India’s Outsourcing Leaders Take A Stand

Pramod Bhasim, CEO of Genpact of Gurgaon, India (Gurgaon is a major suburb of Delhi, the country’s capital), one of India’s largest outsourcing companies, made a major statement on the recent terrorist attack in Mumbai to the Wall Street Journal.  (Before life as a public company, Genpact was the India-based back office operations of GE.)

Bhasim decried the Indian government’s lack of preparedness for dealing with this crisis.  He called for greater protections for the Indian population and stated that in the business community there was enormous anger and despair.  He said:

In the wake of the Mumbai terrorist attacks, it is time for India’s business community to stop being polite to the nation’s politicians and instead demand action on the woeful state of public safety and security.

Bhasim was echoing remarks made earlier by Ratan Tata, chairman of Tata Sons, the holding company of India’s flagship conglomerate Tata Group (and also quoted in a separate Wall Street Journal article).  Tata is parent to Tata Consultancy Services, one of the “Big Three” of Indian outsourcing companies (the other two being Infosys and Wipro).  It is also parent to the Taj Mahal Palace Hotel, site of the massacre.  Tata said:

 We had a bomb blast some years ago; we should have learned to get a crisis infrastructure in place that could snap to attention as soon as something happens. We still don’t have that in place.  If we don’t have this, we will be subjected to a great deal of lack of protection for the citizens.

These Indian business leaders, doing so much business in the U.S., are fully aware of the actions taken by U.S. officials in the wake of 9/11 and are communicating to their government that they expect no less from their home country.  This is a major cultural change for these leaders as it has not been customary in that country for business leaders to express themselves publicly and forcefully on issues of government. 

To the degree that these business leaders are successful in pressing their case, India will benefit.  It can ill afford to become perceived as vulnerable to such attacks, for such vulnerability will invite more attacks.  More attacks would not only threaten the peace of India, they would threaten its prosperity as well should foreign companies decide that doing business in India was becoming riskier.

Let’s hope they are successful. 

(Leading offshore vendors focused on insurance are listed at www.InnovationInInsurance.com)

 

Aw, C’mon; Let ‘Em Dance!

As noted on www.InnovationInInsurance.com, the Federal Trade Commission (FTC) has decided to challenge the proposed merger of CCC Information Services and Mitchell International, two of the three software-and-data-based automobile repair estimating companies that are so integral to the settlement of auto insurance claims.  Their products and services support the relationship between insurance companies who pay the claims and auto body shops who perform the repairs.  The third major firm in this industry is Solera, which used to be a division of ADP but now is independent and publicly owned…NYSE-SLH).  CCC and Mitchell are both private equity owned (CCC by Investcorp International and Mitchell by Aurora Capital Group).

In cases like these, the FTC can’t rule unilaterally but must press its position in court.  Its point is that the merger is anti-competitive; that is, that it would reduce competition in the industry and therefore be detrimental to customers of these services.  CCC and Mitchell have stated their belief that the merger is actually pro-competitive; that is, it will bring additional benefits to buyers including more and better services. 

One of the difficulties faced by the insurance technology industry, of which this sector is a component, is the fragmentation of vendors.  That is, vendors are generally small and lack the resources to build out comprehensive services that compel the market to buy – thus vendors tend to stay small and under-resourced.  It’s a vicious circle.  This is exactly where this industry component has historically stood.  The three major vendors just end up competing on price and while it gives the buyer the lowest price, it prevents the vendors from differentiating themselves in ways that are more meaningful to their customers.  After all, price is important to customers but must be contextualized with value to have any real meaning.  You can’t view price in isolation.  Everyone is willing to pay more for something if the something is worth more than the increase in price.  And no one gains by paying less for something if that something is simultaneously reduced in value.   

At this point, had I paid better attention in my business school economics classes years ago, I’d whip out some sophisticated demand-supply curve argument that would make Schumpeter or Hayek proud.  Instead, I’m going to have to appeal to the judge’s common sense. 

“Your Honor, the market needs vibrant and energetic competitors who are competing for customers on all aspects of value – not just price.  Sufficient scale is an important aspect of vibrancy and energy.  Please don’t relegate these firms to a future of anemic offerings that just cut the price while providing less and less value.  Insurance business processes are in need of major innovative effort for the sake of the insurance-buying public.  Only healthy, growing vendors have the capacity to execute that level of innovation.  Aw, C’mon, Judge; let ‘em dance!”

The Bad News About That Insurance BPO Wasn’t All Bad

It was Mark Twain who said, “Reports of my death have been greatly exaggerated” and Winston Churchill who said, “There is nothing so exhilerating as to be shot at without effect.”  I don’t know if either of these statements apply, but they both come to mind in the case of the MajescoMastek Insurance BPO operation. 

In my recent blog post,   Why Did An Insurance BPO Give Up?, I referenced an article (through www.InnovationInInsurance.com) published in India by The Hindu Business Line titled Mastek Closing Down BPO Practice.  The article gave all the reasons why the company was abandoning BPO.  As it turns out, however, the action described applied to their banking BPO business (which was the certainly the largest part) but not to their insurance BPO business.  Important detail, eh?  Well, probably more important to those of us in the insurance industry than to those in the Indian financial press. 

Through interactions with Erik Stockwell and Billy McCarter of MajescoMastek in the U.S., I learned that the U.S. BPO operations were unaffected by the action described in the article.  Erik is Senior Vice President and General Manager of MajescoMastek’s North American Life & Annuity Division while Billy is President of Property & Casualty.  The Life & Annuity Division has a small and growing BPO operation for new business, case management, and back-end policy servicing – the software platform for which is Vector (previously known as PALLM).  The P&C Division currently offers ASP solutions and says it could offer BPO if it “fits our strategy to be a recognized leader in enterprise solutions.”

Given the limited scale of these operations, I stand by all my musings in the previous blog post.  Nonetheless, I’m thrilled to correct the misimpression of the article that we have one less insurance BPO provider.  (Here’s where the Twain and Churchill quotes come to mind.)  Now, if we can just more insurance companies interested in outsourcing…

Why Did An Insurance BPO Give Up?

The lead headline on www.InnovationInInsurance.com today is that mid-sized offshore IT-outsourcer Majesco Mastek is getting out of the BPO (business process outsourcing) business.  (The firm is known as Majesco Mastek in the U.S. but simply as Mastek in its home country of India.)

The firm’s CFO R.S. Desikan explained that while their BPO business was not losing money, it could not achieve the margins nor the revenue growth rates of its core business.  Majesco Mastek has about 4,000 employees and growth in revenue per employee is an important metric by which they manage.

What does this say about the state of BPO in insurance?  It could be that Majesco Mastek was simply not well-suited to this business.  Presumably they added the BPO line in the hope that it would produce margins and revenue growth consistent with the rest of its business.  Since it did not achieve the desired result after a reasonable period of time, they decided to abandon further efforts.  They did report that most of their BPO employees were absorbed into their core operations so it’s good that they could withdraw somewhat painlessly.

An alternate explanation could be that Majesco Mastek was well-suited, executing flawlessly, and the insurance market simply did not need another provider of BPO services.  That is, insurers’ needs were being fully met by other providers in the marketplace with capacity for further growth.

A third possible explanation is that while insurance BPO is a logical solution to the administrative limitations of insurers, these insurers are simply not willing to consider such options because they deem them to be disruptive to their traditional operations.  That is, they fear the organizational turmoil of employee separation often associated with such broad functional outsourcing.  Moreover, these insurers do not yet feel sufficient competitive pressures to accept such offerings as have their counterparts in other vertical industries. 

I suppose there could be other explanations as well.  My inclination is to believe the answer lies in the third explanation – that insurers are not pursuing BPO opportunities as aggressively as they could or should.

Outsourcing That Innovates…versus Outsourcing That Perpetuates

The stock market roller coaster and 24/7 discussion of recession have everyone thinking about remedies.  Phil Fersht, analyst with AMR Research, who writes The Outsourcing Blog, prescribes The change imperative: it’s back-to-basics time.  If we’re going to get back to basics when it comes to outsourcing (and I think that’s good advice), then it’s worthwhile asking what the basics are.

For one thing, a basic of outsourcing is that a company relinquishes a task which it believes another party can execute better and more economically.  The improved quality and economics usually have to do with scale and focus.  That is, an outsourcer who specializes in certain transactions can do so many more of them than the customer that they can achieve economies of scale (the marginal cost of each transaction keeps decreasing) and economies of scope (by focusing on these transactions, the outsourcer learns so much more about them and is able to apply that knowledge to continually increase productivity).  Thus, companies have over the years outsourced their cafeterias, security forces, payroll, and so on.  (When I heard that some firms were outsourcing their internal audit, I figured the sky was the limit.) 

Another way of stating this rationale for outsourcing is knowledge, or intellectual capital.  That is, success of outsourcing assumes that the outsourcer will amass and deploy more knowledge or intellectual capital on the task at hand. 

This is basic alright.  Problem is, we’ve wandered away from this…or in some cases never truly approached it.  The blame can be shared by the customers as well as the outsourcers.  The customers are to blame (and in this they’ve been goaded by the advisors they hire to negotiate outsourcing contracts for them) for insisting on service-level agreements which essentially lock the outsourcer into executing business processes exactly the same way the customer did.  That may give you economies of scale, but not economies of scope which would allow you to alter the process to achieve a better result.  And it only gives you economies of scale if the outsourcer’s other customers execute their processes the same way.

Outsourcers are to blame when they don’t focus on specific business processes where they can build up meaningful intellectual capital.  Outsourcing, after all, isn’t a competency.  The competency is in knowing how to execute a specific set of business processes.  This is why I love to see insurance outsourcers steep their employees in industry education programs such as CLU and CPCU.  The insurance industry doesn’t need information technology (IT) experts, it needs IT professionals as dedicated to understanding insurance (or some discrete part of it) as they are to understanding IT. 

If customers demand business processes be executed the way they’ve always been executed and if vendors don’t go out of their way to become domain experts in their customers’ businesses, then outsourcing will only perpetuate the status quo.  But when customers unleash their vendors to apply domain expertise, economies of scale and scope can be realized, and genuine innovation can take place. 

The purpose of www.InnovationInInsurance.com is to facilitate greater innovation in the insurance industry.  After all, that is the purpose to which IT should be applied.  And that will lead to outsourcing that doesn’t merely perpetuate, but rather outsourcing that innovates.

P&C Soft Market Begins To Harden

Technology and outsourcing vendors to the P&C industry know well its undulating cycle of soft and hard markets.  In soft markets, carriers are interested in writing more business and are willing to lower prices to get it; hard markets are the reverse.  (For a more textbook definition, see the Insurance Information Institute’s (III’s) Insurance Glossary.)  (Life insurance markets are not so cyclical, and Health – hey, don’t those prices only go up?)

Claire Wilkinson, who writes the Terms and Conditions Blog for the III, has now written Soft Market Winding Down in her Nov 7 post.  In it, she quotes Richard Kerr, founder and CEO of MarketScout, as saying that this “winding down” has occurred “as a result of several factors including the meltdown in the financial markets, slipping underwriting results, and anemic investment income.”  So, they are not quite saying the hard market has arrived.  Moreover, the turn in cycles is never unanimously agreed upon as there is always a little art in the science.  Nonetheless, it does appear that there are the beginnings of hardening as Kerr’s research shows. 

Others concur.  The National Underwriter (NU) weighed in on this same report with its own story, MarketScout: Soft Market Reaching End, published the afternoon of Nov 7.  Even a week earlier, NU had reported that Evan Greenberg, CEO of ACE, had declared based on his company’s experience (earnings for the recent quarter were down 92%), that ”The end of the soft market in insurance has arrived.”  And the day before that, AXIS CEO John Charman said during his company’s earnings call, “We believe a hard market in 2009 is a near certainty.”

Technology and outsourcing vendors who are conversant in the terms carriers and agents use and who are sensitive to the issues carriers face, are in a better position to serve those carriers and agents.  While each carrier and agency are unique, there are some common consequences for technology and outsourcing strategy when a market cycle changes.  Priorities for IT projects can shift when a market moves from soft to hard.  For example, in a soft market finding ways to get new business are paramount.  In hard markets, getting profitable business is paramount.  Of course, it’s always important to grow and it’s always important to be profitable, but the emphasis undulates along with the market cycles. 

Know your customers and know what’s important to them in this next market phase.  You may find that some of them don’t yet think the market is hardening.  Whatever they think, however, you’ll be better off for being on speaking terms with them about their issues…and how your products and services address those issues.

 

P.S. Here are a couple of other sources on the subject.  First, Lynch Ryan’s weblog Workers’ Comp Insider posting Insurance in the storm: Buyers Can Expect the Onset of a Hard Market with additional sources.  Then there’s a contrary view in the article, Broker Executives See No end In Sight To The Current Soft Market. 

Hey,Talk About Your Aging Infrastructure!

The New York Times is reporting that Sam Palmisano, CEO of IBM, is speaking today at the Council on Foreign Relations on the answer his company is proposing for the struggling economy:  more efficient systems for utility grids, traffic management, food distribution, water conservation and health care (click herefor the article).  In other words, IBM is saying, “Let’s take this crumbling infrastructure we’ve got and bring it up to speed with what technology now allows!”  After having a Minneapolis interstate highway bridge fall into the Mississippi River recently (not to mention the daily cracks in infrastructure we all endure), ya gotta figure this is an idea that will have some appeal with the general population.

As the Times says, “Sixty-seven percent of electrical energy, for example, is lost because of inefficient power generation and grid management,” and ”Congested highways cost $78 billion a year in squandered working hours and gas burned.”  The article goes on to point out that this is not just a case of IBM pushing its own interests: “Some economists and policy experts say similar projects are a good way to improve the long-term health of the economy, potentially providing a foundation for innovation and growth across a range of industries.”

Now let’s consider all that’s been said so far here as a metaphor for the insurance industry.  Do we have aging technology and operational infrastructure?  Have we been patching a quilt-work of systems?  Would focusing in this broad way allow us to “improve the long-term health of [our industry], potentially providing a foundation for innovation and growth across [our industry?]“

Maybe we’d have more innovation in our industry if we have an overriding notion that our industry’s infrastructure, like our country’s infrastructure, needed a major overhaul – not just a nip and tuck here and there.

Open Letter to Arun Jain, CEO of Polaris…About SEEC

Dear Arun Jain, Chairman and CEO of Polaris Software Lab:

Congratulations on your successful acquisition of SEEC!  Congratulations also on the success of Polaris over the years.  From your beginnings with Citigroup in India, you have accomplished much.  Though your company background is banking, you have also achieved success in insurance even before the acquisition of SEEC.  You have much of which to be proud.

As you know, SEEC has achieved visibility in the insurance industry with its unique approach and its support of ACORD and SOA.  Those of us who care about the success of the insurance technology industry are hoping that this merger between your companies will bring more resources – talent, time, and treasure – to SEEC customers and prospects.  We know that Polaris has confined it strategic focus to what we in the U.S. call financial services (insurance, banking, and securities) – what you in India call BFSI: banking, financial services, and insurance.  We see that as positive because disciplined focus can bring about better results.

A focus such as your, however, is narrow in one sense, and yet broad in another.  Two notable banking technology firms in the U.S. (Fiserv and Jack Henry) decided to expand into insurance (ten and five years ago, respectively).  It seemed to many observers a natural extension of interests.  After years of trying, however, both of these firms recently began withdrawing from insurance and returning to a more exclusive focus on banking (Fiserv by divesting 51% of its insurance assets and Jack Henry by divesting 100% of its insurance assets).  They found the synergies between a banking focus and an insurance focus elusive.  For more detail see my posts on this blog from a few months ago: Financial Services Divergence and Insurance Technology v. Banking Technology.

We remind you of these examples not because we think you will fail to be strong in insurance, but because we hope that you will succeed in being strong in insurance.  Insurance stands to gain more from improvements in technology deployment than almost any other industry.  Its fundamental product is intangible and its current applications of technology are dated in many instances.    Polaris can participate in great innovation and productivity gains if it is thoroughly committed to the insurance industry.  Lukewarm commitments to serving the insurance industry seldom prevail.  The industry is too complex and arcane to be served well by any other than fully-committed suppliers.

So here is wishing you the best of success with SEEC.  May Polaris be an important part of helping the insurance industry become what it can be: the world’s most innovative user of technology in the 21st century (because it wasn’t always in the 20th).

Patent Landscape May Have Been Permanently Altered Last Week

In news that has blogs and forums running over, especially in the open source world, the U.S. Court of Appeals ruled on October 30th that software and business methods can no longer be patented in the broad way allowed over the last ten years.  The commonly described “business process patents” would be restricted to only those “implemented by a machine or that transform something into a new or different thing.”  This ruling supports the most common criticism of these business process patents: that they were granted for processes that were either not in fact proprietary or that discouraged any other innovations in the same field for fear of inviting a patent infringement lawsuit.

Here are two news sources describing the verdict and outlining its potential implications: eWeek and ITExaminer. 

While I certainly can’t speak as a lawyer, this would seem to have significant bearing on the Accenture-Guidewire litigation.  (See my earlier posts on this subject:  ACN v. GW: Why I Hope Guidewire Wins Against Accenture and ACN v. GW: Details Emerging.)

There is speculation about whether this case will or will not be appealed to the Supreme Court.  There is also legislation aimed at improving patent law but it has stalled in Congress (passed by the House last year, it has not yet made it out of the Senate). 

That patents have become a great source of contention in recent years is beyond debate (just ask Accenture and Guidewire).  Perhaps through this legal ruling and/or legislation from the new Congress, some of the contention’s sources can be removed.

Futurist Says Insurers Must Innovate

Tammy McInturff of LOMA’s Resource magazine got a great interview out of futurist James Canton in the November edition.  Canton is Chairman and CEO of the Institute for Global Futures: Harnessing the Power of Innovation.  He made some interesting comments about the recent financial crisis and current economic slowdown – specifically, that there is more upside than most people are noticing.

As for insurance, he had many specific and prescriptive points.  When asked what he thought were the biggest threats to insurers’ futures, he listed (italics mine):

     – Not moving fast enough to embrace new technologies that will make your operations both cost effective and more future ready.

     – Insufficient appreciation for talent management.

     – Inability to create products that are in sync with the changing demographics and financial needs of the population.

When asked what was the biggest mistake he saw insurers making, he gave two:

     – Not listening enough to customers.

     – Not paying enough attention to innovation.

It’s hard to take issue with any of his points.  Moreover, he describes an increasingly competitive world which only add emphasis to his suggestions about, for example, innovation and talent management.  To read the full interview, click here.