Weak Demand Drives Outsourcing Decline
Insurance Experts' Forum, July 21, 2011
While outsourcing continues to be a live topic in the insurance technology arena, it seems the rest of the world is moving on.
Worldwide outsourcing declined worldwide by 18% to $16.4 billion in the second quarter because of weak demand in the Americas and an overall drop in the number of large contracts awarded, according to an online Insurance Networking News report.
A report from sourcing data and advisory firm TPI notes that total contract value (TCV) in the Americas was down 51% in comparison to the same quarter last year. The decline of large contracts with a TCV of about $500 million had its biggest impact on the Americas, the posting says.
Hearing this, I naturally began to wonder about our own industry. The news posting does not break down the outsourcing decline by industry, but it certainly makes sense that there should be a reduction in outsourcing in insurance due to several factors. First, although the economy has a long way to go to return to its former healthy status, it seems that the recession has at least bottomed out and that some indicators are creeping back up again. Thus, the impetus to cut costs via outsourcing may not be quite as urgent as it once was. In addition, if we assume that many insurers went to outsourcing as a quick means to reduce costs, we would have to conclude that most carriers have already found the places where they can save money by outsourcing and have put programs in place.
It also makes sense that total outsourcing contract value would decline for our industry, again because the larger contracts should already be in force—and/or carriers are renegotiating contracts to a lower level given the increasing competition in the outsourcing market.
Despite the global decline in outsourcing, however, Indian service providers like Tata Consultancy Services (which serves the insurance industry, among others) have reported strong revenue and profit growth for the second quarter, as they are seeing a surge in demand for their services, says the IDG posting. It would be interesting to know whether or not the revenue surge is coming from insurance in North America or from some other industry in some other place.
Those figures notwithstanding, however, it is high time that U.S. insurers stop looking backwards at the horror of the past three economic years and start gazing forward towards building work forces that will put Americans back to work. If economic benefits have been gained via outsourcing of jobs and/or functionality—particularly in IT—so be it, but if we really believe we have seen the worst of the recession, then we should be more than willing to hire American workers to meet what will likely be increased demand as the economy gathers steam in its climb to recovery.
Outsourcing will always have a place in our companies due to the growing influence of a global economy. There is also something to be said, however, for loyalty to our nation and to its citizens. Successful companies and enterprises will strike a sensible balance between the two.
Ara C. Trembly (www.aratremblytechnology.com) is the founder of Ara Trembly, The Tech Consultant, and a longtime observer of technology in insurance and financial services.
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