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.
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“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.”