Today’s business world is characterized by organizations benefiting from efficiency breakthroughs enabled by the exciting technological advances of the past ten years or so. Associated with this change is the way in which businesses can now focus on core competencies, as inexpensive means of outsourcing what were traditionally internal functions, even to distant locales half a world away, have become prevalent.
Outsourcing and offshoring
Outsourcing refers to a transfer of certain internal processes that comprise business operations to a third party. Offshoring, on the other hand, is simply outsourcing business processes to a third party in a foreign country. India, China, Russia, Indonesia and Brazil have emerged as leading offshore outsourcing centers.
Outsourcing is suitable for virtually any business process, however, the most frequently outsourced processes are those that are considered “non-critical,” inasmuch as they do not represent a core competency. Increasingly, however, we’re seeing important, core processes, including product development and market research, being outsourced to third parties. Some commonly outsourced functions include:
Developments in technology and telecommunications have served to strengthen arguments in favor of outsourcing, hence an increasing number of organizations are making the decision to outsource. Businesses that outsource – especially offshore – enjoy the benefits of lower labor costs and favorable exchange rates. However, ill-informed companies often suffer from a poorly considered outsourcing strategy.
Like any other business decision, a decision to outsource should be based on numerous factors. A thorough inventory of existing, internal processes and an understanding of the benefits and pitfalls of outsourcing need to be taken into account.
Outsourcing insurance operations
Insurance operations and the processes that comprise them provide a major area of opportunity for insurers to enhance their competitive positions. As a driver of operational excellence, a well-defined and carefully executed outsourcing strategy can yield:
A word of caution is appropriate here. Few of these benefits may be realized without a thoroughly researched effort. A decision to transfer business processes is a major undertaking that should be analyzed and examined critically to derive an optimal result. A good place to start is by asking, What processes are good candidates for outsourcing? Insurance company operational processes that are most routinely outsourced include:
The motivation for outsourcing is more often than not a reduction in cost and acquisition of important skills, creating an apparent competitive boon to company operations.
However, is gaining competitive advantage this simple?
Before embarking on such an ambitious endeavor, it’s extremely important to understand the specific nature of one’s business and the impact of outsourcing on existing operations. Insurance operations are highly specialized, and their adequate conduct requires considerable experience and knowledge.
Further, cultural considerations must not be overlooked. Certain core activities are best performed with a tinge of local flavor and hence should not be outsourced. As such, differentiating core from non-core activities is critically important since such a distinction is often erroneously made on the basis of what might be considered “important” and “not-so-important.” To be sure, no activity is unimportant, and any decision to outsource should be based on an assessment of those activities that are readily transferable, versus those which are performed with a level of uniqueness that distinguishes them from competitors.
Outsourcing involves three major phases: pre-migration, migration andpost-migration.
Pre-migration includes the outsourcing decision, vendor selection and definition of the service levels that form the basis of an agreement. Once an agreement is executed, the engagement is officially kicked off and the transition to the migration phase begins.
Migration includes a thorough documentation of the activities that are to be undertaken by the outsourcing vendor, governance and compliance policy development, project planning and resource allocation, training, knowledge transfer, system integration (when applicable), data migration, security and user acceptance testing. A completed migration phase sets the stage for fully “operationalizing” the outsourcing relationship, which takes place during the post-migration phase.
Post-migration is the phase during which control of operational processes being outsourced are handed over to the vendor. Viable providers will offer transparency into daily operations and workflow, including activity reports, service level compliance, change control and audits.
The Decision to Outsource
The decision to outsource should center on seeking a professional relationship with a dedicated vendor who can provide fresh ideas on how to run and improve operations. Outsourcing is a strategic initiative, and as such has a goal of establishing a long-lasting and fruitful alliance formed for the mutual benefit of both parties.
One of the most common mistakes in the outsourcing decision is to focus solely on smaller or less critical processes as candidates with an eye toward cost cutting. While a reasonable decision criterion, cost savings should not be the sole motivator for outsourcing; there should be an acute awareness of the compromises to quality that might result from such decisions.
Selection of the best candidate processes for outsourcing begins with a review of all organizational processes. Those that represent core competency and demonstrate little room for improvement are best left alone; those to which a qualified outsourcing vendor can add value – by providing management frameworks, process visibility and guaranteeing service levels at reduced prices – are excellent candidates. Such an internal process review involves:
A typical insurance operation includes multiple opportunities for outsourcing, including underwriting, policy administration, customer support, claims management, renewals, and billing and collections.
A common misconception is that outsourcing should allow an organization to focus only on important operations that require direct control of quality. However, since no function is unimportant, this idea is a detriment to good outsourcing practices. In fact, outsourcing itself should be thought of as a process that requires careful attention to management, in order to derive the maximum value from the relationship.
To support decisions to outsource specific business processes, operational processes should be evaluated with respect to the complexity and level of risk associated with the process, and the value that outsourcing that process can add to the business.
The matrix on the following page illustrates a good way to organize decision criteria to determine which processes represent the best candidates for outsourcing. Notably, in this example the business value derived from outsourcing is weighed against the complexity of business processes, the riskier ones less likely to be outsourced.
Outsourcing selection criteria
In examining their own processes, the organization depicted in our example has determined that:
Naturally, the position of the various processes that comprise an insurance operation in the matrix will vary from company to company.
When choosing a vendor, selection criteria and the weight each is given will vary by company and are heavily influenced by market cycles and organizational objectives. Expertise, experience, reputation, efficiency and good customer service are among the factors to consider when choosing a vendor.
In addition, to better evaluate the fit of a prospective outsourcing partner, vendors should provide information regarding:
These factors help narrow the field of prospective vendors considerably. [N.B.: While there’s some debate regarding exactly what value is derived by examining a vendor’s vision, mission and values, their overall cultural fit – something that should be a major consideration – becomes pronounced only by gaining an understanding of these “soft” factors. These are not mere niceties, rather important indicators of a vendor’s priorities.]
Having arrived at a shortlist of prospective vendors, final selection includes additional diligence, which should include:
Other important considerations include:
As such, auto and similarly situated insurers should take note: these characteristics represent a collection of important evaluation criteria when selecting a vendor for outsourcing. However, an additional characteristic, flexibility, is driven by the notion that lower margin operations inhibit the ability to commit to fixed payment schedules, and as such the vendor should allow some form of unit pricing, where fluctuations in transaction volumes are mirrored with variable pricing agreements.
Agreement and kickoff
The final step in the pre-migration phase is marked by execution of an agreement with the outsourcing vendor and an all-hands kickoff meeting. Contract negotiation and finalization is a key step, the importance of which cannot be overemphasized. Offshoring in particular introduces risks that are only mitigated with the careful attention to contract terms that adequately define expectations. Risk factors inherent in an outsourcing arrangement that are amplified when dealing with offshore vendors include:
A closer look at each of these factors highlights the importance of tight controls memorialized in clear contract language. Unfortunately, many outsourcing relationships begin with much fanfare and enthusiasm, only to irreparably degrade due to misunderstandings that might have been avoided entirely given a more diligent contracting process.
Having executed an agreement, the parties next assemble at a formal kickoff meeting that involves representatives of all stakeholders in the relationship to create the cohesiveness required for a well-integrated vendor-client partnership. Participants typically include the project sponsor, project manager(s), subject matter experts and core team members from the insurance company client, and a lead project manager, team leader(s) and key staff members from the outsourcing vendor. It’s important to understand the structure of the vendor’s project team organization prior to commencing the project, with the lead project manager’s reporting relationships and escalation protocols clearly defined.
The kickoff meeting provides an excellent venue to discuss these and other issues that influence the good communications that characterize any successful working relationship. In addition, the kickoff meeting is the principal forum used to align expectations between client and vendor. Some areas in need of reconciliation include:
The migration phase involves the actual implementation of the outsourcing process. It starts with documentation of all outsourced processes and ends with user acceptance testing.
Activities involved in each step of the migration phase are detailed below:
A related issue during this phase includes the installation of software applications required in the conduct of the insurance company client’s business at the vendor’s locale. Software End User License Agreements (EULAs) should be reviewed, and additional licenses purchased if necessary to ensure compliance. In addition, insurance companies should collaborate with their chosen vendor on the following:
A properly managed migration phase will provide for the insurance company client an excellent understanding of the vendor’s ability to meet expected performance levels. UAT results and any corrective action should be taken by the vendor as a pre-condition to going live.
A common mistake made in outsourcing relationships is moving on to the post-migration phase immediately after completing the UAT. However, it is highly advisable that a thorough comparison of client objectives against test results is undertaken in a manner that validates the outsourcing decision for the client’s management.
Validating the decision
According to the 8th Annual Outsourcing Index released by The Outsourcing Institute, the single most common reason companies outsource is to reduce and control operating costs. As such, ensuring this objective is actually realized should be given much weight when evaluating the viability of continuing to outsource any process. There are many ways to go about this:
The most important takeaway from the migration phase is a validated understanding of the benefits of outsourcing that aligns vendor and client expectations.
During the post-migration phase, emphasis shifts to relationship management and the ability to rapidly address issues that arise in the live production environment.
To preserve business continuity and enhance the quality of outsourced processes, the following steps should be followed:
In the strictest sense, outsourcing should be viewed as a strategic initiative designed to help an insurer in the advancement of its organizational objectives. As with any major operational undertaking, outsourced processes require diligent monitoring, careful analysis and well-documented contingency plans to maximize the benefits of the engagement.
Offshoring operations introduces additional risks, though it’s an increasingly accessible strategy for even small and mid-sized insurers to realize significant cost advantages. Cost considerations, however, must be weighed against the quality, cultural differences, time zone changes and language barriers that might inhibit a relationship with an offshore provider.
Insurers have many choices when selecting a third party with whom to engage for outsourcing business processes. Aligning a prospective vendor’s operational strategy with the insurer’s is a fundamental endeavor in advance of entering such a relationship. Insurers should be aware of prospective vendors’ own market positioning, to see whether they are focused on:
Matching business objectives helps considerably in aligning the client-vendor relationship from the start.
According to Gartner, the offshoring component of outsourcing alone is expected to exceed $235 billion by 2008. This represents a compound annual growth rate of 7.8% since 2002, and speaks loudly about the success of offshoring as an important operational strategy that affords those who carefully consider it, and apply best practices to the engagement of a qualified provider, a distinct competitive advantage.
Vivek Sethia is Vice President, Insurance Practice – North America at 3i-Infotech Inc. In this capacity, he manages and charters the growth path for the Insurance IT Solutions practice and oversees the IT Solutions and Consulting businesses for both the property & casualty and health insurance sectors, managing a team of over 200 people. Having spent more than 12 years in providing IT solutions and consulting services, he has experience with requirements analysis, design, development and implementation. Vivek is a management graduate from India with experience spanning some twenty-five countries across four continents.