The redoubtable Mark Twain is said to have written, “Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: 'There are three kinds of lies: lies, damned lies and statistics.'” That certainly applies to talk of offshore outsourcing in the insurance tech community.

Having taken statistics courses on both the undergraduate and graduate levels, I can fully attest that statistics do often frustrate, befuddle and even infuriate people, but how does it happen that we say the numbers lie?

Reports on insurer outsourcing provide a prime example.

A new book on the subject of offshore outsourcing suggests that “the insurance industry, which has lagged behind others in outsourcing business and technology processes abroad, is now the fastest-growing offshore service sector with a compound annual growth rate (CAGR) of 33 percent.”

In the 2008 edition of “The Black Book of Outsourcing,” its authors note that “overall, global insurance outsourcing is growing at a CAGR of 8 percent, expected to become a $24 billion industry next year. Onshore sourcing relationships are the favored destination of 91 percent of insurance firms, while 9 percent elect to have suppliers from abroad.

“However, that mix is shifting offshore at a breaking pace,” the authors state in a news release.

“Black Book” findings for the insurance industry include the following stats:

o Nearly three-quarters of global insurers currently use at least one information technology outsourcer and one business process outsourcer.

o U.S. outsourcing vendors are preferred by nine of 10 U.S. insurance users/clients.

o Offshore data security, the complexities of managing risks, cultural barriers, compliance requirements and reliability are still viewed as offshoring drawbacks by 95 percent of insurance users.

o 96.6 percent of onshore clients state they would consider offshore vendors if these issues manifested improvements.

o System modernization, process transformation and innovation dominate sourcing agendas as the key drivers for vendor selections–more than the cost-based benefits of recent years, as risks from service interruption, customer data, information security and privacy exposures far outweigh any benefits from cost reduction to insurers.

How very interesting this all is. The CAGR of offshore insurance outsourcing is projected to be 33 percent, yet only 9 percent of insurers seem to favor offshore outsourcing, citing a number of very practical concerns, some of which have previously been voiced in this column.

If you think about it, however, a 33 percent growth among the 9 percent who favor offshore outsourcing is not terribly large, because the numbers favoring it are not terribly large.

Assuming the statistical projection of the book to be correct, a one-third growth in the 9 percent who favor offshore outsourcing would mean that 12 percent will favor it next year, and 16 percent the next.

That still leaves 84 percent of insurance companies favoring onshore outsourcing over the offshore variety in 2010–in other words, the vast majority.

So, did the numbers lie? Well, not exactly. The interpretation of the numbers, however, is another kettle of (stinking) fish.

Having looked at the figures, it is easy to see that the interpretive statement, “that mix is shifting offshore at a breaking [breakneck?] pace,” is hardly justified by the reported numbers. There is no doubt that 33 percent seems like a large annual growth number when taken out of context, but as we have seen, it is actually not terribly significant when the original figures are relatively small numbers.

It may be true that offshore outsourcing is growing in the insurance industry, but to suggest, based on these projections, that it is a runaway trend, is–to be kind–a gross exaggeration.

One also has to wonder how the onshore outsourcers have greeted the news in this book. If they did the math, perhaps a yawn was the best response.

Special Reports /

Lies, Damned Lies & Offshore Outsourcing

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