Outsourcing is becoming increasingly popular in the insurance industry. Whether it's IT or call centres, it is proving to be a great solution for those companies that want to concentrate on what they do best. Yvette Essen reports.
If business is booming, it might sound like a strange idea to pass it on to someone else. But more and more insurance companies are doing precisely that. When a firm cannot cope with a sudden rush of calls or wants to concentrate on a particular area of business, one solution is to hand over the responsibility to a third party.
This trend looks set to continue. Outsourcing specialist Capita has recently unveiled plans to target the insurance sector. The company posted record operating profits of £53.1m last year, up 46% from 1999.
A spokesman for Capita, which provides services for 145 Lloyd's syndicates and 70 insurers, says the marketing opportunity for insurance outsourcing services is "substantial".
But this is not a new phenomenon. In the past, it has been the expense of modern technology that has led a company to turn to outsourcing as a solution.
Graham Twaddle, research director of insurance software provider Sherwood International, says the trend will continue. "Insurance companies will start to list all the service areas they have and the costs associated with them.
"They will start with technological services for outsourcing, as they are the hardest to understand and cope with if there is a breakdown.
"It will then dawn on them that some of the services and associated people are expensive and not really value for money. Staff can be better utilised and the services outsourced."
The potential in this market is huge. Zurich Financial Services made headlines in February by entering into consultation with IBM Global Services. Under the proposed deal, 800 of the 1,800 employees and contract staff employed in Zurich's systems development and support capability division will move over to the computer giant's offices to form a jointly staffed and managed "advanced solution centre".
A new structure
A large number of the transferred workers will continue to concentrate on the insurance giant's business, while the remaining will work on IBM projects during the ten-year agreement.
Jane Hewin, Zurich's senior external affairs consultant, says: "We are not an IT specialist company and think we can gain a lot from a collaboration with a supplier like IBM.
"We expect to deliver annual cost savings of nearly £15m through productivity gains and economies of scale."
One of Zurich's main aims is to also "deliver increased responsiveness" by this approach, as it will have faster access to new technologies.
Cost-cutting has other implications for outsourcing. Technology company Cincom has spent the past four years employing staff in Scotland and Cincinnati to make phone calls on behalf of clients in the UK. It has now branched out into India, where the strength of the pound compared to the rupee contributes to the potential savings that can be made.
Najib Hasnain, director of professional services at Cincom, explains: "The biggest cost of a call centre is the people and agents in India are one hundredth of the price compared to London.
"Some companies do not want to make the initial investment capital but need a competitive edge. The best way to do this is to outsource so there is no investment on the building, people or technology."
Firms may look to employ a third party to act on their behalf for other reasons too - for example, if they have launched a product and are suddenly receiving an unexpectedly large amount of enquiries. In these cases, outsourcing is an instant solution.
Others could be putting on a campaign for a few months and may not want the burden and long-term commitment of taking on and training new staff for such a short period of time.
Following the trend
Whatever the reason, outsourcing is definitely catching on. Last Autumn, Royal & Sunalliance (RSA) began outsourcing its accounts payable department to World Network Services, a subsidiary of British Airways. It employs staff in Bombay to recover invoices from third parties.
Paul Atkinson, UK communications director of RSA, says: "The decision to outsource with a global supplier was to ensure service levels from customers and suppliers would be at least maintained, if not improved. Our second aim would be to generate significant cost savings. The relative costs of qualified employees in India is cheaper than here in the UK."
Atkinson adds outsourcing is working so well that RSA is looking at the way other departments function. Its human resources, finance, UK support functions and IT services sectors may also be controlled by another organisation in the future. "We are reviewing them and have made it clear that it is part of our management thinking going forward," he says.
"But in each case we will assess the financial benefits against the services."
For others, outsourcing technology and other areas of the business allows them to concentrate on their core activities.
Andrew Beazley, director of Lloyd's syndicate Beazley, tries to run anything outside of his immediate business like a "virtual existence".
"Everything that does not relate to risk-taking, we tend to outsource," he explains. "We can keep staff numbers quite small and concentrate on what we do, and hopefully do it well.
"To be the best in this field we would need quite a few staff and a huge management structure. But this structure would sometimes come into conflict with what we are meant to be focusing on."
But are there any disadvantages to outsourcing? Hasnain of Cincom says companies may feel they are distancing themselves by passing over key elements of their business to a separate company. "They will lose a bit of control," he says. "But they can have regular reviews and contracts in place."
Hewin of Zurich adds: "We would never want to abdicate responsibility for our IT systems. That is why the deal we are looking to put together with IBM means that around half of our IT employers would transfer to them."
Companies should also be wary about tying themselves to long-term deals. CGNU recently dropped a £124m contract with IBM after two years. It had agreed a seven-year outsourcing deal in 1999 for a data centre in Perth but has since merged with Norwich Union and may now have to pay millions for a penalty clause to end the agreement.
However, Manjit Rana, head of insurance e-business at ICL E-innovation, believes there are ways to find a trusted third party.
"Look for a supplier that puts the people first," he advises. "If they are put last then this introduces business risk. Ask the supplier if it has a high staff turnover.
"Also beware of the cheap supplier. A message of delivering a better service for the same money is preferable to just driving down costs.
"Also, a company that tries to drive you into their rigid way of delivering service, saying `We know best, trust us', should be approached with caution," he adds.
"It isn't difficult to design a service to match the way the client wants to do business."
Ian Bullen, insurance market managing director at Sherwood International addresses frequently asked questions about outsourcing.
Q. What elements should be outsourced?
A. Decide what is the core component of the business. If the company is good at claims, hold on to that speciality but outsource something else, like information technology.
Q. What do you need to bear in mind when considering outsourcing?
A. Consider the situation if you wish to insource some time in the future. What if you want to terminate the agreement - how will you be able to bring those skills back in-house?
Q. Is outsourcing expensive?
A. It is effectively like buying a business and can involve huge sums of money or a large number of people. You would need a clear idea on budgets or levels of service to be delivered.
Q. How will this affect my already existing staff?
A. If you are transferring staff, consider the terms and conditions of any agreement. There is a potential for job losses and be concerned about the outsourcing company's future. Also, if staff have been working for a very good firm, will they be happy working for a smaller IT company?
Q. How do I find the right outsourcing company?
A. Ask the following questions when trying to decide on the right company for you: does it have a good track record, will it understand your business, has it got financial stability and does it have the financial muscle and reputation to exist in a few years time?
Also make sure your outsourcer is going to continue to invest in new technology in the future.