John Worthy discusses the key steps to successful outsourcing.
Business process outsourcing (BPO) is one of the major business trends in the insurance sector, with significant growth expected this year. Leading players such as Royal & SunAlliance, Zurich and Norwich Union have closed deals over the last year or so.
At a time when margins are under pressure, many insurers are looking at the benefits of outsourcing processes such as customer relationship management (CRM), claims processing and regulatory reporting.
Why outsource business processes?
For many, the reasons for outsourcing will include a desire to focus on core activities and to control costs, possibly linked to ensuring favourable balance sheet treatment. The commercial drivers may also include managing service delivery, improving performance and access to new technology. Whatever the underlying motivation, the commercial objectives will affect how the transaction is structured and negotiated.
The appropriate pricing structures for an outsourcing deal depend heavily on the commercial drivers. Among the key issues here are:
- How will the prices be determined and how far can the prices be defined at the outset?
- What costs are passed through to the insurance company?
- How will the impact of changes on certain costs to the supplier affect the price to the insurance company?
- How far is the supplier to be offered incentives to share the outsourced resources with other customers?
- How will the pricing be market-tested and when?
A BPO deal will often stand or fall on the quality of the service level agreements (SLAs). It is not always easy to document these precisely, but nevertheless essential to a successful relationship. Much will depend on how far the outsourced processes are interdependent with the retained processes. If the outsourced processes are relatively self-contained, such as a claims call centre, the analysis should not be particularly involved. However, where the retained activities are more closely intertwined, such as outsourcing underwriting support for bespoke commercial policies, the links must be carefully managed.
However these issues are resolved, the insurance company will often look for the services to be output-based, in which case the supplier will need to be confident that it can manage the risks associated with ensuring delivery of the service, (rather than simply the operation of the outsourced assets or systems).
The insurance company will typically expect to see a suitable performance incentive and service credit regime incorporated in the SLAs. It will also wish to ensure that it has the practical ability to monitor and manage the service delivered by the supplier. In addition to any performance incentive/service credit regime, the insurance company may wish to have the ability to step in to operate the service itself in case of an extreme failure of service or an emergency.
Regulatory matters will need to be addressed, including the relevant parts of the FSA's handbook which relate to outsourcing. In addition, where personal information is processed, data protection issues will need to be taken into account.
John Worthy can be reached at jnw@dentonwildesapte.com or on +44(0)20 7320 6354.
