Matthew Vallance says a better understanding is needed of what business operations can be outsourced and where.

In a period of economic downturn, companies are being forced to look harder at their business operations for areas where cost cutting and productivity improvements can be made. Many UK financial services companies have experienced the benefits of outsourcing non-core business processes by working with specialist outsourcers with specific financial services expertise.

By outsourcing within the UK, organisations have been able to achieve double digit cost savings and significant process improvements. And by outsourcing offshore, even greater costs savings can be made and quality standards and process improvement methodologies can be readily adopted. Like-for-like operating costs in India, for instance, can be less than half of UK costs.

Some insurers have outsourced business processing work, like applications and claims processing, and seven of the top 10 general insurers have moved processes offshore. But, generally, uptake of outsourcing has been patchy across the insurance sector with some insurance companies wholeheartedly embracing the offshoring model and others reluctant to outsource.

The situation is changing. In the past few years, there has been a steady build up of pressure on insurers to cut costs and improve operational efficiency and, at the same time, retain and grow their customer bases. Margins are shrinking, claims pay-outs rising, and competition intensifying. Increasingly, insurance has become a market defined by commoditised products, with the power in the hands of consumers who are able to change policy at the click of a mouse.

Outsourcing has been rising up the corporate agenda. A recent report from Forrester Research showed that in the second half of 2007, the value of outsourcing contracts in Europe, Middle East and Africa increased by £724.2m, year-on-year, with the UK being responsible for the lion’s share (36%) of the deals, and the insurance and financial services sectors seeing the greatest growth.

The Indian market has also been expanding with strong growth forecast over the next five years. By 2012, the insurance sector is anticipated to be worth $20bn –$30bn (£11bn – £16bn), the country’s second largest outsourcing sector after banking and capital markets, according to Nasscom and Everest.

However, in recent years, the choice of regions offering high quality outsourced services has increased and now includes Eastern Europe, Latin America, South Africa, South East Asia and China.

This globalisation of the outsourcing industry offers insurers the opportunity to develop a ‘right-shoring’ strategy, built on using the best resources for a particular operation, wherever they may be located around the world. The decision-making process is complex and requires in-depth analysis of a range of issues including potential outsourced services, costs, available skills sets and political risk.

But, done properly, right-shoring offers insurers the opportunity to benefit from business process re-engineering that not only delivers sustained cost savings, but also improvements in operational efficiency. This can translate into better customer service provision and the ability to rapidly scale resources to meet spikes in demand, such as during the marketing of new products.

There are different options, but companies that want to keep phone-based contact with customers onshore could use an offshore operation for back-office processing to reduce cost and process time, and improve the flow of information to customer agents. Leveraging this strategy, some companies have been able to cut turnaround time for back office processes from 10 days to two days and substantially enhance the quality of their customer services.

The insurance industry is likely to witness an increase in the range of right-shoring contracts adopted, as insurers respond to the realities of the declining macro environment. With more choice of outsourcing options, together with economic drivers towards cost cutting and efficiency improvements, insurers may find that outsourcing becomes an increasingly attractive business decision.

Matthew Vallance is president of Firstsource Solutions