Outsourcing - A leap of faith?

Many in the insurance industry have shown a reluctance to outsource a significant proportion of their operational processes, but Richard White believes that those that do find the courage to do so will be boosting their business

For years, unlike some larger players who possess the scale, governance and procurement capabilities to manage large outsourcing deals, the rest of the insurance sector has been nervous about committing itself to initiatives that would see the outsourcing of a significant proportion of their operational processes.

But perhaps it is now time for the industry to reconsider its reticence and pursue new relationships that could provide the gain without the pain.

In last year's Strategic Focus supplement, we focused on the subject of risk and operational risk transfer to an outsourcer. This year, we look at the type of outsourcing relationship and some of the best examples we have seen work in other business sectors, both for the client and for the outsourcer.

If it is true that every industry possesses a unique culture and a shared set of values, then perhaps the characteristic that defines the insurance sector is one of prudence. After all, within an actuarial environment, it is a market that rewards those that truly understand the nature of risk, and punishes the overconfident and the reckless.

For service delivery, this focus is undoubtedly essential, but if such caution impacts across the broader spectrum of corporate decision-making, there is a danger that providers might fail to exploit the opportunities that could help them maximise their commercial efficiency.

Lack of enthusiasm

This reticence is reflected in the industry's relative antipathy towards outsourcing. While prospective partners point to the benefits of leading-edge technology, the opportunity to offset the risk of investing in new platforms and the chance to secure absolute reductions in cost to serve through access to state-of-the-art service facilities - all underpinned by real improvements in customer experience - the insurance industry remains distinctly under-whelmed, particularly compared to other peer markets.

The subject of outsourcing is clearly an emotive issue throughout the industry and the orthodox, cautious response from insurers to such a proposition is well shaped and goes something like this: How could a supplier truly understand the volume and complexity of our business? Do they really possess a strong track record of working with blue chips like us? Would they have the stamina to deliver in the long term? Could they ever get to grips with understanding our customers and our culture? What is to stop them making money at our expense when times are good and walking away if there is a problem? How do we stay in control? In other words - what is the worst that could happen?

To be fair, while this interpretation might appear overly critical, it must be acknowledged that some insurers have entered into arrangements that ended up proving far more problematic than planned, and in which the promises made failed to meet expectations.

In a naturally sceptical environment, cases that become dogged by an adversarial atmosphere - then clouded by pressure to raise prices through the enthusiastic application of change notes - reinforce the perception that, while outsourcing may be a highly commendable solution for many industries, it is not one that offers any true merit for the insurance sector.

If some putative suppliers have compromised the reputation of outsourcing within the insurance market, it is a real shame - particularly as some specialists offer alternative approaches to relationship building that are worthy of serious consideration by the profession.

These alternative approaches deserve to be evaluated by the industry's players. After all, it continues to be in the interests of directors to secure a sustainable commercial advantage within the market. The natural caution of boards within insurance must be counterbalanced by their duty to find a way to break down the barriers that block access to the benefits that well-constructed outsourcing agreements appear to offer.

Clearly, however, the onus must be on outsourcers that believe they possess a new way of working to prove the point, so that the insurance market will take their messages seriously.

Core themes

One route to a new operating model centres on three core themes: specialisation, accountability and partnership. Outsourcers must be prepared to invest in people with in-depth skills and sector expertise so that they are best placed to make a difference within a client relationship. There really is no substitute for this level of resource and there is more to it than merely understanding the culture, language and politics of an industry.

Specialists can add value efficiently because they not only possess the insight to help re-configure processes; they can also identify the priority decisions that need to be taken to make an outsourcing relationship productive earlier.

The next two themes, accountability and partnership, are fundamentally intertwined and are both rooted in the need to bring a framework of ethical contracting to outsourcing.

As we have already seen, too many relationships were doomed to fail, essentially because they lacked the vital ingredients of trust, openness and honesty. Here, both sides have to think differently about how they see the way they contract on key strategic programmes. Plainly, it is not good enough for an outsourcer to think "Let's do whatever it takes to win this contract, then, when the ink is dry, we can strip down service and start pushing through change notes to drive up our income".

By the same token, it is unacceptable for a prospective client's agenda to be based on: "Once they are on board we can start loading up the workload and make our investment in them sweat as hard as possible". In short, if both parties believe they can win at the others' expense, the prospects for long-term harmony are bleak.

The reality is that the prizes for successful outsourcing tend to go to those businesses that are prepared to build collaborative partnerships in which objectives are aligned for mutual benefit. This partnership approach goes beyond standard service level agreements common to most customer/supplier contracts in which one party can claim to have met their objectives and therefore 'kept their side of the bargain', even if the overall aims of the initiative have not been secured.

Real outcomes

True partnerships work because they are based on the achievement of real outcomes, so that there is a common incentive for both companies to deliver meaningful results. By structuring a relationship around charging, quality and incentive models that are positively correlated against the commercial objectives of the client, there is far more likelihood that the goals will be met.

But while a structure of risk and reward is important, what must also be in place is a philosophy based on an ethical commitment to the relationship.

Here, the outsourcer can take the lead by focusing on long-term solutions that will meet and exceed their partner's expectations.

By changing the rules of engagement, which will encompass other key measures including a robust approach to corporate governance and corporate social responsibility, outsourcers should be able to shift insurance companies' expectations of what they can gain from a relationship - from suppliers who want to profit from uplifting our non-core processes, to enabling partners who can genuinely change the way we do things.

Already, organisations in other sectors are taking advantage of this new paradigm. Vertex, for example, is the outsource partner for Westminster City Council, one of the UK's largest local authorities. A £420m, 15-year contract has been structured to produce real cost savings to Westminster of £50m over the period of the relationship. The council's relationship with Vertex, modelled around the philosophy of 'working together and thinking together' reflects a shift in emphasis in the way in which outsourcing relationships can be structured.

The principles that underpin the Westminster Vertex relationship encompass:

- A co-located partnership management team

- A jointly agreed partnership vision

- A clear governance structure detailing who is accountable for key deliverables and how decisions are made

- Open book accounting

- A code of behaviour stating explicitly what everyone working in the partnership can expect from each other.

- Both parties are able sit down together as one team and develop strategic solutions to the issues in front of them and focus on the things that really matter.

Modelling the structure

At the other end of the organisational spectrum, Vertex's partnership with Marks and Spencer also underlines the value of aligned relationships.

The company has modelled its operational structure to reflect that of the client, which has ensured that all aspects of delivery, from forecasting to customer-facing service levels, is defined and agreed at the earliest possible stage, leading to Marks and Spencer praising the standards of focus, execution and service delivery as industry leading.

So, while Vertex would not claim to have all the answers, it is increasingly evident that some outsourcers are beginning to resolve many of the concerns that have prevented insurance companies from moving in this strategic direction. Perhaps it is now time for decision-makers within the sector to realise the potential transformation outsourcing can deliver.

- Vertex is a leading outsourcing organisation with specific expertise in customer management, HR and F&A outsourcing. It works with clients in all three areas to deliver business-enhancing change, building revenue, reducing operating cost and boosting both customer and employee satisfaction.

We are driven to do so by a keen appreciation of our clients' needs to reduce costs, grow revenue and deliver outstanding services to customers and employees. We are enabled to do so by an unmatched physical and human infrastructure of contact centre, HR self-service and business process operations in the UK and offshore, scaleable to every client demand. We also contract with clients in a unique, results focused way; we are so confident we will deliver the business value we promise, we will share risk and reward, contracting to meet our clients' business objectives rather than the simple operational criteria favoured by our competitors.

Vertex, part of FTSE 100 company United Utilities, operates out of more than 30 sites across the UK, North America and India, employs more than 11,000 people and has a turnover of £369m.

For further information, please call 0161 493 2282 or visit www.vertex.co.uk.

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