Insurance Post

Outsourcing - Farming it out

A large number of insurance firms outsource different functons to external companies. Sam Barrett reports on the changing role of business process outsourcing

Outsourcing is increasingly a key part of business strategy for insurers. With the prospect of cost savings and efficiencies, most insurers will outsource at least one of their processes to an external company. However, with the market evolving quickly, the role of business process outsourcing is changing too and new challenges are coming to the fore.

"There was a bit of gold rush when outsourcing first became popular," says Tim Rankin, managing director of WNS Assistance. "But it would be fair to say that a lot of companies were a bit naive and simply outsourced processes that were either expensive or complex. This didn't always work well and now, although cost is still important, insurers recognise the roles that can be outsourced most effectively."

So, rather than outsourcing many of the customer-facing processes, insurers are much more likely to outsource back-office operations such as accounting and IT. "Finance and accounting work well," adds Mr Rankin. "You can get a qualified accountant in India for the same price as a school leaver in the UK."

Changing the focus

Matthew Vallance, managing director for Europe at BPO company Firstsource agrees that there's been a shift to the back-office functions but adds that technology has helped to improve the outsourcing of customer-facing operations too. "Technology such as interactive voice response enables companies to route calls more effectively. For instance, less conversational calls go offshore while those that require more empathy stay local," he explains.

As well as changing the focus of what is outsourced, insurers have also become more accustomed to using outsourcing, with many taking a more holistic approach to ensure everything is fully integrated. "In the past, we've seen companies outsource parts of their service and then the processes become loose and this can create further problems. Customers shouldn't be able to tell where the seams are between the company and its BPO partner," says Ameet Dave, commercial director of Room Solutions.

Another key change is that as the market has evolved, so has the technology that lies behind it. Ron Davis, divisional director of outsourcing in the finance sector at Logica, explains: "We've seen shared service for scale, lift and shift for labour arbitrage and cost benefits. Technology now needs to drive transformational change, not just for more cost saving but also for flexibility and growth. This will enable companies to flex and make operational changes much faster without an inflating cost base."

Issues surrounding flexibility have dogged BPO technology in the past. For instance, once a process is outsourced it can be difficult to make changes and so the insurer feels it can't control the process sufficiently.

Mark Bates, chief executive of RDT, says he has seen many examples of insurers that have run into problems when they wanted to do something straightforward such as change pricing. "Systems can allow a change to a loading or a base rate but if more sophisticated changes are required this would need more significant programming and hardcoding. I do expect this to change in the near future so insurers will have greater control over workflow and the processes they outsource."

BPO organisations have changed too, as their role has moved away from predominantly call centre based operations. While they used to be very much the final part of the equation, many now offer a much more technology focused solution. John Keppel, managing director of global sourcing advisory firm TPI, explains: "BPO companies are taking on full responsibility, providing the technology that the insurer would previously have built themselves or used a third company to build."

Pricing has also evolved as competition intensified. Initially based around a headcount model, BPO is now more likely to be priced on a transactional basis. This has clear advantages, especially for the insurer, as it allows them to move in and out of the market more effectively without the constraint of a fixed overhead.

But although insurers are happy with the shift to transactional pricing, other costs do remain a stumbling block for BPO. Building new systems to deliver the flexibility and control the insurers want can be prohibitively expensive as Mr Keppel explains: "Most insurers don't compete on administration but on product features and price. This means that developing systems they need to outsource this element of their business can mean an awful lot of cost to offset. This will get easier as BPO companies work with several insurers and they get the advantage of shared investment opportunities."

Potential problems

There are other potential problems too. For many insurers, especially on the life side, legacy systems can be a real barrier to maximising the potential of BPO. Mr Bates explains: "Where legacy systems are in place you often need to have a much more highly configured solution to be able to outsource anything relating to it. Many insurers now realise they may be better off throwing the systems away and starting again."

And cultural fit does not always work, with some finding they have relinquished too much control over their business. As an example, LV, which had outsourced its IT to EDS and human resources to Hays, brought these operations back in-house. Nigel Snell, corporate communications director at LV, explains: "We reviewed our operations after appointing a new chief executive in 2006, and concluded that we would be able to run the business better if we had more control over strategy. Subsequently, we've left some of the operational areas that can achieve cost efficiencies, for instance facilities management, and brought other areas in-house so we have greater control."

However, given the current economic climate, developments are likely to continue apace in the BPO market. As pressure mounts on cost and recruitment, outsourcing - and the flexibility and reduced overheads it offers - will become an even more important option.

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