Staying competitive: business process outsourcing is helping insurers drive value for core processes.

Relentless global pressures to cut costs, reduce capital outlays and maximize operational efficiencies are causing insurers to take a new look at business process outsourcing.

Traditionally, business process outsourcing, which is the delegation of a business process to an outside vendor who manages the process, has been limited primarily to corporate administrative functions, such as payroll processing, accounts receivable and payable, and cash management. Carriers have realized significant benefits in shifting to others the burden of such administering processes. Recently, however, leading carriers have begun to drive value with new and innovative outsourcing arrangements for their core processes, such as policy administration, claims processing and call center servicing.

Given the degree of process customization in the insurance industry and the importance of these operations, executives have been somewhat reluctant to outsource core processes. However, that mindset is changing, influenced by such factors as the drive for cost efficiency, technology and telecommunications advances that reduce the value of physical proximity for both the outsourcer and provider.

Business process outsourcing can help reduce costs between 10% and 70%. In addition, it can improve efficiency and customer service, turn fixed costs into variable costs, build systems and refocus carriers on their core business--all with minimal additional capital expenditures.

Even when the market exits the current downturn, demand for business process outsourcing likely will continue. In the financial services sector, analysts project the business process outsourcing market to see 10% compound annual growth through 2005, nearly a $20 billion increase.

Many leading financial services firms have discovered the business imperative for outsourcing business processes. In a recent Accenture survey, insurers said they undertook business processing initiatives to lower capital investments, obtain access to new technologies, and centralize and standardize processes and technology. The survey results highlight a noteworthy trend--the driving force behind business process outsourcing demand is shifting from a financial approach to a more strategic approach. In the past, insurers traditionally turned to outsourcing as a way to reduce costs, but today's economic pressures have led to an increased focus on improved competitiveness and revenue generation.

Business process outsourcing is emerging as a strategic response to current economic and marketplace realities because it enables carriers to increase their focus on differentiating value-producing aspects of their business, increase operational efficiencies and become more flexible as business conditions warrant.

Examples of business process outsourcing options include "and drop" outsourcing, in which processes are transferred "as is" to lower cost locations; re-platforming, or moving the process to a different technology platform; and undertaking a transformational outsourcing project, which typically yields the highest value by focusing on redesigning or reinventing a business process.

A European financial-services firm recently discovered the advantages of business process outsourcing when starting up a life insurance operation. Realizing that its existing back-office organization was unable to deliver the required new functions in a timely manner, the firm partnered with an outsourcer to run its back-office operations. The outsourcing arrangement not only helped the firm control costs, but enabled it to maintain competitive pricing for brokers and policyholders over the long term. In addition, the firm can now concentrate more on its cure business activities, including developing products more quickly, establishing relationships with brokers and managing investment funds.

A successful business-process-outsourcing arrangement hinges upon open communication between parties. The carrier must clearly articulate its goals to its outsourcing partner. Partnering with an outsourcing provider with global experience will help with the complex decision of which near-shore and offshore locations to use. The provider should be able to navigate sensitive cultural differences that may arise at these locations and help the carrier realize the full potential that the opportunity holds. Providers that not only set up the outsourcing arrangement but also offer software assets or other solutions that can meet the carrier's technology needs may be able to bring additional cost efficiencies to the table.

To gain the most from outsourcing, insurers need to think about their current business processes and engage their outsourcing partner early on to customize their strategy for success. Determining the processes, the locations and the types of technology to use are among the most critical decisions insurers should make prior to outsourcing.

Samuel F. Altiero is a partner of Accenture Insurance Industry Group. He can be reached at [e-mail].