Last week, a relatively unknown company called Xchanging was awarded one of the most lucrative deals in the insurance industry. The deal is to manage and drive foward the merger of the Lloyd's Policy Signing Office (LPSO) and the London Processing Centre (LPC).

The choice of Xchanging induced a mass eye-brow-raising moment in the insurance industry. “Who the hell is this company?” some asked.

The firm was created at the start of 1999 with most of its equity funding coming from General Atlantic Partners. To date it has 25 staff with skills spread across service, processing, technology, human resources, administration and accounting. Its first and – until now – only customer was British Aerospace (BAe).

At Xchanging's helm is a sharp-witted, confident management consultant called David Andrews. Andrews' colourful CV includes stints managing the refurbishment of Zaire's healthcare service, and qualifications as an accountant and economist.

Andrews was also with Andersen Consulting where he oversaw the installation of new systems for both the London and Frankfurt stock exchanges.

But the task ahead of the Xchanging boss will not be easy. The complexity and variety of insurer, syndicate and broker systems will prove to be a challenge in its own right. And Andrews will also have a tough time convincing sceptics of Xchanging's credentials.

“They're a load of consultants from Ernst & Young,” said one Lloyd's gossip. “They all left Ernst & Young and formed this new company, Xchanging. Got the deal with Lloyd's with no tender. Other technology firms are going up the well. Old boys' act.”

These claims are grossly unfair.

Yes, Andrews is a consultant, a very good one, who founded Andersen Consulting's profitable outsourcing division. He also ran Andersen Consulting West Europe, transforming it from the group's least-profitable region to most-profitable region. He has never worked for Ernst & Young in any capacity. He is also Xchanging's only consultant. No one at the firm has worked for Ernst &Young.

“Xchanging is very different to consultancy,” Andrews says. “We are do-ers, not advisers. Our model is a very capital-intensive model, that requires our active involvement.”

There is, though, truth in the claim that there was no formal tender process to merge the two processing bureaux.

Andrews says: “I don't know about that, you'd have to ask Lloyd's and the International Underwriting Association (IUA).”

A spokesman for Lloyd's admits there was no formal tender process, but says that more than 50 firms were reviewed, and eventually whittled down to a short-list of three. Xchanging won.

New model

In Xchanging's defence, joint ventures are very often secret deals arranged between two parties that share an interest in a successful outcome.

The key to the Xchanging business model is that it creates joint ventures with its business partners. The company commits investment funding to a project in return for a share of eventual profits. It has a great deal of interest in the success or failure of the ventures it backs. Xchanging is hard to define as a company but seems to lie somewhere between a venture capitalist, software integrator and installer and consultancy.

In this particular deal, Xchanging is ploughing $25m (£17.2m) over a five-year period to make the LPSO/LPC a profit-making business. The firm and its backers, General Atlantic Partners, have a vested interest in success.

Andrews says he wants to double the costs of the offices (not as mad as it sounds if revenues increase at a steeper rate) from $50m (£34.4m) to $100m (£68.9m) in five years time.

He sees significant revenues from untapped markets in the US, Europe, and Asia Pacific. At the moment the two processing offices handle revenues totalling around $20bn (£13.8bn). They process around 13 million transactions a year.

New identity

On a combined basis, the LPSO and the LPC have 220 clients who use their services to some extent. Andrews wants to increase the number by at least 50 and wants to greatly extend the services on offer.

“We are looking to identify opportunities,” says Andrews. There are 15 to 20 areas we are looking into. Over the next couple of months McKinsey will help us deepen our understanding to help us look for opportunities. We will look globally, and we will look at related areas.”

Over a ten-year period, Andrews expects Xchanging to build ten such partnerships with blue chip firms and “super tanker” type organisations. Ultimately, the firm expects to have between 10,000 and 20,000 staff under its control. Andrews anticipates overall revenues of between £1bn and £2bn within ten years.

With the LPSO/LPC and BAe ventures, Xchanging is managing 2,000 staff. Andrews says there will be no redundancies following Xchanging's appointment. If anything, numbers are likely to grow.

“We have a real determination to succeed. There is a lot of enthusiasm on all sides, and a sense of genuine excitement that Lloyd's and the IUA will create a joint processing service that's as big – or bigger – than anything else of its kind in the world,” Andrews says.