What can the insurance profession learn from other business sectors? Insurance Times teamed up with IBM to find out. BP has been outsourcing for 12 years and is recognised as one of Britain's leading exponents of outsourcing. In the first of a series, we invited finance directors from general insurance companies to quiz BP about outsourcing
BP started outsourcing in 1991. The first function to be given to a third party was its exploration accounting - invoicing and paying for services related to oil. This was followed by IT, payroll, pensions and seven other functions.
Many of the functions are outsourced to central facilities in Rotterdam, Lisbon or further afield.
Why does BP outsource so much? BP European project director Tony Cowsley says that selling petrol and oil is a volatile business.
"Just look at how the price of oil has moved over the past few weeks and months," he says.
"When prices are low, fixed costs can become burdensome. So it is far better to have the flexibility to cut your cloth, and outsourcing allows you to do this," he says.
"We do oursourcing for strategic reasons. It enables us to focus on core functions. It also helps to make the integration of non-core functions easier and allows acquisitions to be absorbed quickly," he says. "We have been surprised by what we can do."
Once you have made the philosophical commitment to outsource, says Cowsley, then you have to consider what can and should be outsourced and what remains in-house. "At the core of BP are functions like geology, drilling and marketing," says Cowsley.
"The other consideration is judgment and policy. These things we keep in-house," he adds. "For instance, 90% of a tax return is organisation: where is this receipt and that invoice. Only 10% is judgment.
"It is amazing how much in finance and accounting we like to think is judgment," says Cowsley.
Customer relationships are also vital considerations. "Some acquisitions had a problem in believing that functions like accounts payable could be outsourced - mainly because it was a key customer touchpoint," he adds. There are three possible models:
So what's the difference between successful and unsuccessful outsourcing? "Clarity of purpose," says Cowsley. "Whether both of the parties clear about the desired outcome," he adds.
"Once the decision to outsource has been made, it can be up and running in six to seven months," says Cowsley.
"Once you have decided to do it, the key is to do it quickly, otherwise people can lose faith. You need to manage internal stakeholders well."
"One of the key lessons learned is that it is vital to have a couple of BP people embedded in the outsourcing operation (or simply available) in order to help the third party find out who the right people to talk to are within our organisation," he says.
How do you stop providers promising the Earth? "Well at BP, we have to demonstrate that 90% of value has been captured by any deal. This means a thorough assessment of the returns and efficiencies every year," he says.
Where is the real value of outsourcing? Is it actually that the processes are examined more closely and then re-engineered or is it simply that employment costs are reduced? Cowsley reckons that 60%-70% of the value is due to labour arbitrage.
There are also quality benefits. "We have 550 people in four centres doing what 700 people were doing in many different centres. We can get a 30% cost saving on labour and our auditor says our accounting is in the best shape it has ever been in," says Cowsley.
"Outsourcing is great for getting accounts standardised, but the problem we have then is trying to make sure that the information our businesses give to the third party helps produce standard accounts," he adds.
"Also you can see your own inefficiencies so much quicker than when you hold the process in-house.
"For example, a third-party will come and tell you about people doing daft things like raising invoices for 54 cents, or whatever."
Why have insurance companies been late adopters of outsourcing?
Andy Baldwin: There is a paternalistic culture. So there are emotional objections to letting some of your own staff go and work for a third party. Also, insurers traditionally have a procurement stance.
They are not used to managing strategic outsourcing deals and multiple service providers.
David Gittleson: Regulation is also a driver. This demands increased standardisation and that means companies making strategic decisions about putting these functions into accounts factories.
Tony Cowsley: Choosing to outsource is a huge emotional decision. There are a lot of issues to manage, such as people, press, and unions. It is not a natural behaviour. But once you have got over the initial decision, the rest can be overcome.
Peter Hutchinson: The industry's historical focus hasn't always been on costs: it's been on other things such as claims and customer service.
Steve Hardy: Outsourcing is not in Churchill's objectives. We will offshore, but not outsource. It is not part of our culture. We can differentiate through service and we don't want to let that go. As we grow we may do it, if cost is right and service is better.
Baldwin: What is starting to change is the market. In the UK life and pensions industry there are about 20 really big deals on the table right now.
These companies have been forced to consider outsourcing because they have to reduce cost bases.
Companies in property and casualty, especially personal lines, are also facing expense ratio pressures. I can see that many have started to use third parties for overflow work and out-of-hours operations.
Hutchinson: Efficiency is now more of a concern to Royal & SunAlliance. The need to be profitable is much more important now and we will pull out of unprofitable areas. If you have a fixed cost base, scaling up or down is more difficult. Outsourcing gives flexibility and variability of costs; it enables us to shrink our cost base.
Hardy: It wasn't long ago when we had stand-alone finance in every bit of our business. We have aimed at centralised shared service centre. We have a centre in India, but it is very much a Churchill operation rather than a third party operation.
Baldwin: There is a standard pattern to what kind of functions companies outsource first and then what comes next. What we are finding is that technology and experience are driving that faster.
Hutchinson: Companies experiment. They dip their toes in by outsourcing utility-type functions, then when you've proved the concept you start to move on and become more ambitious.
Gittleson: Indeed, cost pressures in the market mean that there are some very ambitious plans, with companies looking to outsource things like management information. As long as companies retain policy and decision-making, it doesn't matter where management information is processed.
Hardy: When it comes to intellectual capital, there are difficult decisions. For instance we would feel very uncomfortable about having a third-party prepare our FSA returns.
Hutchinson: Technology has been the enabler because it has opened up big low-cost labour markets like India. First, companies looked to move from London to, say, Scotland. Now there are the Philippines, India and China - one is almost spoilt for choice.
Cowsley: It is reported that telephone systems in India are actually more robust than in Southern Europe. We can prepare a brief of shared objectives and how service should look in two to three days. Managing the internal stakeholders is the most difficult part.