The Evolving Character of Technology Outsourcing

Perhaps it’s time to replace the word “outsourcing” with a new term. This might be especially appropriate for some of the technology outsourcing options available to the insurance industry today.

To some, the word “outsourcing” is synonymous with turning over responsibility, or perhaps loss of control. When it comes to technology, there’s the concern that vendors may have the necessary technical expertise, yet lack sufficient knowledge of the insurance industry. While true in some instances, many outsourcing providers have evolved to better meet the industry-specific needs of the customers they serve. Used to proper advantage, outsourcing might well be called “strategic partnering.”

To stay competitive in the current market, carriers, agents and brokers need the economies of scale that outsourcing technology provides. Whereas outsourcing was once viewed mainly as a tactical measure to free up employee time on specific tasks (e.g., printing and distribution of policies, handling of payroll, etc.), it is now appreciated as a means to achieve long-term strategic objectives. For the insurance industry, outsourcing technology has become critical to the pursuit of competitive advantage and profitability.

A major catalyst to the realization of the potential offered by outsourcing has been the Internet, specifically the application service providers (ASPs) who host Web-based technology solutions on a pay-as-you-go basis. The Internet, which can augment and even replace in-house IT capabilities, is bringing more carriers, agents and brokers to the outsourcing table.

Acceptance was slow but inevitable
Although the advantages of outsourcing technology have long been appreciated by many businesses, the insurance industry was not inclined to beat a path out the door. Entrusting proprietary data to outside sources met a natural wall of resistance. For this and other reasons, many in the industry have been reluctant to embrace the concept of outsourcing in general, and especially the idea of using Internet-related services.

The short-lived heyday of the dot coms created a misconception that the Internet itself is vulnerable. To the contrary, the Internet is a distribution channel that is simply as good or as bad as the products and services that make use of it. Still, many carriers and agents have been hesitant to put full faith in the unlimited potential it offers. After all, the core of the insurance business is evaluating risk, and the Internet is still viewed by some as unproven ground. Nonetheless, its efficiencies are hard to ignore.

Some agents, for example, have made the switch from in-house agency management systems to traditional outsourcers or ASPs to take care of the maintenance and other problems that often accompany internal computer networks. The choice has been more complex for carriers, especially the larger ones who for decades have relied on their own automated resources and systems. As years went by and the systems were augmented, the architecture grew so intricate (and the investment so great) that the option of using outside sources to reinvent the processes seemed too impractical and costly. Ironically, it was their early adoption of technology that left many large insurers flatfooted in the past decade, when smaller and more nimble carriers, having more of a clean tech slate, were quicker to take advantage of efficient, outsourced technology.

The simple fact is that outsourcing technology is often the clearest path to competitive advantage. Competition is creating the urgency to implement the economies of scale that are provided by outsourced technology. Greater efficiency and faster time to market are critical. These demands require the lightning speed of paperless processes, networked operations and Web-enabled services.

Technology providers must evolve
Technological reluctance is not completely attributable to the insurance industry’s side of the equation. There has also been a learning curve for the technology vendors. In some of their initial efforts, the various business processes of clients were not brought together in a cohesive fashion, leaving large, unanticipated gaps in functionality. Often, clients had to change procedures in order to fit the technology. Costs would rise as fixes were implemented. Further, the technology and functionality did not always address the actual business need. While this was often a function of the limitations of the technology, it was sometimes a matter of unclear objectives set forth by the purchaser.

Today, the outsourcing providers who are finding success are those who understand the golden rule that the customer’s business drives the technology. They also offer the necessary 24/7 service to accompany it.

Given the heightened interest to find ways to leverage the Internet for true business benefit, the new breed of outsourcer, the ASP, is gaining increased recognition in the insurance industry. ASPs provide a unique and powerful combination of the benefits of traditional outsourcing with anywhere, anytime access offered by the Web and the flexibility of pay-as-you-go pricing. Using the Internet as a wide-area network, ASPs remotely host and manage a variety of applications, providing real-time communication and collaboration. With popular applications ranging from underwriting, claims processing, claims litigation management, agency management and policyowner services, the ASP, much like a traditional outsourcer, invests millions of dollars to develop the solution, saving the customer the expense as well as the time. For example, a claims system could take 24 months to five years to develop, depending on the size of the insurer, versus typically 60 to 90 days to be up and running with an ASP. ASP customers have the benefit of making full use of applications that have already been tested and refined, without investing in their own software, IT support systems and other internal resources.

Unlike other outsourcing options, ASPs offer greater flexibility in pricing arrangements, limiting the customer’s commitment and risk. Because the customer can ultimately “pull the plug” and walk away if dissatisfied with the product and service, the ASP is compelled to provide ongoing top-notch support.

Selecting the right partners
When you decide to include outsourcing as part of your business strategy, begin with a review of the core competencies within your organization. Many prefer to retain in-house control over the processes that differentiate them from competitors and outsource the “non-signature” activities.

In selecting a provider, ask about the client service staffing: Are they experienced in the type of insurance products/services they are selling (e.g., if the provider is an ASP with a claims management application, are they staffed with former claims personnel from the insurance industry)? You want service people who can speak your language and effectively translate your needs to their technical counterparts. Be clear about what your needs are and discuss how the provider will meet those needs. It’s much like hiring a candidate for a job, in which you’ve predetermined the job function, the required skills, the objectives that must be reached and the necessary credentials to perform satisfactorily. Probe for complete and clear answers to questions such as: How long will it take to have each capability fully functional? How will our processes and customers be affected? How will our staff be trained to use the new systems? Is 24/7 service provided? How will upgrades and new software functionality be handled as business needs change? And in a worst-case scenario, what will happen to our service and software should the service provider’s business fail?

With Internet-based applications offered by ASPs, make certain that security is uncompromised. Be sure that password protection restricts data to authorized users. Insist upon the highest level of encryption allowed by the federal government, and a server with multiple levels of security for facility, network, data and application.

Finally, do not be daunted by the sheer number of outsourcing alternatives. Determine first what the outsourcing must accomplish, and this greatly reduces the field.

Carriers, agents and brokers who cultivate strategic partnerships with technology providers are redefining “outsourcing.”

Topics Carriers Agencies Claims InsurTech Tech Market