Outsourcing is an important part of the insurer’s CIO toolkit, and its use is widespread. Spending on external services including outsourcing continues to consume an average of 20 percent of insurers’ IT budgets, and external staff represents 20-40 percent of IT headcount on average.
Over the past decade, there have been several shifts in outsourcing business drivers, from pure infrastructure cost reduction and legacy application support during transition to accelerating development projects and increasing agility and scalability through blended staffing models.
Executive SummaryMidsize P/C firms are following in the footsteps of larger insurance companies toward the outsourcing market. Here, researchers from Novarica discuss the rise in blended or variable contracts and offer guidance for carriers large and small about contract provisions that need special attention.
The challenges facing IT organizations encompass meeting changing expectations for customer service; resourcing and managing core system replacement projects; improving IT processes to enhance service delivery and lower costs; and establishing support, deployment and service processes for new capabilities on new platforms. These challenges drive operational, talent and cost issues. Talent management continues to be a top issue due to low graduation rates, increased demand for specialized skills, the fast pace of technology advancement and retention challenges. Outsourcing firms that have certified, repeatable processes and access to large labor pools can address these needs.
Infrastructure personnel and services (data center operations, server administrators, network administrators, etc.) are critical to an insurer’s ability to deliver secure and responsive technology-enabled capabilities. However, few insurer IT groups believe their ability to manage this infrastructure themselves creates competitive value. The need to invest in automation of the data center operations, change processes and monitoring, as well as the need for 24-hour coverage, make this a prime target area for outsourcing efficiency.
Changes in Outsourcing Agreements
Historically, outsourcing agreements were long-term and for a fixed amount of capacity or were for large projects with relatively stable staffing levels. IT organizations could get locked into unnecessary services or be caught short and forced to negotiate for additional unanticipated capacity at higher rates.
The current trend in outsourcing is more toward blended or variable agreements. These new agreements enable carriers to establish cost structures for variable levels of capacity in advance, with defined lead times and service levels. This transfers some risk to the services provider but can reduce administrative overhead for both parties and establish more effective strategic partnerships.
This concept is not totally new, but sophistication in establishing service levels, capacity triggers and resource planning is increasing. Outsourcing service providers are also expanding their capabilities to allow pooling of disparate skill sets into blended resource agreements.
One new area for outsourcing is security services. Changes in security threats and developments in security technology make security services a prime area for even the smallest or most conservative insurers to engage outsourced services. Midsize P/C firms’ usage of infrastructure outsourcing has now risen above larger P/C firms’ utilization. Specialized skills required for management of newer technologies and security capabilities are more cost effective if shared over a larger base through outsourcing.
Another driver for outsourcing is the need to create FAST teams to deploy new technologies. These are often established in geographic areas with expertise in both the technologies and with FAST development techniques. Rather than trying to create these capabilities, carriers leverage firms with established processes and skills to initiate FAST development of capabilities on new platforms. Mobile applications and advanced analytics are two areas where this approach is most likely to occur.
Co-sourcing is also occurring. Carriers concerned about losing expertise or becoming too dependent on third parties can choose to partially staff efforts and manage both internal and external personnel as a team. Co-sourcing can create challenges with respect to accountability and coordination of software changes. Co-sourcing requires sound processes for service request definition and workload assignment. Help desks are a good candidate for co-sourcing, where round-robin assignment of issues can be easily managed or level-one issues (simple) can be supported remotely while level-two issues (more complicated) can be escalated to internal/onsite staff. Production support and maintenance of applications, where many small requests must be managed, is another good candidate for co-sourcing.
The cloud has also changed the nature of outsourcing. Experience with and acceptance of outsourced infrastructure management and support services have paved the way for cloud-based or SaaS-based application models. Insurers are increasingly choosing SaaS-based solutions to assist them in implementing and managing new technology platforms.
One barrier to SaaS agreements is the perception that having data housed in the cloud creates additional security risks. In reality, most cloud-based service providers go to greater lengths to address security concerns and to achieve certification than the typical carriers do for onsite hosting installations. A secure environment should not be assumed; it should be verified during due diligence. The same standards should be applied to in-house and cloud implementations during your evaluation.
Novarica surveyed 104 insurer CIO members of the Novarica Insurance Technology Research Council late last year. Key findings included:
- Fewer than 10 percent of insurers do not use some form of outsourcing.
- All large carriers rely on some level of external staffing.
- The largest forecasted growth is expected to be among midsize P/C firms as acceptance of outsourcing grows and the demand for specialized skills increases.
- Outsourcing consumes an average of 20 percent of insurer IT budgets.
- External staff represents 20-40 percent of IT headcount on average.
- The percentage of IT budgets spent on outsourcing hasn’t changed with competition among vendors and new labor markets emerging (in Eastern Europe, Asian and South American talent centers).
- 26 percent of insurers said they will either expand somewhat, pilot/test or significantly grow their outsourcing of IT infrastructure in 2016.
- Only 8 percent plan to expand their level of outsourcing for application development and maintenance.
- 37 percent indicated interest or activity in a blended/variable staffing model for outsourcing.
Survey findings were presented in Novarica’s report, “Insurance IT Outsourcing Update 2016,” available and during a follow-up webinar.
What to Watch Out for When Entering Into an Outsourcing Agreement
Larger carriers may have experience with outsourcing, a procurement group with experience in vendor negotiations and access to legal counsel. Smaller carriers or newcomers to the outsourcing market need to be careful to make sure they pay close attention to the following.
• Service-level agreements. It is difficult to define service-level agreements if you don’t have experience defining and measuring demand, time service and service levels internally. The control and cooperation from internal employees needs to be achieved through detailed definition of expected roles, service levels and escalation procedures. For each service level that is agreed to, make sure you know how it will be measured and how it will be reported to you.
• Hidden fees and charges. Carriers with a history of users asking programmers for changes will be surprised either by the structure required to get changes approved in a SaaS environment or the fees associated with getting reports and minor changes not provided for in the contracts.
Carriers should ask many questions about what constitutes support versus a work request and the solution provider’s internal management processes. Before signing a contract, make sure you are comfortable with the level of transparency around work performed, resources consumed and services provided.
• Incentives to reduce costs. Internal IT departments are challenged to reduce costs every year. Outsourcing solution providers would like to increase their revenues every year. While outsourcing agreements often offer lower rates for longer-term agreements, the solution providers often assume there will be efficiency gains over the term that will actually increase profitability. Be sure to understand current market rates and trends and consider short terms to allow you to take advantage of changes in technology.
• Exit clauses. Carriers should negotiate the support levels and expectations in the event that they choose to exit from the agreement. The data may be yours, but quite often you will need help extracting it if you are converting to a different platform.
One of the few true certainties that CIOs and their organizations face as they plan for the future is that there will, in fact, be significant change emerging. The other thing they can anticipate is that the pace of change will likely accelerate. Although these new challenges may seem to be daunting for some carriers, the reality is that they can also be invigorating while helping to inspire new and different ways of doing things. They can encourage a constructive dialogue around task and skill prioritization. In reality, the future state model may be more about flexibility and having a resource pool and architectures that can adapt quickly to changing circumstances than it will be about traditional human resources measures such as headcount, hierarchical ratios and budgets.