At first glance the offshore outsourcing option seems like a no-brainer, right? The labor arbitrage alone promises to cut your human resources expenses drastically and for insurers-most of whom don't even measure on the CMM level scale-the quality of services offered is far superior to what can be achieved in-house.
But don't go beating down your boss' door with promises of cost savings in the 50 percent range just yet. First, consider the reality that companies have just broken even despite 40 to 50 percent labor savings, according to the META Group (Stamford, Conn.) study "Offshore Outsourcing Subtleties." If this news comes as a shock, just imagine the reaction of senior management after the delivery of the first year's results. But theirs won't be the only reaction that you'll likely lose sleep over. As the political debate over the practice brews, consumer backlash and the possibility of legislative restrictions must also be taken into account.
Certainly, the idea of sending functions offshore isn't exactly an innovative one. If you have not yet jumped on the bandwagon, your competition doubtless has. Fortunately for all levels of expertise, whether you're new to the game, taking a second stab at it or are a more seasoned player-it's not too late to optimize your offshore results.
Success depends on understanding the rules of the game so that you can manage expectations accordingly. No matter your position, experts stress that it is crucial to consider everything from the hidden costs associated with outsourcing right on down to your own organization's CMM level. Even insignificant-seeming factors can have a drastic effect on your productivity and cost-savings realization-which, according to Dean Davison, vice president, META Group-will be modest in the first year of an initiative, no matter how well-prepared you are.
Underestimate Your Savings
In fact, most organizations experience a 20 percent decline in productivity during the first year of an agreement, largely due to time spent transferring knowledge to the vendor, according to the META Group study. "In an offshore situation there is a certain amount of process that has to be done the same way," contends Davison. "Once the vendor and client get aligned and streamlined they will be able to work together much more effectively, and that has a great implication for cost."
Although it seems a bit disappointing, this projection is not all that grim. CIOs should take heart in the fact that most insurers see savings around 25 percent in their first year of outsourcing offshore, relates Ram Mynampati, head of the insurance and financial services practices of offshore outsourcing provider Satyam (Hyderabad). "As both parties mature, cost savings of 40-45 percent are not unreasonable in the second or third year," he says.
Just ask New York-based Guardian Life Insurance Company ($34.1 billion in assets). The insurer that has been outsourcing IT functions to India since 2000. Currently the underwriter is saving $12.5 million annually on IT maintenance and support and new application development. Shelley McIntyre, second vice president, business technology services, Guardian Life Insurance, reports that the insurer's strategy involves two primary outsourcing partners on the IT side: Patni (Mumbai) and Covansys (Farmington Hills, Mich). Additionally, the carrier has a small geographic risk mitigation relationship with the outsourcer NIIT (New Delhi) for work that is done in both Singapore and Canada .
Although Guardian is one of the most experienced outsourcers in the insurance industry, like the average carrier, it is realizing only modest results with one of its newer offshore relationships that involves data entry sent to India. "On the business processing side the [data entry] deal is still very small so the dollars saved aren't significant yet," concedes McIntyre, who reports 20 percent savings.
CIGNA (Philadelphia, $56 billion in assets under management)-one of the "greener" outsourcers-is in a similar boat. Spokesperson Joseph Mondy concedes that, currently, the carrier "just has its toe in the water," employing the use of about 50 offshore consultants from Satyam for between 20 and 30 application management projects. He relates that "CIGNA expects cost savings to grow as our relationships with offshore vendors grow." And once the carrier gains experience with these deals it will expand the breadth of its relationships.
Still, "one of the advantages of our relatively late entry into offshore outsourcing, is to learn from the missteps of others," relates Tim Montgomery, vice president, offshore program, CIGNA Systems. "It has helped us in our approach to assessing costs and benefits."
Offshore outsourcing provider Patni (Cambridge, Mass.) aims to educate carriers about similar lessons before they've made a commitment to the practice. J.S. Rao, insurance practice lead, Patni, explains that the provider hosts free vendor-neutral workshops that have been attended by carriers including Guardian.