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What in the World Can Go Wrong?

Since the initial popularity of "offshoring" prior to Y2K, much has been learned about communications and staffing. Still, to be successful, insurers must take measured steps in the planning and management of offshore deals.

Since the initial popularity of "offshoring" prior to Y2K, much has been learned about communications and staffing. Still, to be successful, insurers must take measured steps in the planning and management of offshore deals.

In this time of economic uncertainty and lack of available domestic IT talent, more and more insurance companies are going global when it comes to outsourcing. With such draws as desirable time zones for speed-to-market initiatives and a wealth of talent at a fraction of US labor wages, US insurers are not only learning how to get systems work done inexpensively, but also many times at a level of quality that is higher than they can actually provide.

But before you go digging up your passport, know this: Without the right planning, management and communications between the insurance company that is outsourcing and an offshore outsourcing firm, cultural differences can leave a company and its projects with little more to show than a trip to nowhere. And no amount of explaining what the company could have saved is going to make a difference if a project has failed.

Offshore outsourcing, however, is not brand new and many lessons have been learned through past projects, embarked upon by CIOs expecting up to 50 percent savings in countries such as India. Although the estimates of money that can be saved on outsourcing offshore have since dropped to between 20 and 30 percent, according to Gary Venner, director, insurance business and technology, Arc Partners Inc. (New York), offshore outsourcers have improved in areas such as cultural training and communications.

"We are now experiencing the second generation of application outsourcing," says Steve Gudzunas, vice president, The Hartford Technology Services Co. (HTSC, Hartford), a subsidiary of The Hartford ($167 billion in assets). "I think that the experience has taught the industry quite a bit. There are business models in place now that provide for a more effective way" of handling offshore relationships, Gudzunas adds.

According to Arc Partner's Venner who, in the early '90s, oversaw a doomed offshore outsourcing deal between a financial services company client and an India-based company, the project failed primarily because of cultural differences and interpretations. Because Venner's client and the offshore company weren't initially communicating precisely enough, the interaction undertaken to salvage the project in its later stages could not salvage the lost opportunity for the initial cost advantages, and the deal eventually was abandoned.

Today, through work done with a client that outsources offshore, Venner sees the evolution that has taken place since the early '90s. "Both sides learned from their experiences," says Venner. "Indian firms started to have a presence in the US, bringing people over to have them closer to the client." Not only did Indian IT professionals begin to understand things such as American idiomatic expressions, but the US companies became more skilled at defining what they needed.

What, If Anything, To Outsource?

Before a company looking to "offshore" can explain its needs to others, it must analyze its processes to see what, if anything, within its IT organization is appropriate for outsourcing. Basab Pradham, vice president of client services for the Western and Midwestern sections of the US for Infosys (Bangalore, India), encourages clients to look at all of the activities that they conduct in their IT organization. "They could range from setting strategy with business and IT partnerships, to IT process management, to enterprise architecture, to core system integration and development projects, and maintenance," says Pradham. "Look at these and ask, 'Which of these are core to my business, things that I must do myself?'"

Can You Do It Yourself?

The non-core remainder should then be analyzed. "Ask yourself, 'If I were establishing this today would I do it myself?'" says Rebecca Scholl, senior analyst, DataQuest (Stamford, CT) a division of GartnerGroup. "Also, 'Would someone else hire me to perform this task?'" Activities such as application development and maintenance are most commonly outsourced, adds HTSC's Gudzunas.

At Farmer's Group, Inc. (Los Angeles, $12.8 billion in assets), maintenance of the company's legacy system has been outsourced to Wipro, a Bangalore-based company, reports Cecilia Claudio, senior vice president and chief information officer. This strategy enables Claudio to free up her IT staff so they can work on projects involving new technology. This has not only reduced the cost of the legacy's maintenance, but also improved the quality, according to Claudio.

A dearth of available skilled domestic IT talent may have been part of the motivation behind the outsourcing of programming and application development for Progressive Insurance Co.'s (Mayfield Village, OH, $10 billion in assets) commercial vehicle division. Progressive's Tony Laska, IT director, commercial vehicle division, has realized improved processes, as well as cost savings, by outsourcing. It frees up his domain experts for work on migration projects, he reports.

Laska, who had limited knowledge when it came to outsourcing, began his search for a provider in March 2000 with research on the Internet. Laska and his colleagues invited three US-based companies, two of which had locations offshore, to give the group a better education on how an outsourcing deals work. After this month-long orientation, Laska sent out requests for information to 20 vendors, both on- and offshore. Eventually, through analysis of the companies' methodologies and track records, the team narrowed the candidates down to Cap/Gemini Ernst & Young (New York), Keane (Boston), IMRglobal (Clearwater, FL) and Covansys (Farmington Hills, MI).

Although cost had yet to factor into the investigators' decision, the labor cost for work done by IMRglobal and Covansys at Indian locations clearly was going to be cheaper than comparable work done in Canada with another vendor. Similarly, US-based labor would prove to be the most expensive.

In terms of costs and quality, "India is in a league of its own," contends Pari Sadasivan, director global resource operations, IBM Global Services (Armonk, NY). "Indian companies have put an emphasis on establishing mature and strong processes."

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