A new beginning: claims outsourcing can fulfill its promise to the industry.

Like many propositions that look irresistible at first glance, claims outsourcing has proven a compelling but elusive goal for many insurers. Identified as a prime candidate for the next great wave of outsourcing several years ago, claims processing has remained largely within insurance carriers' own walls to a surprising degree. As we enter into 2007, insurers have only begun to scratch the surface of unlocking value from claims business-process outsourcing.

Nearly two-thirds of carriers' personnel are involved in some aspect of claims processing; claims payouts consume almost 80% of a property/casualty company's annual revenue. Given the size of the bite that claims take out of an insurer's resources, even modest efficiency gains can significantly affect the bottom line. The question remains: If the potential is there, then why haven't insurers moved to capture it?

Accenture research indicates that insurers have three main concerns about claims business-process outsourcing: disruption of customer relationships that may occur when a critical process moves to a third party; immaturity of the business-process outsourcing provider landscape-most outsourcers are ill-equipped to deliver on severity management or service uplift, and focus almost exclusively on labor cost arbitrage; and finally, regulatory and political restraints on outsourcing, particularly offshore.

These concerns are certainly valid. Nevertheless, claims business-process outsourcing can yield demonstrable and durable results if the right actions are taken. Our experience has shown three fundamental steps on the path to value:

Step 1: "Industrialize" the claims operating model.

Step 2: Choose the right partner.

Step 3: Start smart and scale fast.

Fundamental to any business process undertaking is a clear understanding, articulation and enablement of the claims operating model. Claims business-process outsourcing requires considerable forethought about how it fits into the claims operation. An "industrialized" claim operating model is characterized by well-defined processes, supported by the right metrics and enabled with the right tools and technologies. Without this kind of maturity in the operating model, claims business-process outsourcing becomes a situation where a broken set of activities is processed at a lower cost and value is ultimately destroyed.

If an industrialized claims operating model is a fundamental first step, then the selection of the right outsourcing partner is next. More often than not, the business case for business-process outsourcing is built almost exclusively on expense reduction through labor arbitrage. Our experience indicates that successful claims business-process outsourcing requires a partnership across all elements of claims performance--severity management, service and processing cost. This requires not just a low-cost provider but one with knowledge of world-class claims processes, along with the tools and technologies to deliver that performance on a continual basis.

With the foundation and partner in place, claims business-process outsourcing can be employed as a means to enhance and extend the performance of the operation. "Starting smart" should begin with the identification of discrete tasks or portions of the process that aren't necessarily core to the claims outcome but represent real cost to the claims operation. This could include functions such as forms generation, medical bill review, claims indexing and, potentially, first notice of loss.

Handing these tasks to outsourcing partners who specialize in them can give an immediate lift in results while boosting the productivity of an insurer's retained claim staff who can concentrate on higher-value work. Equally important, those benefits will be achieved without the risk associated with a wholesale "lift-and-drop" of the entire claims operation. Over time, the scope of services provided can scale fast in a manageable fashion, whether by claim function, type of claim or additional tasks in the claims process.

Done properly, the benefits of outsourcing claims can include reduction in the cost of claims management of 20% to 30%; reduction in avoidable overpayment (leakage) of 50% to 75%; reduced information technology costs; improved customer satisfaction as a result of quicker, more accurate settlement; skilled administrators who concentrate on high-severity claims; a more professional interface with customers and intermediaries; and improved financial predictability through variable pricing.

Contributor Michael Costonis is a senior executive in charge of Accenture's claims services in North America. He can be reached at [e-mail]