Outsourcing IT: Turning Software Into Service

‘Software as a service’ – a new model for outsourcing the deployment, management, maintenance and support of business software to application outsourcing providers (AOP) – is becoming increasingly popular among companies in every sector. Analyst firm IDC predicts that this model, which heralds the convergence of two previously discrete functions, software delivery and customer service, will grow into a US$16.2 billion annual market by 2005.

Industry studies indicate that the desire to improve profitability and reduce IT costs is one of the main drivers of the outsourcing market. Installing and managing enterprise applications internally is usually an expensive affair. For many insurance companies, expenditure incurred on inhouse deployment can be prohibitive, often forcing them to forgo new technology purchases. This, in turn, impedes growth.

A recent Gartner study shows that organizations often spend up to four times more than the license cost per year on operating and managing software. In addition, maintaining high levels of software availability, security, performance and efficient problem resolution and change management is also difficult and time consuming for many companies today. This translates to flawed, inefficient processes, higher costs, fewer revenue opportunities and a disproportionate amount of the IT budget going to routine administration instead of innovation.

Accelerated value

Significant as they are, cost savings are not the only payback from outsourcing. Other benefits include:

Reduced implementation time. Outsourcing can reduce deployment time by as much as 75%.

Better service and support for internal users. Leading AOPs proactively diagnose and resolve 75% of potential problems before their customers are aware of them.

Quicker/simpler upgrades. In an outsourced model, e-business software vendors layer in new features incrementally and handle all upgrade issues.

Core competency focus. By outsourcing software management, insurance companies can focus on tasks essential to their business.

Improved customer service. Outsourcing software administration has helped companies to speed up resolution time for known service issues by around 50%. This sharply reduces downtime, improves productivity and enhances a firm’s relationships.

Thrice blessed

In a report titled “The Financial Returns of Software as a Service”, IDC says the benefits of enterprise software outsourcing fall under three major categories: technology-related benefits, productivity enhancement and business process improvements.

Technology-related benefits are experienced through reduced cost for IT products, such as software, hardware and networking and overheads. These savings, which range from a few thousand to millions of dollars, can be funneled back into projects that directly benefit the business.

Productivity and business process enhancements, however, account for more than two-thirds of the outsourcing benefits experienced by participants in the IDC study. The message in this is clear: companies that evaluate application service provisioning only on the basis of technology benefits will miss more than two-thirds of the benefits.

Outsourcing options

Insurance companies that decide to go the outsourcing route have various options. They could, if required, have their entire spectrum of e-business applications delivered and managed as an outsourced service.

Customers of an outsourcing “suite”, for instance, may have access to more than 100 modules covering enterprise resource planning (ERP), business intelligence, customer relationship management (CRM), supply chain and business-to-business (B2B). Since the software is hosted in a secure data center, enterprises that choose this option avoid the hassle/expense of installing, monitoring and maintaining inhouse applications. Alternatively, an insurer might decide to outsource only certain applications (such as financials or human resources) or even specific modules within an application.

Smaller companies, which face a very different set of challenges, have yet another option. They can harness the functionality of a pre-configured Internet-enabled applications package specifically targeted at small businesses. They can use such an integrated package to manage all their operations online – including accounting and finance, customer care, payroll, online bill payment, sales force automation, etc.

In addition to e-business applications, insurers today can outsource the management and maintenance of other mission-critical functions such as database and application server management, e-mail or the corporate portal. Instead of internal IT staff spending time on routine maintenance tasks – such as managing disk space – they can devote time to more strategic projects.

Choosing an AOP

Once a company decides what to outsource as well as the most appropriate outsourcing model, the next step is to locate a suitable AOP. While a lot depends on the company’s circumstances, resources, needs and business goals – there are certain facts it needs to obtain and assess about the AOP before making a choice. These include:

Quality of Software. The AOP’s software offering should have a time-tested reputation for quality, reliability and scalability. Companies should ask questions like: How easy is it to add new users or extra bandwidth? How much training we would need to give our end users?

Support. The service provider’s track record should be examined: How long has it been in the business? How quickly does it resolve issues such as bugs and upgrades? Does it proactively diagnose and repair potential problems before they impact service? It’s also important to opt for an established provider that has the wherewithal and financial clout to stick things out in an uncertain environment.

Service-level agreements. What service-level guarantees does the AOP offer? Companies should negotiate flexible agreements that do not lock them into contracts for years at a time. An annual contract that allows a firm to review each year whether or not to continue with the service provider is a good option.

Security. An AOP often has more than one client in the same industry, so how will it ensure the customer’s strategic information is kept safe and away from the competition? Questions to ask: How many levels of security are there? Is access assigned by individual, category or both? If the system has modem capabilities, how do you prevent unauthorized access? How are policy, customer and transaction data stored and what is the historical access?

In the final analysis, using an AOP for application outsourcing can generate significant technology and business benefits for organizations of any size and in any sector. But, for these benefits to be realized, insurers must carefully and correctly decide what to outsource in terms of the right outsourcing model and service provider with the appropriate solutions and expertise.