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The strategic-sourcing advantage: most insurers still find managing offshore resources challenging. But carriers that have advanced their outsourcing relationships to the next level of partnership are unlocking strategic competitive advantage.

Article Excerpt
WHEN THE DIFFERENCE between domestic and foreign labor costs is great enough, offshore outsourcing is an offer that an insurance company can't refuse. Historically within the industry, as insurers accepted that offer in increasing numbers, the practice became necessary in order to stay in the game. And yet, carriers have struggled to realize the benefits that they expected from outsourcing. For many, initial enthusiasm has given way to a sober review of hard lessons learned as hidden costs and difficulties have emerged within their partner relationships.

Those lessons include an appreciation of the increasing difficulty of outsourcing more-sophisticated work. Some processes simply are more amenable to outsourcing, counsels Aidan McManus, SVP and CIO of New York-based Tokio Marine Management (TMM; $442 million in gross written premium). Since 2000, TMM has outsourced a significant portion of its IT operations to Fujitsu United States (New York), including both service level agreement (SLA)-based outsourcing and staff augmentation. TMM also has outsourced intrusion detection to Redwood Shores, Calif.-based Qualys since 2005. As a good rule of thumb, McManus advises, "If you can spec out a system tightly enough--if you can put together requirements and functional specifications with enough detail--then it can be outsourced."

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The problem is that the requisite skills for crafting such requirements are beyond the ability of many technology managers. And while that deficiency can be overcome during internal engagements through face-to-face discussions with business analysts and users, the same is not the case with offshore relationships. Because of the distances involved--spatial, temporal and cultural--McManus says, "You lose the ability to fill the gap with real-time interaction and iterative information-sharing processes."

TMM eases such distance concerns through the use of videoconferencing, which McManus says enables an immediacy of communication that otherwise would be difficult to attain. Such solutions, however, point to another important lesson learned from recent offshoring experience, according to McManus--namely, unanticipated infrastructure costs.

But such dangers shouldn't overshadow the potential benefits of outsourcing, McManus insists. Rather, they simply should counsel insurance companies to pursue offshore options with open eyes, both through the upfront benefit of past experience--one's own and others'--and the back-end security of well-crafted service level agreements (SLAs). "You need to be fair with your vendors and flexible enough to renegotiate," McManus acknowledges. "But that doesn't mean you can't still have...

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