Letting go: small insurers can optimize business by outsourcing noncore activities such as data entry, employee recruitment and Web site management.

As business process outsourcing continues to take off in the insurance industry, many agencies wonder if they are too small to benefit from the practice. The truth is, even the smallest companies can reap considerable operational and financial benefits from outsourcing the right operations.

The traditional notion of outsourcing as it applies to big publicly traded companies, particularly in the manufacturing sector, is to downsize local units to obtain cost benefits offshore. This approach rarely applies to the needs and interests of small to midsize insurance agencies. These agencies are almost never looking to downsize, but rather to make better use of their existing employees.

Outsourcing can be defined as leveraging the domain expertise of a specialist service provider to support an organization's core activities and maximize productivity, performance and profitability. In a sense, outsourcing has been going on since business and trade began, since by definition, "What I do not choose to make or do for myself, I outsource to another."

In the insurance industry, outsourcing also is not new, though it is known better by names such as third-party administrators, managing general agents, inspection companies, program administrators, even retail brokers, which are all outsourced service providers to insurance companies.

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What is new is the changing mind-set behind what gets outsourced. Tasks previously seen as integral to the organization-data entry, policy typing, loss summaries, endorsement requests, certificate issuance and claims processing--now are seen as distractions from an agency's core activities of building great relationships with customers and markets.

Changes in technology and communications have made it possible for external providers to connect remotely to agency systems, and for agency employees to supervise the work of external providers, while focusing principally on their own higher-value tasks. In an increasingly competitive and costly marketplace, those who don't take advantage of new these efficiencies get left behind.

Good Timing

To assess whether it makes economic sense to outsource, small and midsize agencies must consider their particular challenges. For instance, most agencies struggle with finding skilled staff and bemoan the time it takes to screen applicants and then deal with supervision, training and retention. By bringing in support from outsourced staff, the agency often can save on both the cost of labor and the intangibles related to managing, equipping and seating the employee.

More significant still are top-line benefits that result when existing agency employees are free to devote more of their day to writing new business and providing rapid customer service. An outsourced provider can have a particular impact for smaller agencies where individual staff members are managing more tasks.

For example, Automotive Risk Management is a managing general underwriter based in Stockton, Calif., specializing in coverage for car and truck dealerships throughout the United States. These dealerships need thousands of motor vehicle records reviewed each year and related information entered into the insurance company's system.

Given that the company has 12 employees, it has outsourced these tasks for entering driver information and ordering MVRs. Over time, the company has given its outsourcing provider additional responsibilities, such as reviewing loss-control reports, entering new business applications into the system, reviewing the completeness of those submissions and advising agents if additional information is needed before underwriters can rate and evaluate the risk and provide a quote to individual brokers.

For retail agencies, the same principle holds true for outsourcing routine processing tasks--certificates of insurance, policy change requests, application entries, review and sending of completed endorsements and policy audits, policy checking, review of appraisals and direct bill reconciliation. If the agency handles about eight policies per day, or 160 per month, then it's a candidate.

In his book,/he Worm is Flat:'A Brief History of the Twenty-First Century, Thomas Friedman said it well: "The best companies outsource to win, not to shrink. They outsource to innovate faster and more cheaply in order to grow larger, gain market share, and hire more and different specialists--not to save money by firing people:'

Key Points

* Tasks once seen as integral to agency well-being now are seen as distractions from the core mission of building great customer relationships.

* Companies prosper when noncore activities are effectively outsourced.

* To assess whether outsourcing makes economic sense, small and midsize agencies must consider their particular challenges.

Contributor Dan Epstein is CEO of ReSource Pro, LLC. He can be reached at [e-mail].

Outsourcing Facts

* New levels of Web connectivity are improving access to outsourcing companies.

* Outsourcers' specialization capabilities mean they can service any size agency.

* Outsourcing's transaction costs are declining.

* Apple, Dell and Nike are embracing outsourcing as central to their business strategy of dominating their markets. These business leaders know what differentiates them from the competitors, and what other providers can do more efficiently or cost-effectively.

* For insurance agencies, core skills revolve around customer relationship-building, insurance expertise, market relationships and customer service. Despite these imperatives, a 2005 survey found customer service representatives at agencies spend 54% of their time on paperwork and computers, and only 24% on the phone with clients and 7% meeting clients.