How to Navigate the New World of Outsourcing

Insurance Networking News, May 1, 2009

Carrie Burns

It seems that every day there's news of a company in the insurance industry experiencing massive layoffs or making extreme adjustments. Yet, the business still must be productive. So who's going to do the work? At first glance, IT and/or business process outsourcing may seem like the answer.

However, many experts caution not to blindly dive into outsourcing as a quick fix. It needs to be approached with a solid outsourcing strategy, internal support and clear contingency plan in case the acord, formal contract and ultimate service-level agreements do not live up to their promise. Here's a look at what some insurers are doing to better the odds their outsourcing efforts will succeed.

Outsourcing is by no means going away, but for the time being, it is at a standstill. Many industry experts agree that the state of the U.S. economy is affecting insurers' outsourcing strategies, but whether it's having a negative or positive effect is up for debate.

Now, more than ever, CIOs face pressure to scale back costs, while maintaining efficiency and quality. Some will contend that outsourcing will accomplish that, while others aren't quite sure the cost-savings are worth the risk. More than 22% of respondents to a 2008/2009 survey from Wayne, N.J.-based Harvey Nash Plc expect their outsourcing spend to decrease in the next 12 months. The number of respondents, which includes the IT, insurance and banking/finance industries, who predicted that their outsourcing spend would increase, fell 5% over the previous year to 38% - a number that is also down a full 10% from 2006 when nearly half of respondents expected their outsourcing spending to increase.

While outsourcing spending may decrease over the next year, experts predict this is just a phase. Boston-based analyst firm Celent estimated the global insurance business process outsourcing (BPO) market for core insurance processes at $5.2 billion in 2008, and further predicts that the market will grow over the next five years to $8.7 billion in 2013, according to the firm's March 2009 "Insurance Business Process Outsourcing: A Global View." The report stems from a survey of systems integrators and global service providers. Reported deals were fairly evenly split between P&C (43%) and life (41%), and multi-line carriers represent the balance (16%).

Sumer Shankardass, SVP of insurance for India-based outsourcer WNS Ltd., has seen a difference in uptake between lines of business. "On the P&C side, we've seen from August to September of last year, insurers that already had large outsourcing programs continue on that path," he says, referencing a large insurer, with which WNS works. "That's because they have a mature outsourcing strategy in place, and teams that support outsourcing."

Shankardass points to the economy as a reason insurers are hesitant. "Decision-makers are uncertain of where the future is and justifiably so," he says. "The people we reached out to essentially pushed it back quarter by quarter, but I think this is a temporary phenomenon. Between June and August we will see more interest and RFPs in the market."

The reasons insurers will outsource now? Cost reduction and being better able to meet the needs of the business. Those were the top two reasons given by respondents to the Harvey Nash survey. Cost reduction ranked highest, with 44% of IT leaders, followed by 29% who said being better able to meet the needs of the business was most important. Last year both "cost reduction" and "better able to meet the needs of the business" were selected by 37% of respondents as top reasons for outsourcing.

GEOGRAPHICAL CONCERNS

Pharmacists Mutual Insurance Co., Algona, Iowa, has put outsourcing to use to meet the needs of the business.

"Here in a small rural area, it's difficult to attract specialized talent," says Barrie Parker, CTO at Pharmacists Mutual. "To acquire specialized talent, you spend a lot of time and money on the search and acquisition of that talent, and then you have to keep it here. Because of this, we are uniquely suited for some kind of outsourcing capabilities."

Parker hired a contract programmer rather than trying to hire in-house for the maintenance of the company's COBOL applications. "On the infrastructure side, to have the talent resident here - or even remotely - to support a virtualized network, and all the port scans we'd have to do for all the disaster recovery components that we need, it would be very difficult to get that expertise."

Parker believes his strategic plan relative to outsourcing is pretty typical to other people in senior IT management. "It really comes down to efficiency and ROI."

However, results from the Harvey Nash report reveal that most organizations today do not have a formal sourcing strategy in place. Of respondents, only 44% said their businesses have a formal sourcing strategy, while the majority (56%) said they do not.

CHAOS

Like Pharmacists Mutual, Conseco Services LLC does have a formal sourcing strategy. About 20% to 25% of overall IT delivery is done offshore with one-third performed by Infosys and two-thirds by a captive, Conseco India - according to Russ Bostick, EVP, Technology and Operations at Conseco. The Indianapolis-based provider of financial services products to the consumer middle market selects which of the two to work with based on its intellectual property restrictions on the software being maintained.

For more information on related topics, visit the following channels:

• Enterprise Technologies
• Insurance Network
• Outsourcing