ONSHORE OUTSOURCING: IN INSURANCE BPO IT S REALLY HAPPENING

Onshore Outsourcing: In Insurance BPO It s Really Happening 1 ONSHORE OUTSOURCING: IN INSURANCE BPO IT S REALLY HAPPENING ING and Cognizant show us how to do it well Author: Michael R. Koontz, SVP and Research Director, BFSI, HfS Research October 2012 Executive Summary The recent political debates focused on outsourcing neglect the fact that many companies are outsourcing to their own backyards. In fact, new research from HfS shows that about half of the buyers either already have outsourcing delivery sites in the United States or are interested in establishing them. To meet this growing demand for domestic outsourcing, each of the top 20 global services providers today has U.S. sites in place. However, meeting the needs of companies isn t a location-only issue: Providers must offer an effective delivery model. We are now seeing the emergence of onshore business process management in industries such as insurance and healthcare payor, which have genuine needs for local knowledge and expertise. To illustrate this dynamic, we examine how ING and Cognizant are working together to create the kind of strategic relationship that can bring complex onshore-centric delivery models to fruition in the insurance BPO category. In June 2012, these two companies signed a $330 million, seven-year deal utilizing multiple U.S. locations in conjunction with their offshore sites. This agreement exemplifies the advances we anticipate will create greater demand from other insurance companies as well as providing a global delivery framework from which providers and buyers can learn in other industries. Success Creates Demand for Onshore Outsourcing Outsourcing buyers in the U.S. have been engaging in frequent discussions about global outsourcing models. In fact, questions regarding onshore delivery have been some of the most asked of HfS this year from our clients. Many executives we spoke with shared that they are looking at ways to better use their U.S. delivery locations,

% of Respondents Onshore Outsourcing: In Insurance BPO It s Really Happening 2 driven by U.S. political, regulatory, and stockholder pressures to balance offshoring benefits with maintaining a larger U.S. presence. According to a recent survey by HfS Research, almost 50 percent of companies are already using an onshore outsourcing model or are interested pursuing this model. Finance and Accounting (F&A) and customer service areas are the most prevalent in the market for onshore resources while industry-specific processes are the lowest. Thirty percent of the respondents have no interest in outsourcing their industry-specific processes to the U.S. The question this raises is whether buyers are convinced that outsourcing companies can drive the value in these core business areas without having the 30 percent salary arbitrage from offshore on their side. This can present an interesting opportunity for those who can prove that value can be derived though additional levels of efficiency and effectiveness using onshore or hybrid models. Exhibit 1: For each of the following business operations processes, how interested are you in outsourcing work to the United States? 100% 80% 60% 40% 20% 0% Finance and Accounting Human Resources Procurement and Supply Chain Customer Service Industry-specific Process Sales and Marketing Not Interested Neutral Interested/Exiting Today Source: HfS August 2012 respondents=221 One question that always comes up is whether U.S. operations are that much better than the offshore delivery locations. In our recent survey, we asked buyers about their level of satisfaction with processes in the U.S. and those in non-u.s. delivery locations. The data show that 45 percent of respondents are satisfied with process performance for U.S.-based programs, while the average for non-u.s.-based delivery centers drops to 25 percent.

Onshore Outsourcing: In Insurance BPO It s Really Happening 3 In high-touch areas such as HR and Marketing, the level of satisfaction is twice as high in U.S. models as in non-u.s. models (Exhibit 2). Exhibit 2: How satisfied are you with the current performance of the following business processes in the U.S. vs. non-u.s. sites? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Finance and Accounting Human Resources Procurement and Supply Chain Customer Service Industry-specific Process Sales and Marketing Percent Satisfied Not Satisfied Neutral Source: HfS September 2012 respondents=221 Five Essential Elements for Achieving an Effective Onshore Delivery Model For an onshore outsourcing model to be effective, greater focus must be put on the performance areas of the process. Work cultures, labor regulations, and other regulatory and compliance issues can pose a challenge for providers who are used to managing teams offshore. All the areas below are also included in offshore programs; the difference is these areas go from secondary to primary. In addition, onshore labor and capital costs are inevitably higher, leaving less room for error than with an offshore engagement. Hence, it can sometimes be more challenging for a provider to achieve results, especially if the onshore model includes rebadging staff from the outsourcing buyers. Areas that have to be managed include the following: 1. Process Improvement. The largest value to the buyer will be the provider s ability to bring process improvement focus to the program. This must happen not just in the first six months but also throughout the term of the agreement. This isn t any different from offshore but becomes critical because providers

Onshore Outsourcing: In Insurance BPO It s Really Happening 4 are not able to rest on the offshore salary arbitrage. If they cannot deliver the process improvement, the business case will quickly go underwater, and the relationship will soon follow. 2. Technology and Automation. If there are heavy cost-reduction expectations and the work remains onshore, implementing technology and automation solutions is essential. Basic process improvement can drive incremental cost savings of 10-20 percent out of the average program, but incremental savings beyond this require more aggressive changes that include technology that will streamline and eliminate large portions of the work being performed. This requires the buyer to allow the provider some flexibility in being able to use their own technology; this could be add-on workflow tools or full platform options. The challenge here is that many buyers are reluctant to allow providers to bring technology because the buyers want to maintain more control and ownership over the technology. 3. Offshore Integration. Just because a process starts onshore does not mean it should always stay onshore. There will be opportunities to provide direct and indirect support from offshore locations. Some functions can be performed better offshore, and some functions have higher effectiveness onshore. For example, in claims processing the front end of working with the customer to gather all the information may be performed better by an onshore resource while the back-end claims processing can take place offshore. These two programs must be integrated. Program analytics and process improvement teams are additional functions that can be located offshore to support the onshore team. 4. Empowerment of the Onshore Team. Many Indian providers still struggle to trust teams outside India to manage large programs, as illustrated by the fact that the 65,000 H1B visa quota for 2013 was maxed out in less than two months. Providers continue to send large contingents of Indian nationals to manage their U.S.-based programs. In a domestic model, the provider must establish a strong onshore team and then ensure the offshore team provides all the support possible without micromanaging the operations. 5. The People: In the end, the reason the buyer chose to have this work performed onshore is the people, and this has to continue to be a focus for the program to be effective. The team performing these functions has deep domain expertise in the process but also in the company and industry. By retaining as many of these individuals as possible, the provider will be more effective. The biggest mistake that a provider can make is to begin to replace the team and leadership onshore with lower-paid resources or by replacing the leadership with offshore expatiated resources. Every other aspect of the effectiveness can be achieved from anywhere; the people are the reason for the process being performed onshore.

Onshore Outsourcing: In Insurance BPO It s Really Happening 5 Do The Providers Really Get It? Providers understand the imperative to provide buyers with U.S. options, but they are each reacting to these demands in different ways. All top 20 global service providers now have delivery sites open in the U.S., but not all have really figured out how to best use them. Exhibit 3: Top 20 Global Providers U.S. Presence PROVIDER Accenture Aegis Capgemini Cognizant Convergys CSC Dell EXL Firstsource Genpact HCL IBM Infosys Southerland Global Services TCS Teletech Wipro WNS Xchanging Xerox DOMESTIC SITES Multiple sites, including GA, FL, PA, TX, OH Multiple sites, including TX, FL, CA, NY Multiple locations, including NC, GA, TX Multiple locations, including AZ, ND, IA, NJ, MA Multiple sites, including TX, GA, CO, KA, MI SC, VA, NC Multiple sites, including MI, IO, IN, AZ TX, NY, IA KY TX, CT NY, NC, WA, CO, VA, CT Multiple sites, including NC, CA, OK Col GA NY, VA, TX, OK AZ, MI, CA Multiple sites, including CO, TX, KY, AZ Multiple sites, including NY, MA, DC, GA, TX, FL, TX SC IL Multiple sites, including TX, NC, CA, MD, FL, KY, NC, UT Source: HfS Research 2012 (list not intended to be exhaustive)

Onshore Outsourcing: In Insurance BPO It s Really Happening 6 Exhibit 4: To what degree do you outsource the following processes to the United States? 100% 80% 60% 40% 20% 0% Finance and Accounting Human Resources Procurement and Supply Chain Customer Service Industry-specific Process Sales and Marketing Do Not Outsource Little Outsourcing Some Outsourcing Significant Outsourcing Source: HfS September 2012 respondents=221 Providers also vary between those that have figured out what onshore/offshore integration means and those that have not. Sadly, some are interested only in moving as much of the work as possible to their offshore sites as quickly as possible and fail to recognize the value in investing in onshore capabilities. Most domestic sites are not integrated with offshore teams, meaning that offshore and onshore teams interact directly with clients and provide different services. This model fails to capitalize on the many synergies that could be gained if the provider s offshore team works as an extension of the onshore team and often creates unneeded silos and handoffs. This model mitigates many of the cultural and time zone challenges that still weigh on this industry. Nevertheless, some buyers and providers have developed an effective working model, and these are the ones that will be able to drive the greatest value for their clients. ING and Cognizant Partner to Create an Onshore Delivery Model In June 2012, ING and Cognizant signed a seven-year, $330 million agreement to expand their existing relationship. A deal of this magnitude was not created from a deck or a pitch. This deal was the culmination of six years of working together and building trust. Cognizant has been providing technology programs to ING, and this move will take them into a new area of the company. Because of their past success, ING is willing to help Cognizant strengthen its Insurance BPO services and U.S.-based operations capability. Cognizant and ING have become

Onshore Outsourcing: In Insurance BPO It s Really Happening 7 leaders in driving new and innovative models designed to decrease cost and increase effectiveness, shaping how buyers and providers will be working together going forward. The ING-Cognizant model covers more than 1,000 people across North Dakota and Iowa and most resembles what was seen in India in the late 1990s, when buyers sold their captives and allowed their employees to be rebadged by providers. In the case of ING and Cognizant, the provider came to the U.S. to establish the operations onshore for the buyer. Specifically, Cognizant rebadged the ING staff supporting key areas of the Insurance and Financial Services businesses, including Annuities, Life, Retirement Services, Distribution Services, and Employee Benefits. By using a rebadge model, the transition was simpler for both companies. Normally, it takes 12-24 months to move this many processes. However, two months after signing the deal, the transition was complete. The ING staff has been rebadged as Cognizant employees, and ING is realizing the benefits with minimal business interruption. It is too early to declare complete success, but they are seeing positive outcomes and are on the right track for success. In the end, this deal helps ING achieve five critical objectives:» Retention of skilled workforce in domestic locations.» Ability to hedge against volume changes through variable models.» Ability to reinvest capital in additional areas of the business.» Access to talent in Cognizant Consulting/Process improvement teams, IT, and BPO organizations.» Higher levels of effectiveness through the onshore model. What s really behind this deal? Given all of the work currently done onshore and that the onshore model is an important factor behind ING s objectives, we believe Cognizant signed an aggressive deal with three primary intentions. First, Cognizant invested in the business with the intent to aggressively develop their market presence in the United States and develop an Insurance center of excellence (COE) that will enable Cognizant to go after additional U.S. insurance clients. It will leverage the experience and knowledge acquired from the ING relationship to win additional work. This is exactly what occurred in the TCS and Friends of Life deal covered by HfS Research. Purchasing an onshore service provider with annual revenues of nearly $50 million would have cost Cognizant considerably more and would suffer from integration challenges. With ING s capability under Cognizant s roof, Cognizant has established itself firmly in the insurance market with the ability to challenge WNS, EXL, TCS, and CSC. Second, with an onshore foothold, Cognizant can incubate onshore processes with experienced staff. Then, once clients are comfortable after a 12- to 18-month stabilization period, Cognizant can transition portions of the processes offshore. Cognizant thus minimizes the people side of the change management challenges associated with outsourcing and provides clients an experienced team that will be difficult to match. Most importantly, Cognizant needs a blended delivery model to deliver profits under this agreement.

Onshore Outsourcing: In Insurance BPO It s Really Happening 8 Third, Cognizant is banking on its ability to apply six sigma and other process improvement techniques to transform processes and drive costs out. Cognizant will be investing in process improvement resources to determine how to drive greater levels of efficiency. This includes reducing cycle times for processing through streamlining many of the processes, applying workflow tools to reduce redundancies, and applying analytics to eliminate errors and backend rework. The Bottom Line: Onshore Interest Remains High, but Challenges Aggressive Service Providers to Succeed Interest in onshore delivery models remains top of mind for companies in heavily regulated industries, but they have to deliver experience and capability to offset higher pricing. HfS Research and the industry will be watching to see if Cognizant and ING are able to maintain their focus and to drive the kind of value that is they believe is possible. Can Cognizant succeed with what most providers have been unable to do: Rebadge a domestic site, staff it with U.S. employees, and empower them to manage it? Can they provide support from India, while still empowering the U.S.-based team and integrate the teams to work together to achieve results? Can Cognizant drive the process improvement expected to realize the value potential of the agreement? HfS is also closely monitoring the onshore development other global service providers are investing in, such as Accenture with WellPoint and Infosys with Marsh & McLennan. HfS Research believes that the ING-Cognizant model has the potential be a future model example for U.S. outsourcing, and that both organizations will remain committed to generating results, based on their history and track record in the industry.

Onshore Outsourcing: In Insurance BPO It s Really Happening 9 About the Author Michael Koontz Michael Koontz is Senior Vice President and Research Director for HfS' Banking, Financial Services and Insurance (BFSI) analyst advisory practice. He provides leading-edge and practical research into global outsourcing and shared services strategies in the BFSI sector, which is in high demand from HfS Research s 120,000-strong readership base and knowledge community, which has a very strong representation from global financial services institutions. Looking into the past, present and future of the outsourcing and shared services markets, reinforced with HfS data and supported by its global analyst team, Michael supports HfS financial services clients in creating strategies for their businesses. He examines the core financial services industry dynamics driving global sourcing strategy, as the boundaries between IT, Shared Services and Business Process Outsourcing strategy continue to blur. Prior to joining HFS, Michael spent 4 years working as SVP of BFS on the provider side of the business, working with many of the top financial institutions in North America. Michael supported the creation of new capabilities, account management and new business development. Michael was at Wachovia Bank for 14 years, where he was the SVP of Outsourcing Strategy and Governance; leading over 130 transitions, and managing over 1000 SLAs, over four countries and three providers. Michael played a critical role in the creation of one of the most creative offshore models in existence, the idea of the virtual captive. Michael held many other roles within Wachovia, including; CFO for Banking Operations, Operations Manager in Check Processing and Research Adjustments, and Process Improvement Leader in Treasury Services. Michael has been very active in the offshoring world for the past 10+ years, and has spoken at many industry conferences including: the Gartner Offshoring Summit, TPI, The Conference Board, BAI, SIG and many others. He was selected by Finance and Accounting Outsourcing Magazine in 2006 and 2008 as one of their FAO Superstars. Michael has a BS in Finance from the University of Tennessee, and an MBA from Kennesaw State University in Georgia. His favorite times are those with his family, his wife Renee and two sons, Dylan and Tyler. They spend much of their free time at baseball and soccer games with the kids. Michael can be reached at Michael.Koontz@hfsresearch.com.

Onshore Outsourcing: In Insurance BPO It s Really Happening 10 About HfS Research HfS Research is the leading analyst authority and knowledge community for the global services industry. In addition to researching business services and technology services strategies, HfS educates and facilitates discussion among the world s largest knowledge community of services professionals, currently comprising 120,000 subscribers. HfS provides a collaborative platform for the largest, highest impact, and most frequently visited professional community in the global services industry, offering rapid and insightful commentary on, analysis of, and debate about enterprise shared services, outsourcing, and global operations dynamics. In 2011, HfS was awarded Outsourcing, BPO and Services Analyst Firm of the Year by the International Institute of Analyst Relations (IIAR), the premier body of analyst-facing professionals, and runner-up for overall Analyst Firm of the Year. Led by recognized industry expert Phil Fersht, HfS Research differentiates itself with its global team of expert services analysts with real industry experience, provocative and opinionated research, unrivalled market analytics, and a view of technology as an enabler for business process improvement. Its on-demand expertise relationship model helps clients leverage HfS knowledge and strategic insight in a rapid, responsive and engaging manner. HfS Research also manages the HfS 50 Sourcing Executive Council, the premier peer discussion group for enterprise outsourcing and business services executives. This by-invitation-only program fosters networking, debate and bestpractices sharing among the most senior sourcing executives of large global enterprises. This powerful forum is shaping the strategic direction of the sourcing industry, influencing other buyers, service providers and intermediaries across BPO, ITO and shared services domains. HfS hosts and facilitates regular meetings, webinars, introductions and peer networking opportunities for HfS 50 members, and its analysts contribute to these interactions with candid, unbiased opinions based on current, relevant research, benchmarking data and deep sourcing governance expertise. Now in its sixth year of publication, HfS Research's acclaimed blog Horses for Sources is widely recognized as the leading destination for collective insight, research and open debate of sourcing industry issues and developments. The thriving HfS LinkedIn community includes over 17,000 industry professionals who share views and information daily. More information about HfS Research can be accessed at www.hfsresearch.com. The company can be followed on Twitter at www.twitter.com/horses4sources and LinkedIn by joining The BPO and Offshoring Best Practices forum. To learn more about HfS Research, please email research@hfsresearch.com.