IT Outsourcing: Success or Disaster

Outsourcing is often summed up with the “shopworn” mantra: “Focus on your core competencies and let someone else do the rest.” Sounds simple. And it works well in theory, and sometimes even in practice. But what specific strategies can turn a project into a quick, measurable return on investment? And what are the key steps that will prevent your outsourcing agreement from becoming a third-party disaster?

If we follow the mantra, it is fair to ask: “What is the strength, or core competencies of insurance companies when it comes to information technology?” Although sometimes maligned, the mainframe systems at the core of insurer operations have done a solid job of processing millions of transactions over the years. When you consider that a typical large property and casualty insurer renews thousands of policies every day, this is no small task.

A study of major p&c insurance companies by TowerGroup released in June of this year confirms this trend. “Over the last 40 years, p&c companies have built an enormous amount of IT capability, as well as sophisticated processes and structures to facilitate and support IT development,” observes Deborah Smallwood, insurance practice leader at TowerGroup.

CROSS COMMUNICATION

So, where do insurers generally not excel? The TowerGroup study argues that insurance companies have not addressed perhaps the most critical issue facing them today – the alignment of IT resources and business objectives. This weakness is most visible among companies in not understanding broker workflow and effective distribution-based systems. We have seen many promises of the next “big thing” in insurer-broker distribution, only to be frustrated by the reality. Even ignoring the volatile issue of the “correct” technology architecture to use, many of these undertakings have been plagued by improper skill sets, wrong project structure, changing business requirements, lack of communication and definition requirement between company and broker (and third-party), among a raft of workflow issues.

This is one area ripe for outsourcing, although not in the same way as the past. Many insurance companies are at a stage now where outsourcing is carefully considered for smaller, more measurable projects. Insurers are looking to vendors that can deliver tactical projects with visible, quantifiable results. The issue is often the scale and complexity of the project. Put frankly, the success stories of large projects geared at distribution have been few and far between.

QUICK WINS

But, just how do insurance companies go about identifying these quick wins in outsourcing? There are several key steps to follow when considering an outsourced IT project. These go beyond the “four Ws” – what, when, where and why – to a five step agenda for successful outsourcing.

The first step involves strategic analysis of the company’s core competencies and areas of weakness. Insurers must identify the best areas to outsource and the ones that will give them the best return on investment. High costs, workflow bottlenecks and difficult application developments are typical factors to consider. One area that often makes sense for outsourcing is the disconnection between underwriters and brokers. Underwriters know what they want and can accept in a policy application, but sometimes fail to appreciate what brokers need at the point-of-sale.

The next step is to clearly define and measure the goals of the outsourcing project. Successful outsourcing depends on not only how well you define your project requirements, but how well you can measure if they are being met. Insurers have to define their requirements, in distinct, comprehensive and measurable terms.

Then, companies can go ahead and select the vendor. But how? It’s important to choose a third-party based on proven expertise and application development – not reputation. Do companies always need to go with the biggest name, which usually means the biggest budget? Are there smaller players that offer expertise that your company cannot match? Some of the most important criteria in selecting vendors may not even be size or reputation, but rather problem solving techniques, values and business management.

Another crucial step is getting the right staffing and teamwork strategies in place. The approach in the insurance industry to external suppliers is changing. Insurers are no longer looking for consultants to come in and take over. They now want consultants to act as experienced trainers and advisors to inhouse staff, who will then be able to apply this knowledge when the consultants leave. It is important to structure outsourced-company teams that work together in identifying issues and solving problems.

The final step is managing and evaluating the outsourced partnership. Invariably, there will be changes in definitions and requirements to an IT project. There may be a need for customization if a certain product or application does not fit with a company’s systems. As such, there has to be flexibility built into the outsource relationship. There should also be an evaluation plan that determines how well the objectives and definitions were met. Also, insurance companies should consider the continuity of the project, in terms of consulting.

PRACTICAL APPLICATION

All this may sound well and good theory for outsourcing IT projects. But does any of it work in practice? ING has worked with the smaller as well as larger IT third-party vendors. These arrangements succeed when each of the partners bring their unique competencies to the table. One example of this has been ING Canada’s “Savers” point-of-sale personal insurance system. This tool allows brokers to quote and sell new business at the point-of-sale, including guaranteed rates, document printing and automated upload to the company’s backend systems. Nearly half of ING’s new personal insurance business in Western Canada is now generated through Savers. Similar success was achieved with ING’s small commercial “Edge Express” book of business, where the emphasis was on speed and efficiency at the point-of-sale. Both systems have significantly enhanced brokers’ competitive ability to promote and sell products.

ING had engaged Policy Works in the development of the above systems, primarily because of the vendor’s expertise in Internet technology application in the point-of-sale arena. Utilizing an external provider not only saved time and money, it provided ING with an enhanced perspective on insurance company-broker interactions. In both cases, ING followed a sound outsourcing plan, identifying an area it had less expertise in and setting definitions and measurements for what it wanted to achieve.