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.
Tags: Insurance, Innovation, outsourcing, Phil Fersht, The Outsourcing Blog, www.innovationininsurance.com
November 12, 2008 at 6:08 am |
Good information about outsourcing. Thanks for going back to basics of outsourcing. Its a informative blog
November 16, 2008 at 12:08 am |
Hi Mike,
Do you want to say that having domin certifications like CPCU, LOMA, etc. can help both Outsourcers and technology professionals?
November 16, 2008 at 11:03 am |
Absolutely yes. Outsourcers and technology professionals without insurance domain knowledge can only automate existing processes. They do not know enough about the process, its inputs and outputs, and its fundamental purpose to improve it. As Peter Drucker said, it’s not just about the shovel and how to use it, it’s even more about where to dig the hole.
November 17, 2008 at 10:10 am |
Well said Mike, I agree with you on that. I have been working with US based Insurance clients and to better serve them, I have completed INS diploma conducted by AICPCU and IIA. My practical experience after completing this diploma in P&C Insurance is that I am able to relate to the Client’s need and I am able to talk to them in their terminology and language. I think this gives them a comfort feeling that they are being served by people who understand their Business.
November 17, 2008 at 10:18 am |
Mike, what is your take on Obama getting into power in the USA? Is he going to promote offshoring and outsourcing or he would rather discourage it? How would it impact countries like China, India, Taiwan, Vietnam, etc.?
November 17, 2008 at 11:15 am |
Obama’s voting record suggests that he would vote according to U.S. labor union views which want to restrict outsourcing and offshoring to protect existing U.S. jobs. Many Americans regardless of their political persuasion, however, recognize that restricting trade and erecting barriers usually backfires. An economy is usually better off letting existing jobs go away and focus on creating new jobs which offer more opportunity. Therefore, we can hope that once in office, Obama will, as Clinton did, resist his party’s pull and instead support free trade policies.
November 18, 2008 at 12:26 pm |
If that happens it would be good for Asian countries that are outsourcing hub. I was reading an article published in a leading newspaper in India. The article mentioned that Obama is likely to tax offshoring, though he would not discourage outsourcing. He would rather promote near shoring to countries like Canada and Mexico.