American insurance carriers are turning to offshore IT development strategies, and Craig Weber, senior analyst for Celent Communications, says there is no mystery to the strategy. Its a short list, he remarks. The top three reasons for using the offshore model are cost, cost, and cost. I heard that from everybody I spoke with.

Weber interviewed carriers for a new study called Raising the Bar on Offshore IT for Insurance. One of the major cost savings for insurers involves the use of programmers. The Celent study found the average salary for a programmer in the United States is $63,331, more than double the second-highest average salary (Ireland, $28,500). With India being the popular choice for IT outsourcing, it shouldnt come as a major surprise the average programmer there makes $5,880, which is the lowest salary of the 10 countries included in the Celent survey.

Even with currency and exchange rate fluctuations, the labor arbitrage has worked consistently since the offshore model came to prominence, says Weber. We dont think its going to change anytime soon. Its not just IT, though, its manufacturing as well. Weber believes the offshore model is not being utilized to its best potential: It makes sense to a much larger degree than [American insurers] are currently applying it.
India has a strong lead over its clos-est competitorsthe Philippines, Russia, and Chinain the IT race. Those countries have low costs, but they dont have great language skills, and they dont have great insurance vertical experience, says Weber. Despite the increased competition, Celent expects to see India maintain its leadership in the offshore market for the foreseeable future.

American executives need to be aware of public relations risks if they are perceived as sending their companies overseas, Weber says. For internal perceptions, he believes the best companies can manage expectations of their staff by saying, Heres whats never going to go overseas, and here are the skills you need to do the job that will remain at our office.

Most of the IT jobs going overseas are those the U.S.-based IT staff doesnt want to do, according to Weber. These tend to be focused and defined tasks such as programming. Some offshore IT providers are looking to provide more services, but the best fit tends to be fairly low-skill-level IT tasks such as coding, he says.
Whenever an American company sets up operations out of the country, there will be certain geopolitical risks. India has been the most popular choice for IT outsourcing, but there were scares there last year when relations with neighboring Pakistan deteriorated to the point where nuclear warfare was threatened. American companies were unwilling to move new projects offshore until they were sure things were going to cool off there, says Weber.

The other risk for insurers is delivery. Once you send a project offshore, are you going to get the results you expect? Weber asks. There always is a risk of project failure, but when the project is being conducted overseas, you add an element of uncertainty and increase the risk the project will fail unless you manage it very carefully, he says.

Most offshore IT projects belong to large insurers, but Weber believes once the medium- and small-tier insurers understand the model, the benefits will become available to any size carrier. The problem smaller carriers face is dedicating resources to focus on an offshore effort. Weber says many consultants are developing offshore practices to assist in such a project.

Offshore IT is not shooting fish in a barrel, says Weber. Carriers need to be careful doing this, and they need to keep the internal staff engaged. They need to measure results so they know they are getting what they think they are getting. Despite those warnings, Weber believes it is the direction to travel. This clearly represents a huge opportunity for most carriers today.

Special Reports /

The Road to Bangladore

Related Stories

Recommended For You