Successful Outsourcing for Insurers

"Outsourcing" has become a hot topic for insurers and other businesses alike. This article highlights some of the factors to bear in mind if an outsourcing project is to be successful.

The recent economic climate has resulted in many businesses reviewing their business models with a view to reducing overheads. One of the tried and tested (if not completely trusted) methods of saving costs is outsourcing, and it comes as no surprise that in recent times there has been a significant surge in the extent to which businesses are outsourcing IT and business process (i.e. back-office) services.

The insurance industry is no different to any other in this respect. Indeed, several outsourcing suppliers have picked up on this trend and focused their efforts on meeting the specific needs of the insurance industry. As a firm, BLG has advised on many significant outsourcing projects, from both a supplier and user perspective. In this article, we distil some of the key considerations which can make the difference between success and failure in outsourcing.

THE OUTSOURCING PROCESS

One of the key contributors to successful outsourcing is an understanding of the outsource process itself. Those procuring outsourcing services may not have a great deal of previous experience of such projects, but an understanding of the process is critical and will then enable the project to be carefully managed and controlled. Whilst there are any number of variations, the basic model is as follows:

Scoping - The customer (ie insurer) must identify its business objectives (these will often include improving service levels and achieving cost reductions), and have a clear understanding of the services and service levels expected from the supplier. This may sound simple, but the process can take many months.

Invitation to Tender/ Request for Proposal - Based on the scoping exercise, the insurer issues an Invitation to Tender to selected suppliers.

Evaluation - The insurer evaluates the suppliers' proposals (this evaluation usually covers the technical, commercial and legal elements of each proposal) and selects the chosen supplier. Frequently the insurer will select two suppliers and negotiate these proposals in tandem to retain negotiating leverage in the final stages of contract negotiation.

Contract negotiations - Given that many of these projects are complex and business critical, negotiation of the outsource contract is a significant task. Some of the key contractual...