Stretch & Flex

Robert Regis Hyle

The lure of cost savings likely always will drive the outsourcing market in the insurance industry. However, insurers are finding it's the agility enabled by extending and reallocating resources and expertise that also can lead a carrier to achieve competitive advantage. While insurers are keeping a tight grip on their IT project development, they are turning to outside help for systems maintenance, help desk support, and programming needs.

While many observers bemoan the loss of American technology jobs to offshore outsourcing firms, the insurance industry never has jumped with both feet on the outsourcing bandwagon.

A study conducted by research group Celent showed 2006 budgets for large life insurers included only 17 percent of IT funding directed toward outsourcing. For medium-size carriers, the number was even lower–11 percent. Those insurers utilizing outsourcing mainly have good things to say about their experience, and consultants also sing the praises of outsourcing. With the rest of the IT world normally a step or two ahead of the insurance industry, it seems likely insurance IT outsourcing will rise considerably before the end of this decade. So, what should carriers that thus far have resisted the lure of outsourcing look out for? Saving money is the siren song for most, but those that have studied the issue believe there are greater benefits to be achieved than simply dollars.

The first thing the consulting firm eGlobal CIO does with a client interested in outsourcing is to understand what the company seeks to accomplish from its outsourcing relationship in terms of objectives and expectations. Bruce Skaistis, founder of the firm, explains companies invariably start out with the view they want to save money, and he believes this is a reasonable desire.

But Skaistis likes to counter that initial response with the view that the real benefit of outsourcing for companies is having access to capabilities or knowledge a company ordinarily might have a hard time attaining otherwise. "It really is a capabilities issue as much as a cost issue," he says. "[Companies] need to stop and think about the potential benefits and the potential risks. Outsourcing certainly can be a painful experience."

Michael Natan, senior vice president and CIO at OneBeacon Insurance, spoke at the recent IASA Educational Conference & Business Show. He identifies two business drivers for outsourcing. "First is achieving a competitive cost structure," he says. "You can't afford to compete if costs aren't at an optimal level. Second, you need to create a pool of resources to tap into when necessary or turn off when not needed."

The dollar savings, Natan adds, still are attractive. "The differences in labor costs are such that you could save 35 percent on staffing," he says.

At Wilton Re, a life reinsurer that commenced business in 2005, several factors combined to drive the decision to outsource as a long-term practice its noncore functions, according to CTO Andy Wood. First, the company believed there was no value or differentiator in managing in-house certain routine functions, including servers, networks, security, phone systems, the help desk, or desktops. Wood points out these have become ubiquitous in any type of company in the world–not just insurance. Second, he believes in leveraging the investment, experience, and skills of an outsourcing partner, which would be difficult to duplicate in a vertical company. Third, Wood indicates, Wilton Re was seeking an infrastructure equal to a large company's IT capabilities but priced for a small company's budget. Finally, he concludes, though speed wasn't the determining factor, an added advantage was the ability to plug into a proven system immediately rather than deal with the time-consuming process of hiring a team of people who then would work on delivering a whole suite of systems. "We want to concentrate on core competencies internally, and where there's no differentiator, a partner can do it better and cheaper," Wood sums up.

Choose Your Partners

AXA Equitable selected two partners–CSC and Tata Consulting Services–for its IT outsourcing project. Concerning CSC, Sheela Venkat, senior vice president of operations, notes the technology company has a lot of capabilities around life and annuity products, and the systems the life carrier outsourced–at one time or another–were and continue to be owned by CSC. "CSC has a lot of subject matter knowledge, both from the business side and the software side, and our expectation was we would be able to leverage the cost structure of the India operation combined with the expertise CSC offered from the India operation," she says.

AXA Equitable had been considering IT outsourcing for several years but didn't get serious about it until late in 2004, when Venkat joined the organization. "[AXA Equitable] was doing only parcels of outsourcing without having a rigorous program around it," she says. "Starting in January 2005, the outsourcing program went into high gear." Since then, the carrier implemented the first phase of its IT transformation strategy at the end of 2005. Now, AXA Equitable is looking at additional systems for ongoing outsourcing projects with both of its partners. "CSC probably has received five or six additional contracts beyond our initial relationship to do major work on the systems we've outsourced to them," says Venkat. "We're also identifying other systems in our franchise that might be good candidates for the same program."

At the outset, Skaistis states, a company must define clearly its objectives and expectations for outsourcing. He also believes a company needs to share that information with outsourcers to avoid any potential disconnect.

When companies tell Skaistis their only goal is to save money, he leads them into a discussion about the other advantages that can be achieved. "Besides saving costs, you want to tap into capabilities you wouldn't have on your own," he says. Big outsourcers have personnel and technology most medium-size carriers can't afford. "You look for the competitive advantage you can achieve by tapping into those capabilities," he says. "That serves as a catalyst for [carriers] to think about things they need to be doing."

One change Skaistis has noticed is companies are adopting a selective approach with different partners. "We are seeing more of the menu approach," he says.

Thanks to what Skaistis calls an "incredible skilled labor force they can tap into," India remains the premier destination for companies with a desire to outsource. When seeking a good partner, he recommends looking beyond the dollar figures. Communication is one concern for companies to contend with. Another is the time difference–businesses in the U.S. have to handle a 12- to 15-hour time differential with their outsourcing partners in India. "It takes work to make the relationship successful," he says.

While other countries are looking to make a dent in the IT outsourcing market, Skaistis points out India has a track record. "The plus for Indian companies is they have adopted a quality standard," he says. "They are going to give you a quality product and quality support."

Level the Field

Outsourcing can level the playing field for small and medium-size insurance carriers–particularly those carriers that are competing against top-tier carriers, Skaistis believes. "If you are going head to head against some of the big companies that have network capabilities in place and can offer leading-edge technology, a smaller company can do the same thing by outsourcing and taking advantage of an outsourcer that has access to those capabilities," he says. "Outsourcing gives companies access to technology they might not have by themselves."

The ability to be more agile is another area where companies can gain competitive advantage through outsourcing. "Your competition is moving and changing, and you wake up tomorrow and some insurance company is rolling out a new product you never heard of before," says Skaistis. "You have to be in a position to respond as quickly as possible. If you structure the outsourcing relationship correctly, you are more likely to be able to respond to competitive market conditions correctly."

The outsourcing market is changing, Skaistis explains. It started with companies going to a blanket approach where they took their entire IT function to an outsourcer. Today, it is more of a menu approach. "Help desk is help desk is help desk," he says. "[Outsourcers] have expertise in help desk. They can do this function for you. It's become a selective function basis." He believes the companies most successful in utilizing outsourcing are those that have become more sophisticated in how they determine what functions can be outsourced, how they select outsourcers, and how they manage outsourcers.

How Much Is Just Enough

However, Natan cautions carriers can't afford to be totally reliant on outsourcing. A good mix, he suggests, is 70 percent outsourcing with 30 percent of IT work done in-house.

AXA Equitable decided against using a particular percentage to indicate the optimum level of outsourcing, choosing instead to focus on functions. "Our outsourcing program is different in terms of strategy," says Venkat. "We intend to keep all the business analysis within the AXA Equitable franchise itself. We don't outsource any pieces of that."

AXA Equitable looks to outsource functions such as coding, construction, and unit testing to its partners. "It's our intention at some point in our transformation all the coding, construction, and unit testing actually can be candidates for outsourcing on our systems as long as we keep the business analysis and the high-level design within AXA," says Venkat. "The rest of it is open for consideration."

Anything Wilton Re regards as strategic is going to be done in-house, and anything that is not a core competency for a reinsurer is where the company plans to work with a technology partner. Core competencies include process, business, and information analysis as well as project, program, and relationship management. The noncore functions cover operations and application development, especially applications that, for instance, capture information simply to process a policy or update the general ledger–activities that generally are not competitive differentiators. Wilton Re doesn't consider building what Wood calls "transaction systems" as strategic. "We see them as important for getting data into the organization cleanly, with the right depth and breadth of information so that we can do our analytics in the future, but as a function, the transactional systems we do not see as strategic."

Wilton Re takes a two-pronged approach to its outsourcing. First, the company relies on Logicalis, a global managed infrastructure service provider (MISP), for its operational needs. "We have one server in our computer room, and that's it," notes Wood. "Everything else goes down the T1, and we access everything out of [Logicalis' center in] Cincinnati." He compares the service to electricity. "We want to pay for it in exactly the same manner. We want to ramp it up when we need to and ramp it down when we don't."

As for applications, many reinsurers prefer to build, says Wood, because they believe their market is highly specialized and the investment made by software vendors in reinsurance systems is limited by a niche customer base. However, Wilton Re has taken a buy-before-build approach. Software either has been purchased and shrink-wrapped (and then handled by Logicalis) or, when heavy modifications were needed, Wilton Re has turned to outside providers.

The first modified purchase came from Riverswave and targeted EDI and system integration, allowing Wilton Re to take data in from multiple clients in multiple formats, turn it into industry standard ACORD XML, and then feed it into the administration system, which was a modified life and annuities package from AdminServer. "Because it was XML-rules and transactionally based," Wood says, "we were able to build or modify transactions that fit into the system, configuring it as a reinsurance system that interacted with the EDI through Web services and XML."

What to Keep

AXA Equitable does not turn over total responsibility for project management to its outsourcing partners, preferring co-accountability. The outsourcing partner has a project manager to manage the team doing the construction and some pieces of quality assurance. That project manager is partnered with AXA Equitable's IT manager, who runs the business analysis and the systems analysis to find a way to take the code being written and release it into production.

AXA Equitable's competitive advantage lies in knowing its business and keeping business analysis and intellectual property within the organization, Venkat observes. "I think the rest of what we need to do to get solutions for our business partners is a perfect marriage with a company such as CSC to have it help us get a cost point that is more optimized," she says. Outsourcing also brings a scalability of resources, so an outsourcer can bring in a team if the carrier has a project with accelerated delivery and scale back if there is less activity. Venkat doesn't believe AXA Equitable will lose any competitive advantage through outsourcing because the company didn't enter into this strategy based on the hope of removing X number of people and outsourcing X number of jobs.

Despite outsourcing all its noncore functions, Wilton Re keeps its internal IT in the mix. "We still have a role to play there in these areas, but our role is managing the cost and managing the risk," Wood emphasizes.

But, he contends, "we believe the real value of IT for a vertical such as reinsurance is in innovative business processes, and through those innovative business processes, we've got excellent analytics and information at each stage where decisions need to be made." Because this involves multiple clients and business partners that deliver Wilton Re's business proposition, collaboration tools also are very important at each stage of those business processes, he adds. "Transaction processing systems are what IT has been about for 35 years. That's done."

Given its focus on business processes, currently Wilton Re is building its first software from scratch for its business intelligence layer, in particular, data warehousing and data marting. "We consider it strategic, and with our strategic focus on business process and information, data warehousing or analytical applications can't be bought off the shelf. You can't get a data warehouse at Wal-Mart, for instance, that gives you great analytics for a reinsurance company," Wood remarks.

However, Wood says, true to its nature, the company still is going to utilize its partners–Logicalis to supply the expertise around the infrastructure for running the data warehouse securely and Riverswave not only to get the data from multiple sources into the data warehouse but to build the first iteration of the data mart or warehouse to support the analytics the organization wants to do.

At OneBeacon, commoditized functions are the easiest candidates for outsourcing, Natan points out. When it comes to functions that need to be retained by the carrier, he doesn't hesitate. "Project management is something we always would retain in-house," he says.

Personnel Changes

Currently, AXA Equitable's outsourcing partners are taking over about 180 positions formerly held by direct employees, reports Venkat. The carrier has approximately 530 positions remaining in its IT department. "It's worked out remarkably well," she affirms.

Wilton Re until recently has had only two people in its IT department including Wood, and a third person has just been added. The skill base the new hire possesses includes project management and business and process analysis. Experience in outsourcing development management also was essential. If Wilton Re did all its IT in-house, Wood explains, he would need people with experience in LAN/WAN and storage management, security, exchange servers, SQL server, Biztalk, .NET development, architecture design, systems analysis, VoIP, e-mail, and systems testers. "We'd probably be looking at anywhere between 25 and 30 people," he says.

What Wood likes is he is not spending 100 percent of his time dealing with people and organizational issues. "I'm spending my time concentrating on aligning IT with business, meeting the strategic goals, working on the business processes, and making sure we have the information, the analytics, and the collaboration capabilities to do our job well," he says.

Yet despite all the upside, Natan does raise one warning: "Outsourcing doesn't solve any problems you can't solve yourself."

Special Reports /

Stretch %amp; Flex

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