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Table of Contents

Dr. Christian Baader of SAP

What U.S. Insurers Can Learn from their UK Counterparts

How Service Management Software Solutions Enhance Outsourcing Relationships

Outsourcing the Replacement of Core Banking Systems

Salt Lake City Airport's Gift Shops Cut Theft, Improve Inventory Control Thanks to Hosted Solution

Buyer's Influence on Provider Spurs Both to Greater HRO Success

Sabre Tests Strategic Offshoring with NIIT Technologies, Then Opens Captives Around the Globe

Billing Strategies for Innovative Business Models: How Boring Old Billing Could Be the Competitive Advantage You Never Knew You Had

Supplier Corner: Helping Companies Buy Better

How to Make Indirect Procurement Outsourcing Work Effectively

Process Improvements Without the Pain

Upgrading Your ERP System is Not Just a Technology Decision

Beyond Labor Arbitrage: Achieving operational excellence through business process outsourcing

Recipes for Bundled Finance and Accounting Outsourcing

Developing Your Software Testing Strategy

Spelling 'Value' from the Alphabet Soup of Quality Frameworks

Developing a Vision for Windows Vista Roll-Out

Blazing a path into new territories holds risk. At best one suffers the occasional misstep with the associated loss of time and momentum. At worst one falls into a pitfall and does not survive the experience.

Followers of these early adopters have the advantage of learning from their predecessors. Fortunately for the United States -- indeed global-insurance companies -- their UK counterparts have much to teach their colleagues about the advantages advantages and risks of offshoring. This article outlines the progress of UK insurers in leveraging offshoring and/or outsourcing and should assist other insurance companies in charting their offshoring strategies. They don't have to repeat their mistakes and can instead leapfrog over that part of the learning curve.

The financial services industry was one of the largest and earliest adopters of offshoring services. Offshoring worked because of the dual emphasis on maximizing the efficiency of their IT infrastructures and BPO transactions and cutting costs.

The UK story

UK insurance companies faced significant bottom-line pressure in the early part of this decade. Many key insurance executives followed the early lead of GE, HSBC, and others and realized that sending work to lower-cost countries was an important element in an integrated cost reduction programme. That led to a significant adoption in the UK insurance industry, e.g., RSA announced the outsourcing of 1,500 jobs in 2003 and the offshoring of a further 1,000 the year after. The primary functions UK insurers offshored are claims processing, finance and accounting, customer service, and IT.

Today, all the large UK insurers send work offshore. The top four insurers have more than 15 percent of their staff offshore; the leader, Norwich Union, has 24 percent of its staff offshore.

Most UK insurers have used a combination of captives and third-party service providers. For example, Prudential UK has a captive in Mumbai, India. It also outsources to Capita and Wipro.

The companies tested the waters slowly. First they transitioned basic back-office processes such as claims processing and policy renewals offshore. As the comfort levels grew, the insurers let their captives and providers handle more complex processes.

For example, insurers are starting to offshore processes such as actuarial analysis, fraud detection, and customer analytics. This reflects a coming of age of offshoring in the insurance space -- these new processes are much tougher to offshore, as they require both significant domain and technical knowledge.

Offshoring benefits

Offshoring has clearly been a success for UK insurers. Many including the leader Aviva have announced plans to expand their offshore presence.

The cost savings are there. The Everest Research Institute reports offshoring typically saves 40 percent in the financial services arena. The top four UK insurance offshorers have all reported savings in the 40-50 percent range. Some companies have taken these savings all the way to the bottom line, which is reflected in their operating costs-to-premium ratio, a key indicator of efficiency in an insurance company. Others have reinvested these by redeploying staff to improve customer service and risk management.

Better quality is there, too. An Everest Research Institute survey in 2007 found more than 60 percent of buyers surveyed reported productivity improvements from offshoring. UK insurers report faster cycle times for claims, for example.

Offshoring risks

Every business decision has risks. Companies new to offshoring are typically most concerned about factors such as political instability and loss of intellectual property. However, the areas that most commonly cause issues are weaknesses in controls and inappropriately managed PR.

UK insurers are today most concerned about two areas. The first is voice. While UK insurers continue to offshore voice processes, some have repatriated certain processes that require a lot of empathy and understanding of the cultural context. For example, Aviva repatriated the First Notification of Loss process for its home insurance business in response to customer feedback. They learned that a customer whose house has sustained significant damage has just undergone a lot of stress and is expecting a lot of empathy when they first report the loss. Locals seem to have a more intrinsic understanding of the situation.

The second risk is wage inflation in India. That wages in India are rising is a well publicized fact. However, a holistic analysis of labor arbitrage must also take into account inflation in the source country as well as movements in foreign exchange rates.

Everest Research Institute calculations predict that the labor arbitrage is sustainable for the next 12 years under the most pessimistic scenario: if the Indian rupee appreciates at 2.5 percent a year and cost inflation checks in at 15 percent.

More likely, the cost inflation will only register at 10 percent, as other countries mature as well as alternate locations in India mature. If that happens, it will take 18 years before Indian labor rates reach within 60 percent of the UK's.

Lessons for U.S. insurers

The current credit crunch is putting significant pressure on insurance company financials. AIG recently announced $30 billion of losses and write downs because of the credit crisis. In the prevailing market conditions, like it or not, insurance companies will have to offshore to remain competitive in today's tough times.

Lessons from the Outsourcing Journal:

• Global insurance companies can learn from their UK peers that have pioneered the use of offshoring to cut costs and improve quality. They have the luxury of leapfrogging over this part of the learning curve.
• UK insurers have proved that both simple transactional processes as well as more complex ones have worked well from offshore.
• There are two worries: determining which voice activities to send offshore and maintaining a labor arbitrage advantage. Careful thought needs to go into which voice processes companies should offshore. And labor arbitrage won't be an issue for more than a decade.
• Most UK insurers have set up their own captives as well as sent work to third party service providers -- both models clearly work.

Publish Date: June 2008

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Copyright © 2008 - Everest Partners, L.P.

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