1 by Mike Connolly Vinay Couto Gil Irwin Karl Kellner Aiming for Outsourcing Excellence The New Knowledge-Based Outsourcing Environment Calls for Sophistication From Insurance Companies
2 Booz & Company is a leading global management consulting firm, helping the world s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in Today, with more than 3,300 people in 57 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit Visit to learn more about Booz & Company. CONTACT INFORMATION Chicago Mike Connolly Partner Vinay Couto Partner New York Gil Irwin Partner Karl Kellner Partner Originally published as: Aiming for Outsourcing Excellence: The New Knowledge-Based Outsourcing Environment Calls for Sophistication From Insurance Companies, by Mike Connolly, Vinay Couto, Gil Irwin, and Karl Kellner, Booz Allen Hamilton, 2006.
3 Aiming for Outsourcing Excellence The new knowledge-based outsourcing environment calls for sophistication from insurance companies Outsourcing is reaching a new level of maturity in the insurance industry. It has evolved from a cost-cutting measure to a lever for strategic growth, offering access to a critical mass of resources and talent. Consequently, the industry has taken steps to maximize its investment in outsourcing and offshoring by examining which functions to outsource, how many and what kinds of vendors to use, and how to manage vendors more strategically. The degree to which insurance companies have initiated outsourcing varies. Smaller, regional companies, which are typically wary of the reputational damage that could result from sending services offshore or even out of state, have largely avoided outsourcing core activities. Larger companies, on the other hand, have been more aggressive. Early initiatives with IT and help desk functions paved the way to outsource claims processing, member services, adjudication, finance, HR, employee-absence monitoring, and medical and disease management. As insurers become more sophisticated in their outsourcing strategies, some have revisited (and in some cases reversed) previous decisions. For example, many health plans initially outsourced disease management and are now insourcing certain activities. To reap the full benefits of their outsourcing programs, executives would do well to learn from the outsourcing virtuosos, both within and outside the insurance sector, that heed the following best practices to make the most of their outsourcing experience. 1. Commit from the top and move quickly. Outsourcing efforts tend to involve multiple functions and carry significant implications for spending and for individual staffers. They are thus vulnerable to internal resistance, and senior management s unequivocal support is essential. At one large, U.S.-based insurance company, for instance, the operating committee of the company s largest business unit made a global sourcing initiative a top priority; it ultimately resulted in annual savings of more than $90 million. Furthermore, the most successful programs are enacted quickly. Aside from its operational and cost virtues, swift execution sends an unmistakable message of resolve. 2. Understand and articulate the reasons for outsourcing. People are more likely to mobilize behind a potentially controversial initiative if the
4 2 business reasons for doing so are clear. Management must have an acute grasp of what the company is trying to achieve Cost reductions? Optimized processes? Access to expertise? Better service levels? Innovation? and keep these priorities in mind. Equally critical, the outsourcing decision should be based on a business case that is built on hard analysis. Without a granular understanding of the underlying costs, both tangible and intangible, a precise grasp of the potential benefits is nearly impossible. 3. Be partners, not just customers. Many companies try to manage service providers not as partners but as virtual lackeys forcing down prices, holding them to impractical contracts, and micromanaging the process of service delivery. This approach is fundamentally misaligned with both the basic objectives of an outsourcing arrangement and the realities of a more complex outsourcing world. Instead, executives who have gotten the greatest benefit from their outsourcing arrangements have built relationships of mutual trust with their vendors. Enlightened companies rely on mechanisms such as governance structures with clearly defined decision rights that are agreed on in advance by both parties. In addition, service level agreements, performance dashboards, formal business reviews, and rewards and penalties for meeting or falling short of service levels all help to minimize surprises. 4. Embrace complexity and learn to manage it. Complexity has crept into outsourcing on every front: the number of vendors, the number of countries from which those vendors can deliver services, delivery models (onshore, nearshore, or offshore), and the sheer scope of offerings. But this complexity can work to the customer s advantage, translating into greater choice and thus greater customer empowerment and better results. For example, one large health insurance company varies its contract models, managing two large vendors on the IT side but several smaller vendors for business process outsourcing, to suit its needs. To manage multiple sourcing contracts, companies are installing centralized vendor-management functions with personnel who can oversee strategic vendor relationships, monitor vendor performance, ensure compliance with service level agreements, and keep vendors abreast of evolving company strategies and priorities. 5. Be a visionary. The new generation of outsourcing leaders is always thinking beyond the boundaries of its function and, in some cases, even beyond the boundaries of existing market capabilities. Integral to these leaders skills are the ability and the willingness to look beyond the core functions when considering what activities to outsource. For health insurance companies, for instance, new opportunities may be found in core, process-based medical management functions such as preauthorization and precertification, case and referral management, and care coordination all of which require scarce clinical resources. Companies that offshore these functions to locations such as India, where there are well-trained clinicians who could be employed for a fraction of the usual cost, could realize significant savings. Despite the potential pitfalls, outsourcing has become indispensable to the successful corporation. In a new environment where the customer is king, the successful design and execution of an outsourcing plan is limited only by a company s commitment and imagination. Adapted from Outsourcing Virtuosos, strategy + business, Fall 2006,
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