Technology Outsourcing’ Exploring ASPs, xSPs

Technology and innovation advance continuously, and it is difficult, if not impossible, for insurance companies to stay abreast of emerging technologies. In fact, carriers may not only fall behind, but they could even risk developing and sustaining a competitive disadvantage due to a lack of insider’s perspective on new technologies and how they relate to an insurance company’s short-and long-term business strategies.

Outsourcing the development and hosting of a Web-based platform is one method companies are using to keep pace, as well as to maintain a competitive advantage. According to a recent survey by Gartner Inc., many insurers are turning to technology outsourcing, such as application service providers (ASP), to realize efficiencies and refine processes.

C-level executives are exploring partnerships to maximize Web-based technology, among other emerging technologies, as a cornerstone of their IT strategy to achieve rapid speed-to-market, reduce operating costs, provide greater underwriting control, lower expense ratios, improve loss ratios, increase sales, enhance ease-of-use by agents, and improve customer service to realize “hard dollar” bottom-line savings.

Exploring ASPs
One might find many different definitions of an ASP, and over the past two years ASPs have evolved significantly, which makes them even more difficult to define. One of the simplest definitions is that an ASP is a third-party that manages and distributes software-based services and solutions to customers from a central data center. The ASP usually hosts the software application, which can be accessed via the Internet for a lease or rental fee arrangement. In essence, ASPs provide insurance companies with the option to outsource some or all aspects of their information technology needs.

The move to outsourcing to ASPs in the insurance industry seriously began in 2000. The business drivers stemmed from insurance carriers facing competitive pressures to reduce costs and streamline business operations. With increasing pressures to reduce operating costs and launch new products, many insurers found these objectives difficult to meet. They have discovered that they have inadequate internal resources, such as staff with specific skills, or they are so overwhelmed with other priorities that they simply cannot complete all the requirements in the necessary time frame while maintaining current legacy systems. Lack of time, inappropriate skill sets and faster turnaround with the use of outsourcing to an ASP is driving much of the impetus today.

Many ASPs offer lower total cost of ownership when software, hardware infrastructure and maintenance are taken into account. Most ASPs let you negotiate a service-level agreement tailored to an insurance carrier’s needs.

The most effective ASPs offer fully redundant architecture (N+1 architecture), and ultimately, the scalability that most IT departments cannot achieve for a comparable cost or staff level. ASPs also have a distinct advantage in that they cost-effectively provide multiple backup services, including remote “hot” sites to ensure that companies can recover data immediately in case of a disaster, as well as the most advanced security technology.

Beyond ASPs
While many insurance executives may be knowledgeable about ASPs, most may not be familiar with the term xSP. The “x” is a variable and can represent many different types of companies, such as network service providers, managed service providers, Internet service providers, content service providers, and many more. Insurers are exploring partnerships with xSPs because they offer turnkey solutions and a broader range of specialized services unlike the “one-size-fits-all” that an ASP typically offers. Insurers can outsource some or all of their requirements, including hardware, software, physical space and staff. An xSP constructs the ASP solution to meet the exacting requirements of each client’s business function or process. The xSP hosts the services, but the infrastructure for each client can be dedicated to that client, and code/work flow is configured to meet each client’s unique individual requirements in that space—all leveraged with the same xSP staff and centralized data centers.

ASPs and xSPs provide outsourced solutions for many organizations. Their advantages include economies of scale, experienced personnel, solid production infrastructure, more rapid speed-to-market, and better return on investment. An important benefit for insurance company executives is that an ASP allows an organization to focus on its core competencies.

According to the Gartner Group, there is strong growth expected for ASPs, with projections of a $25 billion market by the year 2004. While they are relatively new to the insurance industry, they show enormous potential to improve efficiencies and reduce operating costs.

The outsourcing analysis
It is estimated that technology investment costs insurers four percent to eight percent of their annual budget. With increasing costs, outsourcing can provide a cost-effective alternative to building expensive technology systems internally. Industry analysts vary in predicted cost savings for a company that invests in Web-based technology. The average cost savings can range from 25-30 percent of expenses.

Whether or not your enterprise is a candidate for outsourcing depends on an internal assessment of skills, capabilities and needs. Outside vendors can be used in varying degrees. For many companies, they can add significant value to the planning and execution of their Web-based strategies and ongoing management of e-business initiatives.

According to a study by The Economist Intelligence Unit written in cooperation with Pricewaterhouse Coopers, increasing numbers of carriers and insurance providers will choose to outsource to implement their e-business capabilities. The study indicates that they will turn to outside vendors for services ranging from Web site construction and maintenance, claims, underwriting and actuarial services.

Organizations should strongly consider outsourcing when the business strategy requires highly specialized skills to design, integrate, deploy, host and maintain complex applications. It should also be considered when the IT staff is simply not available because of thin resources or because it lacks adequate product knowledge about new technologies to meet aggressive target dates to get the solution to market. Outsourcing can eliminate the in-house learning curve and erase any possibility of reinventing the wheel.

Organizations that choose not to outsource have to take precautionary steps to avoid a fragmented infrastructure, lack of skilled IT staff, and ultimately a significant waste of money.

While the advantages are significant, there also are challenges in choosing to outsource. Without a strong internal champion for the outsourced solution, there is little incentive for the IT staff to embrace a partnership with an outside partner. And while turning over internal development projects and application management to an outside vendor may preserve financial resources, managing the relationship with your partner does require commitment. An equally important concern is the smooth integration of your existing carrier systems and processes.

Efficiency and economies of scale
Economies of scale can be realized with an infrastructure provided by an outside partner. An outsourcer’s systems operations group provides the skill set, experience and localized skills to develop and host Web-based platforms. An outsourcer can also leverage strategic alliances with their application and hardware vendors that are not likely to be available through other means. The benefit is a rapid deployment to production and an enhanced resolution of issues.

Organizations often struggle with integration, deployment, upgrades and incremental development of sophisticated technologies. This often results in long lead times, high development cost and potentially detrimental interruption to the end user. A quality outsourcer can respond to change faster and typically assure that the change is seamless to the users.

An outsourcing partner can implement upgrades with frequent drop cycles and can do so with less cost because that is their core competency. When dealing with a specialized outsourcer, best practices have been established and are leveraged and continually refined throughout the lifecycle. Again, this means faster and more frequent upgrades and improved development cycles and the ability to manage market changes quickly without compromising the quality of the business.

Companies that take advantage of outsourcing will have a competitive advantage because in-house teams face ramp-up time, reallocation of internal resources, and longer lead times to deployment, which can result in missed opportunities and higher costs.

Compatibility between all involved
It is critical to have compatibility between the cultures and philosophies of your organization and an outsourcing partner. Moreover, an organization needs to be comfortable with the fact that their technology provider may have a particular expertise that is unfamiliar territory to them, and trust the guidance of its partner.

Finally, it is important that top management within the organization is involved and on-board with the decision-making process. Unless you have the buy-in from key players from within the organization, implementing an outsourced technology solution can be an uphill battle.

Vision for the future
C-level executives who accept the outsourcing value proposition, and are able to successfully implement an outsourced solution, are likely to consider it to be one of the (or “the”) most important strategies of their business plans.

Carriers that choose to embrace Web-enabling technologies will have the inside track. While the early adopters are sprinting ahead, those who follow may not have time to catch up or participate in the next wave of emerging technologies.

Geoff Smith is executive vice president and COO of ePolicy Solutions Inc. (www.epolicysolutions.com). Previously, he spent 30 years at The Hartford.

Topics Carriers InsurTech Tech