most likely choose a captive center and face very different transition challenges. There will be much greater emphasis on recruiting and hiring, training, communication and defining an optimal customer experience - all of which must be factored into the transition plan. Upfront investment will be higher, and more management time will be consumed, as befits these higher-value processes.

It is important to note insurers' historical preference for captive models. This would seem to make sense, given the industry-wide aversion to operational and compliance risk. But in terms of the greater capital and management requirements and the difficulty of reaching economies of scale, captive centers are often a riskier option.

Transition plans must also be tailored to fit vendors. More experienced third-party providers can play a larger role in transitions, offering insurers access to process re-engineering, best practices, greater scale or superior technology. With more providers offering unique value propositions - targeted functional expertise vs. lowest cost, for example - there's no reason that insurers shouldn't take the time to find the best fit.

The value of program management Strong program management capabilities are another hallmark of effective transitions. In fact, in our experience, alternative sourcing success directly correlates to the presence of a strong program management office (PMO). It's somewhat surprising, then, that most companies under-invest in the necessary resources and training. Without PMOs to reinforce milestones and accountability, basic technology breakdowns and process bottlenecks that occur during transitions may never be solved, or only solved through workarounds. Left to linger, these issues can threaten the entire business case. During transition periods, the PMO serves as the first line of defense against these situations, escalating issues quickly and in line with pre-defined processes. If necessary, contingency and backup plans must be executed. In this way, PMOs "operationalize" governance models and working agreements.

Mastering the technology and human factors Technology plays a critical role in transitions. Organizations must model hardware, software, network and storage needs for new operations, and define IT support processes. Data management protocols and security standards should be clarified, and cutover processes rigorously tested, especially if significant integration or software updates are required. Bad data, slower processes and higher error rates can result if technology issues are not managed effectively during transitions. Over the longer term, that can translate into lower customer satisfaction and reduced management visibility into performance.

Lastly, it is important to recognize the value of various change management and human resources best practices. Effective communication and robust training programs help streamline transitions, strengthen vendor relationships and minimize cultural differences. Some insurers co-locate existing staff with new workers so relevant knowledge can be handed off - an especially good approach for more complex processes, like claims processing.

Most importantly, effective communication and training programs can reduce worker turnover, which has been pushing wages steadily upward in India and other low-cost countries and, therefore, cutting into labor cost savings. In other words, so-called "soft" cultural issues actually speak directly to "hard" bottom-line metrics.

Transition in context A case could be made that transition is ultimately the most important step in alternative sourcing. After all, even the strongest business case will fail if the transition breaks down. Alternative sourcing is more like a long-term journey with each step building on the previous one. Successful transitions are enabled by a strong strategic concept and comprehensive plan, and extend through effective monitoring of ongoing operations. Collectively, these steps allow insurers to reach their destination of a low-cost, high-performance sourcing, while minimizing risks and maintaining strategic alignment along the way.

About the Author:John P. Varricchio is a partner in the insurance sector of Ernst & Young LLP's Financial Services Office. He is based in New York City and can be reached at (212) 773-7645.A case could be made that transition is ultimately the most important step in alternative sourcing. After all, even the strongest business case will fail if the transition breaks down. Successful transitions are enabled by a strong strategic concept and comprehensive plan, and extend through effective monitoring of ongoing operations