Populist Politics Obscure Facts and Reason

For the last few years, visible populists like Lou Dobbs have sought to stigmatize any company who outsources.  The populist argument goes that such companies are “exporting U.S. jobs to other nations” such as India.  If that was the only story you heard, you’d think such companies were bent on ruining America just to make more money for themselves.  You’d also think that multitudes of American workers, including IT professionals in the insurance industry, were losing their jobs week after week to offshore firms. 

Fortunately, there are plenty of facts which refute such specious arguments.  A notable story filled with such facts turns up recently in Insurance & Technology magazine where they describe how one of the largest insurance claims processors in the U.S. has had the dickens of a time finding enough IT workers – so much so that they’ve now partnered with IBM and a major university to try to get more young people interested in pursuing the field  (click here for the article). How can this be if outsourcing decisions have idled multitudes of U.S. IT workers?

Blue Cross Blue Shield of South Carolina (BCBSSC) has a million customers but also is a major behind-the-scenes processor for other Blue plans and for several programs of the U.S. government.  In fact, there are more insurance claims processed by this Columbia, SC-based firm than by any other firm in the country.  Thus BCBSSC is one of the major employers of IT talent in the insurance industry and would be able to speak more credibly than Lou Dobbs about whether there is a surplus or shortage of IT workers.

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.

Want Your Insurer To Be More Innovative?

Matt Josefowicz and Steve Kaye of Novarica have just written and published a twelve-page research report titled Innovation and Agility in Insurance IT.   The research included interviews with 31 insurer executives conducted last month through Novarica’s Insurance Technology Research Council, a moderated membership group of senior IT executives from both life/annuity and property/casualty carriers.

The preview page of the report includes a provocative graph which indicates these execs would like to see more emphasis on innovation from the top of their organizations.  It also indicates line-of-business execs are receiving too much pressure for innovation – pressure that should be on designated innovation groups as well as on the senior execs of a company. 

The report promises recommendations for increasing the agility and innovation quotient for a carrier.  Matt is highly regarded in the industry so the report is likely to receive attention.  (Among other accomplishments, Matt is a magna cum laude graduate of Brown University, though I hear Brown does not award summa so he could be a 4.0 for all we know.)   

A key question for those interested in increasing innovation in insurance is the formation of innovation groups in a company and how responsibility is shared between such groups and the line-of-business organizations.

The long-standing argument for innovation groups is that line-of-business organizations are too pressured for recurring operational results to have sufficient freedom to innovate.  The long-standing argument against such separate groups is that only line-of-business organizations can execute and achieve innovation so assigning the responsibility somewhere else just makes for organizational confusion.  While this report doesn’t seek to settle this debate, it does add useful information and advice for achieving the ultimate goal. 

By all means, let us innovate!

IT Spending for Insurance Holding Up…So Far

As economic shock waves continue to reverberate throughout the economy, we all keep wondering what might happen to IT spending in the insurance industry.  The latest indications from analyst firms like Celent, TowerGroup, Gartner and others are all – believe it or not – encouraging. 

These reports are encouraging because while they certainly indicate some softening in growth rates in spending for 2009 compared to 2008, they generally don’t indicate an actual decline in spending.  For many people, that’s very good news.  The broad consensus seems to be that spending will be relatively steady, albeit with altered priorities.

Altered priorities is indeed the second common theme of these reports.  Insurers are not expected to spend money exactly the same way they did last year.  Emphases vary by analyst firm.  Here’s a scan of what they’ve been saying recently:

Priorities Will Shift, But Insurers 2009 IT Spending Remains Healthy According to Insurance & Technology Review of Analysts 

Insurers Face “Unprecedented Financial Pressure” But Will Still Spend on IT According to TowerGroup

Insurance IT Spending Will Slow in the Short Term But a General Contraction Will be Avoided According to Research and Markets

IT Spending for Insurer Data-Oriented Projects Looks to be Holding Up According to Celent

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.

Customer Sat Is Not Easily Measured

Most of the insurance technology industry sells business-to-business (B2B), not business-to-consumer (B2C).  Since the customer is a business and not an individual, customer satisfaction is a plural not a single measurement.  More specifically, there is seldom one person at the customer who represents the totality of what the customer thinks of the product or service being provided.

This comes to mind because I was reading Donald Light’s recent post on the Celent Insurance Blog in which he laments a vendor not knowing the mind of any customer given as a reference.  He cites the example of one reference he called who gave such a negative opinion that Donald was left to wonder:

How could the vendor not know, in general, what the reference is thinking–and knowing that, just give another reference? 

It’s a reasonable question.  But this leads me to think of the underlying and even more important issue than references – customer satisfaction.  It’s hard to measure in B2B situations because there are many opinions that matter.  There’s the opinion of the customer’s project manager charged with getting the product or service installed and operational.  There’s the opinion of the users who actually operate the system or service to be installed.  Then there’s the opinion of those who use the reports and other outputs of the system or service (and they are sometimes different than the users).  And, of course, there is the executive whose budgetary approval paid for everything – that opinion matters, too, eh?

It is no easy task to monitor and measure all these opinions.  Yet, they are all important.  Although it’s a more difficult challenge, I think insurance technology vendors should make sure they study customer satisfaction from all customer perspectives that matter.  Only then, can you be sure you know what you need to know.  Building a product or service and not building along with it an effective system for hearing the voice of the customer at every level is missing the best opportunity for further value creation.  This is because customer satisfaction monitoring not only tells you how you have done (in the past), it also tells you how you can do (in the future).  And that can lead to even more customers.

If you manage customer sat effectively, then managing references is simple:  you just say that people can call any of your customers and ask what they think (not just some select list of references that you’ve pre-approved because you know they’ll say good things).  Sure it’s  a gutsy move, but it’s far more persuasive than any other form of customer reference.

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)

 

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!”