Explaining the Hiatus

Wondering why I haven’t posted to this blog in a while?  I’ve been working with the Moore Business School of the University of South Carolina (USC) this summer to enable them to assume ownership and operation of Innovation In Insurance – the web site of which this blog is a part, a site focused on improving the insurance experience for consumers and businesses all over the world by dedicating itself  to all things insurance technology (software, services, data, outsourcing). 

The most interesting and exciting aspect of this transition and new phase is that Moore School students will operate the site.  In fact, the transition has already begun with two students and a professor becoming trained and doing most of the site’s work this summer.  Plans for the fall semester call for ten students to comprise the operational team.

The Moore School of USC is the logical institution to take up the charter of Innovation In Insurance.  Its graduates have been actively involved in making Columbia, South Carolina a center of innovation in insurance for over 100 years.  The file cabinet was invented here in 1898, the industry’s first fully-integrated online policy management system was launched here in 1972, and today more health insurance claims are processed here than in other city in the country – perhaps the world.  (For more on this history, see article in middle of this page.)

I have loved launching and managing this site, but its demands have outstripped my semi-retired time resources.  I had a decision to make, and allowing it to become a research program of a world-renowned business business school and research university (for 20 consecutive years its international MBA program has been ranked number 1 or 2 by U.S. News and World Report; more on its rankings) was by far the most attractive alternative to me.  I believe the site can become the nucleus of a host of research and innovation activities involving not just students, but faculty, administration, graduates, and, of course, the broader industry and its community.  The scope of the site’s interest will continue to be worldwide (not merely U.S.) and this fits perfectly with the Moore School’s reputation.

We’ve been working on installing leadership for the effort.  Managing Director of the site will be Jeff Thompson, adjunct professor at the Moore School.  Executive Director is Ernie Csiszar, Special Assistant to the Dean of the Moore School and former president of the National Association of Insurance Commissioners.  As Executive Director, Csiszar will also co-chair the site’s Board of Directors.  The other co-chair, representing the business community, is Eddie Jones, Senior Vice President of Marketing and Communications for StoneRiver, formerly the Insurance Group at Fiserv.  In addition to its Board of Directors, the site will also have a Board of Advisors (executives who give guidance to students about industry needs for the site) and a Board of Contributors (organizations that donate time and expertise to help students operate and enhance the site).  Membership for these  boards is being secured and announcements regarding the individuals involved will be made over time.

Official announcement of all this will be made by the Moore School, probably in September (if you’re with a news organization, please await that announcement before publishing this news – thanks).  I am very excited about  how Moore School students will grow this site to better serve the insurance technology industry.  If you’ve appreciated the site and would like to follow its progress as it reaches for new levels, be sure you are signed up for its news update e-mail sent at the end of each week by clicking here.

Wipro Makes It Interesting

While some are still wringing their hands about Satyam, Wipro has announced that it has developed and will market a software-based solution called Insurance Claims Analytics (ICA).  This business intelligence solution is designed for P&C carriers, and is expected to be followed by other solutions for the insurance market.  This move, of course, takes Wipro beyond its bread-and-butter business of providing people to execute processes and into the field of providing proprietary technology.

Wipro is not the first Indian outsourcing company to take such a tack, nor even the first to do it in insurance.  That distinction probably goes to Majesco Mastek whose chairman, Sudhakar Ram, formulated and began executing this strategy several years ago.  He believed that proprietary software was an important weapon to add to his competitive arsenal.  Wipro is a far larger company, however, and its move in this direction sets up some interesting possibilities.

It’s natural that Indian firms would take advantage of the business process knowledge they’ve gained from the work they’ve been doing for insurers.  To leverage the domain expertise they’ve gained as a result of aggressively growing their operations is a wise move on their part.  On the other hand, it will be interesting to see how other competitors respond – will everyone step up their game?  The insurance industry should benefit from the heightened competition that will occur.

It will also be interesting to see if the Indian firms are willing to develop software that reduces process steps, automates processes, and, as a consequence, reduces the headcounts required to execute an insurer’s business processes.  After all, the Indian outsourcers have grown their revenues by “adding seats.”  If this new revenue stream of proprietary software reduces seats, will the owners be as aggressive in pushing it?  It’s not easy for any company to alter its business model or do anything that might cannibalize its core business. 

Of course, it’s much too early in the game to wonder whether an analytics solution like ICA is going surface all these issues.  But if the major Indian outsourcers are going this direction of converting their ever-increasing domain expertise to technology solutions, we’ll see some of the answers in the next few years.

Satyam Is But One Apple

“One bad apple doesn’t spoil the whole bunch,” goes the old saying.  With the Satyam debacle on our minds, this is certainly an adage worth remembering.  Unfortunately, news accounts and opinion pieces are carrying notes like this:

Far beyond Satyam, it raised fears that similar problems might lurk in other Indian companies, particularly in its vaunted outsourcing industry.  – NY Times, January 8, 2009

Let’s hope that’s not the case.  How wise would it have been if, when Enron’s follies were revealed, Indian and other global investors decided that they should stop investing in and relying upon all oil and gas companies?  Or worse yet, if they had decided all American companies were, as a result, suspect?   

I can’t vouchsafe that no other Indian company will similarly fall – but neither can I do so for any other American company, or British, or French, or German or…

Those who know India only from a distance see all Indian outsourcers the same.  Those who know them more intimately, however, have always known there was a suspect culture at Satyam.  They were certainly never regarded as in the same league with the Big Three: Tata, Infosys, and Wipro.  Moreover, even among the second and third tier Indian outsourcers they were widely regarded as having an overly-aggressive culture – promising too fast, explaining too glibly.  While this was by no means proof that a billion-dollar shenanigan was going to take place, it did mean that sophisticated observers were not completely surprised by this outcome – just as many who knew the sharp-elbowed, predatory culture at Enron were not as shocked as the rest of the world at its ultimate fate. 

I have known and worked with Indians for over a decade and I love them as individuals and as a people.  They hold dear all the things that we Americans hold dear: life, liberty, and the pursuit of happiness (even though they’d use different words to describe those values).  Moreover, Indians are a Horatio Alger story for our times.  They pulled themselves up from poverty and are making themselves a world economic power.  A lot of the affinity between India and America perhaps owes to our common ancestry as outposts of the British empire and heirs of its finer ideals.  But even more of it owes, I think, to our common humanity and shared belief that honest hard work can make a better world.

If anyone wants to say that these Indian companies aren’t subject to sufficient scrutiny, then let him take a look at how well U.S. oversight agencies have done in the last few years (Fannie Mae has had more oversight than any other business on earth and how well has that worked out?).  And then consider that if you want to know why Satyam’s auditors didn’t catch this sooner, you can reach out to an office of theirs near you because you’ve probably heard of them: PriceWaterhouseCoopers.

Let us not paint India with a Satyam brush.  It’s not fair, and we wouldn’t want it done to us.

Show Us The Money!

Although there are not enough data points yet to call it a trend, we may be seeing the beginning of an altogether expected scenario given the severe recessionary climate in which we find ourselves:  insurers more willing to outsource because they not only need to cut costs, but also need to generate capital.  That is, insurers looking for upfront cash from outsourcing deals with increased interest.  The case of which I speak was reported in today’s The Economic Times of India and includes the following quote:

“One large insurance company, currently discussing a contract, demands over $100 million upfront payment as part of the savings promised by a vendor,” said a top executive of a leading tech firm who did not wish to be named. “We find more telecom companies discussing this as part of the deal currently,” he added.

(Click here for the full article)

It stands to reason that in this environment where “cash is king” has an intensified meaning, that insurers would look for such deals.  Whether they can get them is another story.  But here would be the good news: if insurers are becoming more open-minded about outsourcing because of benefits such as these. 

If vendors are only facing increased pressure on the deal terms for a deal flow they already have, then that could be downright discouraging.  But if yielding such deal terms means a vendor will receive a significantly increased number of deals, or significantly increased size of deals – then that makes for an interesting environment to enter.  Let’s give it more time and see what happens.

Beauty Contests For Vendors Abound

You may have seen on www.InnovationInInsurance.com notice about the Celent/Insurance Networking News VIP (Vanguards in Insurance Practices) Awards Program.  If not, you can participate in the survey at this link.  Just prior to that, there was the Insurer’s Choice survey (now closed) conducted by Financial Insights/TechDecisions (link here).  I guess this could remind you of Chicago-style voting (i.e. ”Vote early, and vote often”). 

Some people may take issue with multiple beauty contests like this, but I think it’s good for the industry.  Anything that gets vendors recognized and gives visibility to their offerings is a good thing.  Of course, it makes for an interesting situation when both awards are to be presented at the ACORD/LOMA conference in May (Imagine the Miss America and Miss USA pageants being held at the same time in the same building). 

Kudos to the research firms and the trade periodicals investing in these surveys.  Vendors will spruce up for entry and everyone in the industry will have greater visibility to these vendors who are bringing the software, data, services, and outsoucing that are so important to the advancement of the insurance industry.

And may the best man win!  (In the spirit of gender equality, I decided to mix the metaphors.)

Insurance Outsourcers Finding Strong Support

This week brought announcements about two of the insurance industry’s larger outsourcers – Long Term Care Group (LTCG) and ZC Sterling (ZCS) – changing owners (news reports can be found at www.InnovationInInsurance.com).  LTCG was acquired by a financial buyer and ZCS by a strategic.  Details were limited but both deals appear to be good for all concerned, which is all the more encouraging when you consider the financial/economic climate in which we now find ourselves.

LTCG is by far the largest processor of long term care insurance in the U.S. with approximately 20% market share.  The company has 1,200 employees and provides its service to over 30 carriers, including 9 of the top 10 writers of long term care insurance.  Interestingly, LTCG will become part of a larger play by affiliation with a provider of long term care services which should create scale and synergies. 

ZCS is also a leader in its market, being the leading provider of force-placed property insurance in the U.S.  They are expected to generate about $425M in written premium in 2009 and $525M in the following year.  Having been acquired by a public company (QBE, Australia’s largest P&C insurer), ZCS’s sale price was disclosed at close to a billion dollars ($575M upfront with a two-year $325M earnout).

The common thread in these deals is that outsourcing, while so far somewhat limited in its insurance deployment, can be very successful.  Each of these companies operates in a specific niche where it can achieve not only economies of scale, but economies of scope as well.  They move up the experience curve by narrowing their focus to a specific subject which they can master.  Contrast this approach with the one-size-fits-all historic outsourcing models used in other industries.  The former model succeeds while the latter model has struggled.

The ingredients for success in companies like LTCG and ZCS include proprietary technology, a strong and focused management team, and a workforce of domain experts.  When I say “workforce of domain experts” I’m not suggesting that every person needs know everything about the topic.  As a team, however, they need to collectively represent strong and deep knowledge of the business being served.  This begins with the leaders who must be dedicated enough to the success of their customers that they commit to truly understanding the customers’ business. 

LTCG and ZCS are both strong companies and should continue to grow with their new owners.  The insurance industry can grow more successful outsourcers by following the paths cut by these two firms.  That will mean good results for customers and for investors.

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)

 

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.