A look at the IT outsourcing landscape for insurers, which recently was released by Novarica, shows midsize carriers turn to external partners for more expensive project-based work and have yet to adopt the philosophy of a blended sourcing strategy.
"What that is saying to us is midsize companies are using expensive consultants to do implementations, but they are not really doing blended sourcing in the same way large companies are doing it," says Matt Josefowicz, a director of Novarica and head of the research and consulting group's insurance practice.
While midsize insurers are focused on application development, large insurers have a more varied approach to IT outsourcing, reflecting the way they do business today, according to Josefowicz. 
"When people think about outsourcing they think about handing everything over and getting out of the business," he says. "But with large insurers, very few are using external service providers for the majority of their work in any particular area. What that tells me is, there is a lot of blended sourcing going on rather than letting someone do it all."
(For more on how Nationwide is dealing with outsourcing issues click here.)
As with many technology trends, Josefowicz expects the midsize insurance market eventually will follow the path of the large carriers, but the challenge for the midsize group is to change its culture.
"Large companies are more used to operating on a global scale–seeing themselves against global peers even if they primarily are focused on the North American market," he says.
Midsize carriers are less focused that way, points out Josefowicz. "A lot of them are in smaller markets where they are tightly imbedded into the community, so anything that smells like offshoring and destroying jobs in the community is politically challenging for a lot of companies," he says.
The reason smaller insurers eventually will follow this varied path to IT outsourcing is the overall benefits, not just cost savings.
"Cost is only part of the picture," says Josefowicz. "What [large insurers] really are getting is variable capacity and access to updated skills. This is absolutely something midsize carriers need because many of them are located in secondary markets where there isn't a large IT work force to draw from."
One of Novarica's clients found itself in a similar situation and turned to IT outsourcing for a good solution. "It had very limited IT resources to draw from in the local talent pool, and in order to gain access to both modern programming skills and modern technology experience, it was able to bring in an external service provider and supplement their existing skill set," he says.
Most of the outsourcing providers used by insurers offer a blended global delivery model, Josefowicz explains, adding few providers are purely U.S. oriented and those vendors tend to top out with a staff of a couple hundred people.
"There are some predominantly U.S. companies, and certainly for the midsize companies, those will help with some of the perception issues," he says.
Going from an integrated internal organization to a blended organization means a learning curve in terms of project management and requirements gathering, notes Josefowicz. Additional discipline is required to work with a service provider, where you pay as you go, rather than internal staff members, where business users lean on them to get projects completed.
"The plus side is you are not paying for work that is not getting done, but on the other hand, you really have to pay for the work that is getting done," he says.
Over the years, priorities have changed within insurance companies in regard to IT, continues Josefowicz. Things have evolved to how fast business capabilities can be deployed and how effective IT can be in meeting the needs of the business, not just how current spending can be reduced.
"If you ask any insurer what its biggest issue is with IT, it's not necessarily it spends too much; it's [IT] can't do things [the business] wants it to do that are technology dependent," he says. "IT services have moved from that cost reduction bucket to the capabilities delivery bucket."
– Robert Regis Hyle
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