Until insurance carriers have clear reason to believe the economic situation is going to improve, they are likely to explore further ways to control costs — even if they continue to pursue strategic systems initiatives. Past experience and current concerns are shaping debate about resorting to offshore outsourcing, but emerging hosted solutions are giving insurers an expanding menu of options.
The need to find cost advantages is especially acute at insurance carriers burdened by legacy mainframe systems, notes Scott Mampre, VP of New York-based Capgemini Financial Services’ insurance practice. “The high costs of legacy systems tend to stand out more on the balance sheet during a downturn,” he comments.
Outsourcing remains an important avenue for carriers to take advantage of specialization and labor arbitrage for non-core functions, Mampre asserts. In addition to IT outsourcing, he says, carriers are continuing to farm out business processes, such as HR, billing, accounting, call center and claims.
Now is an especially good time to leverage outsourcing services because insurers enjoy a buyer’s market for solutions, suggests Akhil Tripathi, SVP and CIO of Harleysville Insurance (2008 total net written premium of $1.1 billion). “There is a greater opportunity to negotiate better services and pricing because there is greater availability of offshore resources and outsourcing in general, and because providers are also facing the economic downturn,” he explains. Tripathi adds that the Harleysville, Pa.-based insurer has not altered its attitude toward outsourcing and will continue to leverage both IT and BPO opportunities for activities that can be handed off without impacting strategic initiatives.
That view is not universally shared, according to Dirk George, insurance practice lead, BearingPoint (McLean, Va.). While the life and annuities business is more motivated to seek offshore outsourcing solutions, the P&C industry in both the United States and Europe is showing some reluctance to embrace offshore as heartily as it has in the past, he relates. The Satyam scandal on its own did not make a decisive impression on the consumers of offshore services, but combined with worries of terrorism related to the Mumbai attacks and domestic political concerns, the industry is eyeing outsourcing with somewhat less favor, George suggests. “There is a more dramatic pullback in the European Union with regard to offshore use, fostered by political concerns on a country-by-country basis, as well as concern about the security of data from a terrorism perspective,” he comments.
Within the U.S., there is greater sensitivity about outsourcing as business leaders and the general public recognize its possible counter-stimulant effect on the American economy. “Buyers are starting to recognize the effect that [outsourcing] has had by eradicating jobs that fuel the economy domestically,” George says. “I have heard several business people say, ‘What are we doing to ourselves from an overall economic perspective?’ ”
The Bottom Line
However widespread those concerns may be, economic forces will continue to drive the adoption of outsourced solutions, though carriers may look for different ways of embracing them, according to Kimberly Harris-Ferrante, VP and distinguished analyst, Gartner (Stamford, Conn.). “Insurers are more risk-averse, they want faster results, and they are increasingly becoming interested in alternative delivery models for software, including software as a service [SaaS] and broadening relationships with outsourcing partners,” she says. “Since the market crisis we have seen a great number of our insurance customers asking their already established outsourcing partners to do more, including business process outsourcing [BPO], assistance with package application deployments, testing, portfolio rationalization, and business-oriented projects such as business intelligence and business process management [BPM].”
Many companies are simultaneously seeking to reduce internal staff and improve operational efficiency, Harris-Ferrante reports. “Using third-party partners to help with staff augmentation and to fill in staffing skill-set gaps is critical for many companies,” she says. “Lowering technology acquisition costs through alternative delivery methods is also a key tool for staying competitive and having access to modern solutions without the large up-front costs or the financial burden of undertaking large-scale implementation.”
For years, Harleysville has maintained a lean internal IT group, partially by ramping up with external resources, according to the carrier’s Tripathi. “It’s more of a variable cost model that doesn’t require displacing our own employees,” he says.
The cost model is very important, Tripathi continues, but it is not cost alone that drives outsourcing initiatives at Harleysville. “It’s also how quickly you want projects done and the opportunity cost of not getting it done in time,” he notes.
In addition to more-traditional ITO and BPO arrangements, Harleysville also is exploring other means of getting non-core work done. “We’re looking at hosted options and SaaS — especially when delivered through the cloud — for things like call center services,” Tripathi comments. “There are pretty adaptable applications and tools available without having to invest a great deal of money up-front that make these services attractive.”
The future may hold the possibility of using such solutions, but Tripathi doesn’t believe the moment has arrived for their use for functions such as policy administration and financial systems. “If one were to say, ‘I’m going to use payroll services or general ledger all through the cloud or SaaS,’ I don’t believe the solutions for that are sufficiently mature,” he contends.
A Matter of Survival
That judgment may be a luxury some insurers can’t afford, suggests Karen Pauli, research director, TowerGroup. “Carriers whose survival hinges on market penetration and growth that also lack sophisticated IT capabilities should consider options for the entire back-office function,” she advises.
BPO in general is growing steadily as the number of providers with deep domain expertise grows, according to Pauli. “It looked as if carriers were pulling back around the end of the fourth quarter of 2008, but we are now seeing more deals being done,” she says. “There’s a very robust market, especially for onshore providers catering to more cautious carriers who need their expertise.”
Adds Lisa Hastings, SVP of client services, Kaplan Compliance Solutions (KCS), “Over the past few years, the insurance and financial services industries have become more open to outsourcing their onboarding and licensing activities to industry experts.” As insurance carriers anticipate increased regulatory burdens — both state and even federal — in the coming months, they are concerned about the resources they may have to devote for compliance purposes, she says.
An insurance executive with a large northeastern P&C carrier who declines to be named reports beginning an outsourcing relationship with KCS in 2007. “Our decision to outsource was a combination of an internal initiative to reduce costs and our previous positive experience with Kaplan products,” the executive says. “Having a team of professionals who can handle the processing has made a world of difference.”