A Few Good Tips to Consider on Outsourcing

By | November 18, 2019

I honestly do not see many agencies benefitting from outsourcing. They think they do, but their results show otherwise. Most of the time, they would be more successful simply with better management as outsourcing is not a solution for inadequate management. In fact, outsourcing is quite often just camouflage for the failure to think through internal opportunities and/or the failure of managerial accountability. In other words, instead of dealing with a required reorganization or developing better procedures or eliminating problematic employees, management just outsources work hoping all those other issues will go away.

Outsourcing is not the solution in those situations. Being a better leader is the solution.

If you are going to outsource, here are a few good rules:

1. Determine first if you really need to outsource. Consider whether a better management solution exists. For example, outsourcing to carrier service centers. In most cases agencies can create better processes and/or an internal service center that will outperform the carrier service center virtually every time, provided management will back the required structural changes. It is interesting how most of the time management does not make decisions based on what option most benefits the agency financially and structurally, but on the basis of what requires the least amount of emotional stress.

2. Read the outsourcing company’s contract and understand what the contract says and does not say. Read and discern what is not in the contract in addition to the actual verbiage. What is not in the contract is often more important than what is in the contract.

3. Pay particular attention to the limits of liability. Quite often a provider will state they have $1 million in E&O coverage. However, is that $1 million per occurrence? Aggregate? What if there is a cyber event involving 50 agencies? If that is one occurrence, how much of the $1 million do you get?

Just because they have $X million in E&O coverage does not mean:

a. That your claim against them is an E&O claim. How much in GL and cyber do they carry?

b. Some of the contracts have a limit of liability of $50,000 regardless of how much E&O insurance they carry. A big difference exists between $50,000 and $1 million!

4. Read the cyber requirements and know this:

a. Is the contract and vendor itself in compliance with New York and California, and if offshore, international cyber security laws?

b. What is their security?

c. Does any part of the contract put their cyber security responsibilities onto you, the client? Regardless of how unfair such clauses are, quite a few providers do this today.

5. Around March 2017, China passed a security law that “compels firms to participate in intelligence gathering when the Party (the Chinese Governing Party) asks them to. Since November [2018] the police can enter the offices of any Chinese internet-services provider to copy data deemed relevant to cyber-security.” The Economist, April 27, 2019

In other words, know the privacy laws of your outsource provider’s host country.

6. Review your E&O policy. Does it provide coverage for mistakes made by outsource firms? Quite a few E&O policies have specific limitations as to where outsource firms may reside for coverage to apply.

7. Do not substitute outsourcing for technology. In other words, consider whether enhanced technology is a better solution. Some of the technology that exists for agencies today (or will very soon exist) offer far better solutions than using specific outsourcing firms.

8. If you outsource, have a clear training plan, development plan, and workload plan for your employees. I continually find employees doing the same work post outsourcing as they were doing before any work was outsourced. No savings occurs. Outsourcing works best (excluding temporary situations or for part-time expertise) when the lowest level of work is exported and the employees’ work is elevated to higher quality, more complex tasks. Do not export until the strategy is locked and ready to go.

9. Do not forget sales outsourcing such as leads. Many agency owners do not see this kind of outsourcing as “outsourcing,” but it is. If your producers do not have to develop their own leads, then make them share in the cost of developing leads for them.

The greatest opportunity for proper outsourcing is in executive functions such as specific operations elements like file audits, straight accounting and IT for smaller organizations where the agency cannot afford full-time expertise but needs expertise nonetheless. These are examples where outsourcing can bring significant benefits for a long time.

Another good example of proper outsourcing is for temporary situations and part-time situations. Outsourcing at least one of these duties is quite often the best outsourcing ROI of all.

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.

About Chris Burand

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com. More from Chris Burand

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Insurance Journal West November 18, 2019
November 18, 2019
Insurance Journal West Magazine

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