Insurers now need to have concurrent objectives: driving growth and optimising efficiency and performance. Andrew Groth explains what principles clients should apply in order to create a collaborative sourcing environment that delivers enduring value for money
Insurance institutions are facing unprecedented levels of competition and pressure to improve performance. A proliferation of competition from new entrants, combined with the pressure of regulation is affecting premium growth. This means executives today have to deal with two conflicting boardroom agendas: the first, to improve operational efficiency and agility; the second, to drive growth, transformation and improve services - all at no extra cost to the organisation.
Understandably, these multiple demands have convinced the market that some things are best done outside the firm and/or in partnership with those for whom such activities are core and who command 'best practice'. In the insurance sector, market-leading insurers are taking steps towards global sourcing to improve operational efficiency and agility, which enable them to focus on entering new markets and optimise new legislative opportunities.
For example, Zurich Financial Services has worked with CSC to transform its business on two fronts. Firstly, it has reduced and optimised costs by moving the organisation to a more centralised structure that leverages greater economies of scale. Cost optimisation was a tertiary objective but has, nonetheless, been central to freeing resources for strategic investment. Secondly, it has created a centralised application function delivering greater quality and responsiveness to business unit demands and improved time to market for key projects.
Traditionally, outsourcing has been seen primarily as a means of improving operational efficiency - reducing the cost of service while improving technical performance. However, the traditional approach to outsourcing is now being challenged, as today's requirements for organisations are very different. They now need to pursue a wider agenda than cost reduction and technical improvement. In contrast to this, CSC often finds that clients engage on discrete 'tower of service' outsourcing transactions that still just focus on operational efficiency, often with little regard to overall sourcing strategy, which needs to take into account the need for greater agility, integration and business effectiveness.
Therefore, understanding how to design a sourcing strategy to be a collaboration of best-of-breed partners working together to innovate, transform and create measurable improvements to the overall business - rather than a collection of contracts offering price/performance gains within each specific domain - is becoming a hot topic.
To compound matters further, traditional outsourcing arrangements and the contracts that define them have not coped well with radical change, and fail to address flexibility and collaboration between competitive service providers. That is why CSC believes in a new approach to strategic sourcing: accommodating and exploiting change; weaving innovation and continuous transformation into the fabric of a long-term relationship; and designing and facilitating multi-partner, collaborative business models to improve performance.
This approach has been branded 'dynamic sourcing' and is built around five principles.
Firstly, there is the focus on business outcomes. Dynamic sourcing recognises that the technical goals and measures within conventional outsourcing contracts are becoming secondary to the business outcomes that the overall sourcing strategy aims to accomplish or support. These higher-order objectives are better understood by the business and have the advantage of greater longevity.
Secondly, insurance organisations need to understand how to create a collaborative sourcing model. Most are 'serial outsourcers', optimising each transaction with little regard for the target sourcing model and with almost no regard to any eventual collaboration between the portfolio of partners that they are creating.
This new approach acknowledges the need for each sourcing transaction to be designed to fit into a collaborative model, as well as to be optimal in its own domain. These considerations are made explicit in the solution, transition, transformation and governance, as well as in the commercial and contractual approach.
Another benefit of dynamic outsourcing is that of aligning client and supplier intentions. This approach aims to accommodate and exploit change, as opposed to simply mitigating it. There is an explicit recognition that many of the assumptions that underpin the initial transaction will change, as will the required performance levels and economic expectations. The key is to focus on the real requirements from a business perspective and to be realistic about the supplier's need to recover investments and make profit.
Traditional outsourcing envisages a single period of aggressive transformation to improve services and deploy supplier processes, followed by a sustained period of continuous improvement. This, however, is no longer sufficient to maintain market-leading performance - which is where the fourth principle, the need to build mechanisms for sustainable transformation, comes into play. Dynamic sourcing uses the latest tools, techniques and approaches that enable sustained, or iterative, transformation throughout the life of the sourcing relationship.
Finally, effective outsourcing needs to ensure appropriate systems of governance and alignment. The approach outlined above assumes that from the outset there will be a need for appropriate aggregation and orchestration of a multi-partner environment providing end-to-end service delivery, management and improvement processes. It assumes the existence of end-to-end service delivery, management and improvement processes. It also understands that the objective is to harness the combined capabilities of the various partners into a cohesive whole working to meet client goals, whether those goals are driven by opportunities, threats, market requirements or innovation. Dynamic sourcing embodies these ideas in an innovative operating model and a radically different approach to governance.
So, as insurance executives juggle the need to optimise their cost base while driving growth and transformation, dynamic sourcing should be considered as a key strategic enabler for enhanced business performance.
- Andrew Groth is vice-president, European business development division at Computer Sciences Corporation.
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