Markets, K. Harris Research Note 9 May 2003 Outsourcers in India Set Their Sights on Insurance BPO Vendors in India are targeting the insurance business process outsourcing market. Evaluation of vendor offerings is crucial. Focus on insurance expertise, stability, riskmitigation practices and past customer relationships. Core Topic Financial Services: Financial Services Drivers, Strategies, Direction and Vision Key Issue How will management strategies and practices affect the technical environment in financial services? Outsourcing providers in India have been making headway into the insurance industry in North America and Europe, the Middle East and Africa (EMEA) for years. However, the majority of their work has focused primarily on the IT services arena (see "Insurers Shift Focus and Approach to Outsourcing"). Common services provided by offshore IT outsourcing (ITO) providers include infrastructure management, application development and legacy maintenance. Continued market changes are driving insurers to increasingly "do more with less" and to balance tactical/strategic projects. In response, traditional IT outsourcers are being enticed to expand their service offerings, adding business process outsourcing (BPO) capabilities to their portfolios through joint ventures or developing new divisions. However, how will IT outsourcers expand into BPO, and is India-based BPO a good option for the insurance industry? The ITO and BPO Offering Continuum Generally, most ITO projects have been tactically focused the result of resource or institutional constraints (such as a lack of staffing or not enough time). Outsourcing is being elevated within the insurance organization to a strategic initiative as the maturity level of sourcing deepens. Simultaneously, project scopes are expanding to include aspects of BPO. As sourcing evolves, the range of services for outsourcing follows a linear progression (see Figure 1). Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
Figure 1 The Offshore ITO and BPO Continuum Strategic Direction Pure IT Engagements IT Strategy and IT/Business Alignment Not Mission-Critical Mission-Critical Processes Processes ITO BPO Source: Gartner Research (May 2003) Time Offshore outsourcing strategies continue to evolve. "Type A" (technically aggressive) insurers are beginning to consider outsourcing as a key strategic initiative and identifying business opportunities that may result from outsourcing. Offshore outsourcing plays a major role in an insurance carrier's sourcing strategy as a means to control costs, respond to tactical constraints and support competitive differentiation. Offshore engagements can range from IT services to mission-critical business processes. On the ITO side, the range of services span from pure IT engagements (such as applications development or maintenance) to more-strategic IT assessment and alignment projects On the BPO side, the range of services span from those supporting non-mission-critical processes (such as human resources or financial aspects) to mission-critical processes, including policy administration, claims processing and customer service support (see "Insurance Claims Processing Trends and Directions") Project scope will have a great effect on vendor selection for outsourcing services. All outsourcers aren't the same, and each provider has a "sweet spot" or area of greater experience within this vertical. Each node on this continuum is important for industry success. For insurers, ITO and BPO will be critical elements of their organizational strategies because of continued industry change and pressures. Vendor evaluation should be focused on the specific type of outsourcing project required in addition to vertical skills. 9 May 2003 2
Outsourcing providers that currently offer ITO will be able to leverage past ITO experience, including application development and exhibiting insurance-process knowledge, in their newly developed BPO units. Resources such as domain experts may be shared across the organization, and customers may be leveraged. Given the diverse landscape of ITO and BPO opportunities, vendors must focus on building core competencies in specific areas, rather than taking a "shotgun" approach to outsourcing. Vendor Landscape There are three major types of vendors in India that should be assessed for mission-critical insurance offshore outsourcing: Traditional ITO vendors that are migrating into BPO (see Table 1). These vendors generally have insurance as a percentage of their business, and have developed insurance competency through their IT operations. These vendors have worked with insurers to build new solutions and are leveraging these solutions through their BPO operations. The evolution of these providers into full-scale BPO is moderately optimistic. Past investments in building vertical expertise and leveraging past IT relationships will enable ITO providers to slowly build confidence with BPO prospects. Traditional ITO vendors are best suited to provide BPO related to back-office system processing areas (such as running policy administration systems) because of their experience in legacy areas and for implementations heavily reliant on technology development. Call center providers that have potential to expand their services into other BPO areas (see "Offshore Contact Centers: Still a Long Road Ahead"). These providers offer targeted services to insurers and have just begun to expand their offerings to add other BPO services. The transition from offering independent call center services to full-scale BPO will be successful if investment is adequate. BPO providers with call center expertise will be best suited for customer service implementations for policy and claims. Pure BPO vendors that offer only BPO services, such as EXLService, WNS, Daksh, ICICIonesource, and Msource. This type of provider will find fewer obstacles in building insurance BPO practices, given adequate investment in verticalization. Success will be contingent on building strong customer references and finding insurance-focused competency "sweet spots." Pure BPO providers, or process specialists, will cut out niche markets such as claims processing for a specific type of insurance, for example, life or property and casualty (P&C) where they will excel. 9 May 2003 3
Vendor Cognizant Technology Solutions HCL Technologies Percentage of Revenue From Life and P&C Insurance Table 1 India's Outsourcing Vendor Market and Focus on Insurance P&C and Life Insurance ITO Clients Are Insurance Products/Solutions Offered 16.5 11 Yes. Solution Accelerators As interest grows, more vendors will enter the insurance BPO market, from onshore, nearshore and offshore. This will lead to a crowded market in which vendors with process focus/specialization will find it easier to differentiate themselves. Evaluating Offshore BPO Vendors BPO Operations Name BPO Life and P&C Insurance Clients Cognizant BPO 0 6 10 to 12 No eserve 3 Infosys 16 11 No Progeon 0 Satyam Computer Services Tata Consultancy Services Patni Computer Systems Wipro Technologies Source: Gartner Research (May 2003) 14 1 No Nipuna 2 13 to 15 50 Yes Intelenet 3 38 16 No Patni 0 8 11 Yes. Point Solutions Wipro Spectramind Insurers must carefully evaluate BPO vendors to find a suitable match. Although the process will be similar to that taken for onshore outsourcers, risk-mitigation assessment should be more stringent. Insurers should focus on risk-mitigation procedures, including those related to disaster recovery and risks associated with offshore processing such as country-related issues (see "Potential Risks in Offshore Sourcing"). In addition, assessment should carefully review additional requirements, such as: Insurance Expertise: Setting up a BPO operation isn't enough. Although horizontal or generic BPO services that lack industry focus may be adequate for invoicing, billing, accounting or payroll, insurance expertise is a fundamental requirement for providers wanting to support policy and claims processing. Outsourcers, in all geographies, must prove to prospects that they understand the market dynamics and core processes and industry expertise must go beyond sales/marketing so that individuals engaged in fulfilling BPO deals are also knowledgeable about the 1 9 May 2003 4
insurance process. It is imperative that the outsourcer has an insurance vision and strategy to grow its business and understand future trends/directions within the insurance market. A keen awareness of regulatory and reporting requirements will be fundamental in exhibiting industry expertise. This may be difficult without adequate domain experts within the targeted geography, which can be obtained through hiring or partnerships with other services providers. Careful attention will be paid to referenceable customers, including geography and type of implementation. Balanced Global Delivery Model: North America- and EMEAbased insurers may be leery of handing off mission-critical processes to far-off geographies. To balance outsourcing, insurers may select different vendors that operate in different geographies, or vendors may open up multiple processing centers in different regions. In both cases, India-based BPO providers must take the necessary steps to eliminate fears and mitigate the risks associated with offshore outsourcing. Necessary resources, including domain experts, must be available in the local region (such as North America or EMEA) for implementation and long-term processing-based outsourcing. Partnerships may help BPO providers fulfill customer requirements, particularly within certain vertical domains that may be specific to a certain region or line of business. Ability to Execute: For success in BPO, insurers must mitigate the risks associated with offshore models. It is imperative for the insurer to find outsourcers that are able to deploy and manage large-scale outsourcing engagements. Execution success of the vendor will be contingent on: The size of organization (bandwidth, geography, number of employees) Historical performance record in outsourcing and insurance, in terms of past projects and customer satisfaction (especially related to project deliverables and time frames) Financial stability Organizational structure, including tied relationships with other insurers that may have investment in the company or other IT or services providers or partners (including IT and services partners) The source of insurance systems that will run processing operations (that is whether the outsourcer is building new systems to support operations or using a packaged solution, and if the user can choose which solution is used to support its operations). 9 May 2003 5
Although market penetration will be difficult, providers in India that meet these criteria will be able to slowly build confidence and grow their BPO customer lists. Acronym Key BPO EMEA ITO P&C Business process outsourcing Europe, Middle East, Africa IT outsourcing Property and casualty Bottom Line: The offshore insurance business process outsourcing market is becoming crowded, with more supply than there is demand. Providers in India must specialize in a specific process/area within the outsourcing continuum and build stronger practices highlighting that aspect of their offerings to penetrate this market. 9 May 2003 6