Outsourcing IT In Insurance Is Gaining Favor
Its often been said that “if you want something done right, do it yourself,” but experts say insurers and other financial services companies are increasingly looking to save by outsourcing all or parts of their information technology operations.
The Outsourcing Institute, a professional association based in Jericho, N.Y., estimates the global outsourcing marketplace accounts for $400 billion in IT expenditures each year.
The outsourcing trend is especially evident in insurance companies that bring in less than $1 billion in direct written premium, according to Judy Johnson, vice president of insurance information strategies at the Meta Group, Stamford, Conn.
“We see it across the board in p-c and life/financial services companies,” Johnson says. Mid-tier companies, she notes, tend to be regional and tend to have undergone some consolidation. “They have lots of competitive issues, such as low-margin products that are bought on price.”
As a result, Johnson asserts, “they must be operationally efficient, and they have been anything but efficient.”
When mid-tier companies suffer from inefficiency as well as the usual problems with recruiting top IT talent, outsourcing IT becomes an attractive option.
Although the IT job market is cooler than it was because of the collapse of many dot-com ventures, Johnson says good dot-com alumni still have plenty of options.
“Top [IT] talent goes where its needed,” says Johnson. “There are more vendors coming into the insurance space looking for people who understand both technology and insurance.”
As a result, IT professionals who might consider a job in insurance or financial services are lured away by the vendors, who offer high compensation, stock options and other perks.
Larger insurers have already embraced outsourcing for reasons of cost, but few have the proper “metrics in place for managing for performance,” Johnson says.
The result has been what Johnson calls some “spectacular failures” in outsourcing deals.
When outsourcing relationships fail, the insurer must take the systems back in-house and rehire the people it fired after it struck the outsourcing deal.
“Were talking tens of millions of dollars annually” in additional costs, Johnson says. “There have been huge investments and a tremendous drain of resourcesall for naught.
“One thing that insurers are not good at is managing partner relationships,” says Johnson, “because they never have. One partner has been the distribution channel, and we know they havent managed well there.”
Johnson acknowledges that there have been some IT outsourcing successes in the insurance industry, but adds that “no one can really look under those covers. You have to assume that if [the outsourcing relationship] is still going on, its considered successful enough by the parties.”
The areas of IT traditionally outsourced by insurers include day-to-day operations and maintainenance of legacy applications.
Singling out application maintenance, Johnson asks, “Who wants to do that anyway? Your people can focus on more interesting stuff.”
Referring to companies that have attempted to build and maintain their own proprietary applications in critical areas, Johnson insists, “Theyre all nuts. You never build a [proprietary] system, of which there are already dozens on the market.”
Johnson says one Boston-based insurer spent $50 million over five years building a policy administration system “thats probably going to be scrapped now. And theyre not alone by any stretch.”
Outsourcing critical functions like customer relationship management may also be a mistake, Johnson says. “I dont know that anybodys doing it. CRM is complex and expensive; its your lifeline to your customer.”
Johnson recommends managing CRM systems in-house.
“I have not seen a CRM vendor I would trust my competitive advantage with,” Johnson states.
Bruce Hill, vice president of development at Hillcomp, Denver, a systems integrator and provider of IT outsourcing services, sees “a bit of an increase” in outsourcing across the board, in part because of companies reluctance to hire new staff during these subdued economic times.
Outsourcing services in IT are “not that expensive,” Hill contends. “People are trying to defer the costs [of hiring and maintaining] new employees to companies like ours, and general economic conditions are contributing to this.”
Hill points out that when a company commits to training an IT person, that persons value increases with the accumulation of knowledge and skills. “You have to pay more to hang onto him, because someone else will want him.”
Recruiting IT talent is very difficult, says Hill. “If theres a good [IT professional] out there, why doesnt he have a job?” he asks. “It makes me nervous any time someone hands me a r?sum?. Hopefully, [the candidate] is just out of school.”
Hill admits, “Were having a tough time hanging on to our own employees” in the current IT hiring atmosphere. To ensure that his customers dont go without service, Hill says he and his partner make certain they have all the training and knowledge needed to service any of their clients should a key employee leave the company.
Outsourcing can be a profitable move for companies, however. One company is outsourcing all of its IT functions to Hillcomp for about $15,000 to $20,000 a year, Hill reports. “That sounds like a lot, but the owner said the cost of hiring one employee [to do the same tasks] would be $35,000 to $40,000 per year.”
Hill also points out that his client got “better service,” because “theres not one person out there who can do everything” that is involved in maintaining a companys systems and software.
Despite the economic advantages, however, Hill says companies that outsource IT operations still need someone in-house who can “control IT and take care of smaller problems.” Ideally, requests to the outsourcing vendor would come through such a person, who “usually ends up being the accountant,” Hill explains.
When it comes to delivering outsourced services, says Hill, “most of our fixes can be done in 10 minutes. If the network is put together rightsound hardware, sound strategywe come in just once a week to do maintenance on the server and software. With one [client], were down to once every two weeks.”
Eli Dabich Jr., president of Synergy 2000, a Pasadena, Calif.-based systems integrator with ties to the insurance industry, agrees that down economic times are spurring increased outsourcing.
Companies are also considering outsourcing, says Dabich, because, in some cases, IT professionals “have never established themselves as a valued business partner within the company.” When IT is viewed as not being part of a companys core business, it is more likely that a company will seek to outsource IT functions to save money.
Dabich emphasizes, however, that “the really big difference has been from offshore outsourcing companies,” particularly programming operations located in such far-flung places as India. “Its not unusual to find a major insurer with an offshore company doing its basic programming,” he states.
“Theres always been a certain amount of [IT] outsourcing, and there always will be,” says Dabich, “but programming is the big change now.” He points out that Indian programmers are bright and well-trained, and that the 9.5-hour time difference between New York and New Delhi allows much of a U.S. companys programming to take place during off hours when the systems in New York are not in use.
The downside of using such programming companies, says Dabich, is that “the cultural differences between Indian and U.S.-based programmers are pretty dramatic.” He notes that the Indian outsourcing companies are becoming increasingly Americanized, but adds that “its tough to do business nine-and-a-half time zones away, so you really have to manage that carefully.”
Overall, Dabich concludes, “I think [outsourcing] is saving insurers a lot of money.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.