American insurers have options in where they perform their business processesin-house, nearshore, or offshore. The subject has been the object of much hype and some scorn, but its reality may depend on an insurers needs and have little to do with either of those provocative points of view.
By Robert Regis Hyle
One thing technology has brought to the business world today is a higher set of expectations. Customers expect business to be conducted in a certain way, no matter whether you run a multibillion-dollar insurance carrier or your net written premium is less than $50 million. America may love the little guy, but if that little guy cant match the service offered by bigger competitors, customers have no qualms about taking their business to the option that will provide better service.
Thats a key reason business process outsourcing (BPO) has caught the attention of insurance carriers of all sizes. BPO has leveled the playing field for insurers by allowing carriers to choose what services they can offer with the assistance of outsourcing vendors. Smaller carriers such as Piedmont Mutual Insurance Company, located in Statesville, N.C., operate in communities where the pool of tech-savvy insurance talent is quite a bit more shallow than their competitors. We are competing with companies operating in 50 states, says Jim Chick, Piedmonts controller. Even though were not as big as [the competition], we have to offer all the services the big companies offer.
While carriers as large as New York Life and MetLife have used BPO tactically in various areas, much of the current activity in BPO has involved smaller insurance carriers, according to Chuck Johnston, director of industry marketing for Callidus Software and a former industry analyst.
Usually the smaller [carriers] are the ones that are going to get the internal economies of scale, so the financial pieces look better, says Johnston. [Smaller carriers] dont see their back-office processes as their competitive advantage anyway. The smaller guys never are going to get enough economy of scale to be excellent in a particular space. And if you talk to the larger players, theyll often tell you they think they can do [business functions] better than the BPOs.
Johnston believes larger insurance carriers have found BPO to be worthwhile in specialized settings. They are more likely to turn over the back-office operations for a smaller piece of their business. Often, youll see [large] carriers interested in BPO either at the beginning of the life cycle of a particular product or block of business or toward the end, he says. When [the products] are too new, the carriers dont want to make a capital investment to start up a group. When they reach a point where a block of business is tailing off or possibly closed, they are tightly managing expenses.
For insurers of every size, outsourcing means looking for the right opportunities. The search often leads insurers to nearshore options, including Canada or Mexico in North America, or to far-flung parts of the world such as India, South Africa, or China.
That is part of what makes business a global community. Eric Miller, senior principal with the consulting group Highpoint Partners, LLC, relates he recently appeared on a panel with a couple of attorneys discussing offshore outsourcing. The audience was stunned to silence, he says, when one of the attorneys told a story about legal services being provided to some U.S. companies on an outsourced basis from South Africa at the ridiculously low rate of $10 per hour. You even are seeing tax returns being prepared offshore, so theres a whole lot of this going on, continues Miller. People were saying, Technology? OK, thats not a problem. But now companies are beginning to look at moving more business operations offshore. Whether its offshore, nearshore, or just purely outsourcing, [BPO] is becoming a big issue.
Tech Departments
Indeed, technology has been a favorite arena for outsourcing providers operating outside North America. On the buy side, insurance and other industries have not hesitated to act when they saw the technology-outsourcing model being used in countries such as India. Insurers have been more hesitant about following this model for business functions, though, especially those that fall more closely under the heading core competencies. So, while business process outsourcing is an important and growing part of the industry today, its not without some concern.
In a research note prepared by Gartner earlier this year, analyst Kim-berly Harris writes, From a theoretical perspective, offshore BPO sounds promising. However, do the savings justify the risks involved with moving operations overseas? She indicates even those companies experienced with IT outsourcing offshore will not be prepared fully for the risk and due diligence needed for offshore BPO.
The nearshore outsourcing market is stronger for insurers, particularly in the area of call centers. The size of the Spanish-speaking population in the U.S. makes Mexico an attractive option for call centers. Miller says another nearshore option for call centers is Canada, where residents of the maritime provinces have accents similar to those found in midwestern America. If you look at [outsourcing] from a cost point of view, its not as big a cost savings to go nearshore as opposed to India or South Africa, but its a step in the right direction, he says. With our clients, I generally use the phrase, I dont want to go over a large body of water. So, were often looking at something on the Canadian side.
Tips for Insurers
Piedmonts Chick believes it is easier to find a BPO provider than to find quality technology-savvy staffers locally. We probably could find the computer programming talent here, but we could not find the combination of insurance knowledge and experience and computer knowledge and experience to put together to form such a program ourselves, he says.
Piedmont selected IDP for its outsourcing needs. We essentially are forced in the modern day to somehow acquire the sophistication that isnt available locally to compete, says Chick. Insurers dont have much of a choice to make. We have to have the technology, he says. Its not an option these days. If you dont continue to upgrade, youll be trampled by the big companies and fall by the wayside.
Linda Philipps, COO of Virtual in Processing Services, Inc., a subsidiary of Clarendon Insurance Group, needed an outsourcing vendor to provide policy administration, billing, claims administration, and claims handling when Clarendon took back one of its programs from an MGA it had used. I needed someone who could do everything from soup to nuts, she says.
Clarendon turned to CSC for its outsourcing, and Philipps cites stability, financial strength, flexibility, and a broad offering of solutions as the reasons the company chose CSC. Each carrier has to make its own decisions, but Philipps offers several pieces of wisdom for someone considering the BPO option.
You need somebody who is going to be in business for the long haul, she says. If the outsourcer is a vendor, too, she adds, its good to know the outsourcer is using a product also being sold to other companies.
You want to know what your costs are going to be [to do business], she continues. There are no growth restraints.
You need someone flexible enough to be able to jump if your direction changes, which it often does, she advises.
If you are a new company or you are going into new lines or markets, [BPO] is a good way to avoid an outlay of cash, she asserts. All the uncertainties are handled for you.
You want to be with [a provider that] constantly is looking at what else is happening in the market to see whether it needs to add [more options] to its offerings, says Philipps.
I like dealing with one vendor, she states. What about carriers that want best-of-breed solutions? Thats fine, but you are looking at policy administration, the Internet, document automationsix or seven different things, at a minimum, that you need, she points out. If a carrier does an RFP for each of these solutions, by the time the carrier knows what it wants done, a full year could go by. In the meantime, Im probably already writing business, she says.
Cost Benefit
Johnston believes the cost benefits can be attractive for insurers, estimating a savings of between 20 and 25 percent for nearshore BPO and as much as 50 percent for going offshore. To achieve those higher savings, though, Johnston believes globalization must take place within the industry. There are technical issues and socio-political issues, he says. [BPO] is going to evolve over the next 10 to 15 years.
Western General Insurance Co. went the outsourcing direction because it was the most effective cost-benefit model for the insurer, according to Joseph C. Smith, vice president of information technology. It was a fixed cost we could budget for, he explains. The IT costs the carrier would have endured for a new claims solution were extremely variable, he adds. The more advanced the systems become, the harder they are to support in-house. Western General went with a claims solution from Bridium. Within three months, the carrier noticed a return on its investment. The more the software does for you, the less you have to invest in people, he says. You raise your level of people to be knowledge workers, and you dont have to pay for such huge clerical overhead.
As Miller points out, the savings in BPO come from eliminating labor costs. Infrastructure, which is pure technology hardware, accounts for only about 15 percent of the total costs [of an operation], he says. So, all the rest of it really is people cost. [Insurers] have been addressing the technology piece, now they are looking at customer service and new business operations to see what makes sense [financially]. Whether its putting a new application on the system or keying in the new application, thats going after the labor costs.
The biggest benefit of his outsourcing deal is the managed expense, Smith maintains. The expenses likely would be lower if the insurer did the project in-house, but time-to-market issues sometimes make that impossible.
Time and expenses, says Clayton Bush, vice president of Alfa Agency/Alfa Specialty Insurance Corp., as his reasons for outsourcing. We had a short time frame to get the program out. We wanted to be efficient, but we didnt want to spend a considerable amount of money on the implementation. Our resources were in other projects.
Alfa works with CSC as its BPO provider for its nonstandard auto product. We have 12 total employees in that area with close to 20,000 policies, says Bush. Thats probably 20 percent more policies per person being handled than by our other company. We think we can do twice as much business as we are doing today in terms of processing with just a couple or three more individuals than we have today. The system is more efficient, and we can hold down the head count as we grow.
Carriers can save money for such outsourced jobs as customer service reps, Miller points out, but there are other expenses charged against those employees that dont go away. A typical fully loaded CSR [for a life insurer] is going to run you around $75,000, he says. The direct portion of that is about $35,000, so you look at all the overhead that gets layered onto thatthe three jets that are in the hangarand it gets pretty expensive.
When Miller meets companies that want to reduce their expenses, he says, he typically asks if they are ready to get rid of the indirect costs, as well. If youre just going to swap direct cost for direct cost, you may get a little bit of a savings, but youre not going to get a huge savings. If youve got a huge overhead and [you] cannot make that overhead go away, youre not going to save anything.
What Was and Will Be
Outsourcing of any kind is hardly new to the business world and insurance in particular. Independent agents are nothing more than distribution outsourcers for insurance carriers. Outsourcing has been going on forever, says Miller.
Industries and population centers may not like outsourcing, but it always has had an effect on American industry. Look at what happened to New England with the textile industry in the early part of the century, he says. It got outsourced to the South, and then it got outsourced offshore. People continually are looking for better value.
Businesses turned to reengineering to push down the labor content as much as possible. Now theyre saying, Where can I get a little better value for my labor content to [further] reduce those costs. Thats why youre looking at either nearshore or offshore.
Web-based policy administration systems allow insurers to work on the system from virtually anywhere in the world, Miller points out.
Harris asserts domestic or nearshore BPO providers will prove to be more popular among American insurers. Projects can be managed in the domestic location, which will ensure better regulatory knowledge and compliance than with offshore models, she writes. In the short term, insurers could rely more on onshore locations and bring in greater offshore resources as the market matures or as it becomes more confident with the process and the provider.
Gartner predicts slow growth in BPO over the next five years, but those carriers that do choose the BPO option will do so domestically or nearshore at twice the rate of those opting for offshore outsourcers.
Something to keep in mind, according to Miller, is that outsourcing providers are not immune to the problems they are trying to solve for insurers, in particular, turnover and higher labor costs. When there is a scarcity of resources, you start to obtain the same problems you had before, he says.
So, outsourcing firms find themselves outsourcing their own contracts, which can be dangerous for the insurer. We always recommend a non-subcontracting clause, says Miller. Some of the disasters you hear about start when something was outsourced to India, and then the company turned around and outsourced it to China. You run into huge problems when this happens because you dont get the quality of work you expected.
Nearshore and domestic outsourcing are easier to manage because there are fewer major cultural differences for a carrier to deal with. Going offshore, though, requires a strong commitment to handle those cultural differences. You cant just set up [outsourcing] and let it run, says Johnston. [BPO] needs to be managed the same way you manage every other business unit within your organization. You can never outsource responsibility.
Tech Guide: Outsourcing/ASP Vendors
Accenture
Murray Hill, N.J.
267-216-1597
www.accenture.com
AdminServer, Inc.
Malvern, Pa.
972-715-2028
www.adminserver.com
Afni Insurance Services
Simsbury, Conn.
860-651-9775
www.afniinc.com
AIG Technologies
Livingston, N.J.
800-788-0144
www.aigtechnologies.com
Allegient Systems
Wilton, Conn.
203-761-1289
www.allegientsystems.com
Allegis Communications
Seattle, Wash.
800-566-6112
www.allegisteam.com
Apex Data Systems
Tucson, Ariz.
520-298-1991
www.apexdatasystems.com
@Global, Inc.
Golden, Colo.
800-419-4449
www.atglobal.com
Balance Consulting, Inc.
Ann Arbor, Mich.
734-668-1099
www.balanceconsult.com
Brightwork, Inc.
Chicago, Ill.
773-529-0465
www.aboutalyce.com
CGI
Andover, Mass.
978-946-3343
www.cgi.com
CNR, LLC
Reno, Nev.
775-851-2829
www.cnrsearch.com
Computer Outsourcing
Shelton, Conn.
203-925-3920
www.computeroutsourcing.com
Connextions
Orlando, Fla.
877-772-6868
www.connextions.net
Corporate Systems
Amarillo, Tex.
800-927-3343
www.csedge.com
Cover-All Technologies, Inc.
Fair Lawn, N.J.
201-794-5586
www.cover-all.com
CSC Financial Services
Austin, Tex.
800-345-7672
www.csc-fs.com
dakota imaging
Columbia, Md.
410-381-3113
www.dakotaimaging.com
Diagenix Corporation
Norwell, Mass.
781-871-6624
www.diagenix.com
Docucorp International
Dallas, Tex.
800-735-6620
www.docucorp.com
DST Output
El Dorado Hills, Calif.
800-441-7587
www.dstoutput.com
Eagle Technology
Management, Inc.
Marion, Iowa
800-975-3245
www.eagletm.com
E-Claim.com, LLC
Gretna, La.
504-388-3256
www.claimassignments.com
EDS
Plano, Tex.
972-605-5000
www.eds.com
Enwisen, Inc.
Novato, Calif.
415-897-0728
www.enwisen.com
Examen, Inc.
Sacramento, Calif.
916-921-4300
www.examen.com
FARA Business Services
Mandeville, La.
800-259-8388
www.fara.com
First Notice Systems, Inc.
Boston, Mass.
800-310-4367
www.firstnotice.com
Fiserv
Brookfield, Wis.
800-322-4220
www.fiservais.com
Genelco Software Solutions
St. Louis, Mo.
800-983-8114
www.genelco.com
GenSource Corporation
Valencia, Calif.
661-294-1300
www.gensourcecorp.com
gotoPremiumFinance.com
Woodland Hills, Calif.
800-229-9822
www.gotopremiumfinance.com
HCL Technologies America, Inc.
Sunnyvale, Calif.
847-303-7200
www.hcltech.com
Infogrow Corporation
Cuyahoga Falls, Ohio
330-929-1353
www.infogrowcorp.com
Input 1, LLC
Woodland Hills, Calif.
800-229-9822
www.input1.com
InsBridge, Inc.
Plano, Tex.
972-516-4218
www.insbridge.com
Insurance Data Services
Hemet, Calif.
800-996-9964
www.certsonline.com
Insurity, Inc.
Hartford, Conn.
404-456-5088
www.insurity.com
ISCS, Inc.
San Jose, Calif.
988-901-4727
www.iscs.com
LIDP Consulting Services, Inc.
Woodridge, Ill.
630-829-7100
www.lidp.com
Magnify
Chicago, Ill.
312-384-7161
www.magnify.com
Management Data, Inc.
Birmingham, Ala.
205-991-7511
www.mgtdata.com
Marshall & Swift/Boeckh
New Berlin, Wis.
800-285-1288
www.msbinfo.com
McCamish Systems
Atlanta, Ga.
800-366-0819
www.mccamish.com
MFXchange Holdings, Inc.
Toronto, Ont.
866-639-6399
www.mfxfairfax.com
NAT, Inc.
Rosemont, Ill.
847-384-2200
www.natinc.com
NaviSys
Edison, N.J.
800-775-3592
www.navisys.com
nomoreforms, Inc.
Boca Raton, Fla.
402-336-6637
www.nomoreforms.com
NSite Solutions Inc.
Urbandale, Iowa
888-282-6596
www.nsitesolutions.com
OUR-HR, LLC
Greenville, Miss.
663-334-6919
www.our-hr.com
Outerbounds Technologies
Atlanta, Ga.
770-261-6010
www.outerbounds.com
Output Technology Solutions
Kansas City, Mo.
816-842-5862
www.output.net
Patni
Irving, Tex.
866-728-6446
www.patni.com
Pink Elephant Global
Hosting Services
Burlington, Ont.
905-331-5060
www.pinkghost.com
Rackley Systems, Inc.
Pulaski, Tenn.
800-874-2616
www.rackley.com
ReClaim Technologies
Newark, Ohio
740-344-6956
www.reclaimtech.com
Results International Systems, Inc.
Dublin, Ohio
614-540-3666
www.resultscorp.com
Risk Sciences Group, Inc.
Schaumburg, Ill.
800-619-0224
www.risksciencesgroup.com
SAS
Cary, N.C.
919-677-8000
www.sas.com
Sector, Inc.
New York, N.Y.
212-383-2168
www.sectorinc.com
SevenSpace
Chantilly, Va.
703-961-5700
www.sevenspace.com
Severan Corporation
Exton, Pa.
419-584-0284
www.severan.com
SS&C Technologies, Inc.
Windsor, Conn.
860-298-4625
www.ssctech.com
SunGard Insurance Systems
Roswell, Ga.
800-337-2677
www.insurance.sungard.com
Tata Consultancy Services
New York, N.Y.
630-245-8314
www.tcs.com
Trumbull
Windsor, Conn.
877-285-2174
www.trumbull-services.com
United Systems & Software, Inc.
Lake Mary, Fla.
800-522-8774
www.ussincorp.com
Valley Oak Systems
Alamo, Calif.
925-552-1650
www.valleyoak.com
Visibillity, Inc.
Chicago, Ill.
888-484-7424
www.visibillity.com
Worldwide Testing and Security Services, Inc.
Clifton Park, N.Y.
518-371-8327
www.worldwidetest.com
Xerox Global Services
Rochester, N.Y.
770-569-5668
www.xerox.com
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.