IT Outsourcing: An Overview of Current Trends and Key Issues

Though IT outsourcing allows insurers to effectively staff transformational initiatives, it’s no panacea—and it comes with its own set of unique challenges.

(Image credit: Gerd Altmann.)

Insurer IT leaders have long been leveraging outsourcing as a tool to meet evolving business demands. Many view outsourcing as a cost savings measure while others look to outsourcing for greater flexibility in resources. Though IT outsourcing allows insurers to effectively staff transformational initiatives, it’s no panacea—and it comes with its own set of unique challenges.

Current Uses and Business Drivers

While many carriers turn to outsourcing when taking on transformational projects, some do so as a result of an enterprise-wide decision to permanently offload some portion of their IT functions to an outsourcing partner. Insurers currently outsourcing at relatively low levels were more likely to cite transformational programs as a reason to outsource; those outsourcing at moderate and high levels were more likely to cite the ability to scale to demand and cost as driving factors behind outsourcing. In the face of stagnant IT funding levels, some insurers are making the strategic decision to use external resources to meet shifting business demands. 

Future Plans and Reasons for Change

In aggregate, future plans of insurers tend to push outsourcing levels towards moderation; insurers currently outsourcing at lower levels plan to increase whereas those outsourcing heavily plan to pull back. The driver behind outsourcing efforts evolved from cost—a popular initial driver—to other outsourcing benefits, including the ability to scale to meet demand and access new technologies. Insurers experienced with outsourcing reported that cost savings (in hourly labors rates) are not only less substantial than imagined, but also less of a critical need when compared to other operational benefits gained through outsourcing.

Managing the Relationship with Partners

Insurers are advised to recognize their own role in deriving value from outsourcing. Some insurers have reported difficulty in communicating requirements effectively to outsourcing partners. Measuring and managing outsourcing partner performance was another challenge; many insurers viewed their own abilities to be lacking in this area. As a best practice, insurers should measure everything from the on-boarding process to first-time call resolution. Maintaining a strong approach to measurement is a critical element of building a successful outsourcing relationship.

Insurers are also advised to actively and thoughtfully manage their outsourcing engagements, particularly when outsourcing heavily. Preventing scope creep and overrun is paramount when outsourcing at high levels. Oversight and strong management paired with a defined set of key performance metrics can go a long way to ensuring relationship success.

Outsourcing can help insurers tackle demanding transformational programs by providing more staff, new technological skill sets, and greater flexibility in resourcing for varying business needs. However, insurers are cautioned to remember that outsourcing isn’t a silver bullet. As is the case for any other full-time on-premise employee, onboarding, training, and active performance monitoring must be consistently done to ensure derivation of an outsourcing partner’s true value. Effective outsourcing requires substantial time and enterprise-wide buy-in from both the insurer and outsourcing partner.

The Insurance Industry’s Game of Thrones

Paul Vancheri // Paul Vancheri is a Vice President of Research and Consulting at Novarica. Prior to joining Novarica, he served as Global Head of Shared Services at Finastra/D+H, a global FinTech firm, and spent 15 years as CIO at Fidelity Investments. He spent the first half of his career as an officer in the United States Air Force, developing and producing advanced technology software and hardware systems. He holds a BA in Economics from Duquesne University and an MS in Administration from Central Michigan University. He can be reached directly at [email protected].

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