IBM Business Consulting Services Point of View Insurance Realizing Embedded Value through Insurance Business Transformation Outsourcing The life and annuities business a scene of spiraling complexity The life insurance and annuities industry is changing quickly and dramatically. Regulations, tight margins and increased volatility are making it diffi cult to generate a consistent, high rate of return. At the same time, opportunity is robust. Fueled by a decline in pension plans and shifts from accumulation to payout mode for major population groups, there is a strong, emerging global market for income for life products. But, complicating matters is the fact that many premier life insurers are attempting to address industry challenges and capitalize on opportunities with multiple, antiquated legacy administrative platforms ill-equipped to quickly and profitably bring competitive products to market, and unable to provide necessary effective and effi cient policy administration services. The resulting drain on both human and financial resources is reducing profi t margins and potential investment income. And, this drain is inhibiting focus on the true competencies of the industry, namely, the manufacture and marketing of innovative life insurance, and annuity products and services. This is, by no means, a new situation. Life and annuity companies have been wrestling with it for years, with little to moderate success. Time after time, sincere efforts have been made to convert legacy platforms to a common operating environment that, ostensibly, would take out costs and increase efficiency. And, occasionally these conversion endeavors have failed, leaving the insurer trapped between the old and the new and, ultimately, in an even worse position. The failures have largely been attributable to three factors: the inadequacy of the new systems, the lack of a cost-effective conversion capability and the lack of a compelling business proposition. In the 1990s, efforts were focused around the edges, with attempts to isolate and even preserve the core engine. Implementations centered on areas like customer relationship management, Web portals, e-business, networking capabilities and data warehouses.
The root of the problem In today s marketplace, most serious players have ambitious plans for seamlessly integrated operations, strategies to target product manufacturing and delivery capabilities, and objectives of cost-effective service for discrete customer segments. But all too often, the real world operation is disjointed, resulting in hit-or-miss efforts to serve target client segments. And, the overlapping capabilities still residing in product silos create a sorely ineffi cient cost structure. Burned by failed conversions and transitions in the past, today s executives are understandably reticent to once again tackle the need to relieve themselves of burdensome, non-core administrative costs. The reality is that these core, isolated systems have become an Achilles heel. By using a business component model view and componentizing certain pieces of the business, such as the call center and agent support, it is apparent that the blob in the middle is the real roadblock. It is a powerful inhibitor to real business progress and success. Transformation with significant results Transforming to an on demand business requires insurers to address their business model, technology environment and capabilities outsourcing. While the majority of major life and annuity companies understand the need for change, many are daunted by the implications of proceeding and not reaching intended goals. Executives are now seeking a new way one that is less risky, based on a different economic model one that opens the door for a variable cost base. This new way is based on (Business Transformation Outsourcing) BTO, a model that drives efficiency and responsiveness, and allows companies to focus on differentiation in their core businesses. Companies who are embracing this model are often seeing not just variable cost structures, but also reduced cost structures, through a combination of: transformed, responsive business models; scalable, fl exible technology environments; and a variety of capabilities sourcing options. A Component Business Modeling (CBM) approach is used to help identify transformation and outsourcing opportunities. By viewing the business from a capabilities (or componentized) standpoint, companies can identify processing and servicing redundancies, ineffi ciencies and obstacles, lay out transformational paths and objectives and prioritize opportunities. BTO is one of the levers that can then be applied to achieve the transformational objectives. For example, an insurer might have eight areas needing urgent attention. It could to use a BTO approach to address three of those eight, keep the two areas which are core to its business fully in house and address the remaining three by keeping the processing in house and outsourcing the system. The goals of CBM include achieving the fl exibility to adapt to changing conditions, a reduction in the capital requirements to achieve transformation and rapid performance improvement.
The holistic approach to transformation By using BTO, it is possible to take a holistic approach to delivering improved business results through the transformation of business processes, applications and infrastructure. Flexible, customized deal structures and financing are part of the total picture. With BTO, transformation across the entire life and annuities value chain can be achieved. BTO affords a very attractive economic model a much more attractive proposition than traditional transformation. Traditional internal transformation normally demands high up-front investments and often projects realize only limited savings. There is an implementation risk that is frequently onerous to top executives who have experienced disappointment in the past. In direct contrast, BTO arrangements typically involve limited, or even no, up-front investment. And, risk is reduced. Savings are committed when the BTO contract is structured. The BTO partner, not the insurance company, takes on the transformational risk. Because of the variable cost structure and partner accountability, greater and longer-term savings are often realized. Savings can be significant The potential savings of a BTO approach can be significant. Based on actual results achieved by the IBM Insurance Outsourcing Services organization, typical cost savings come primarily from cost effectiveness and process efficiency: Cost effectiveness Cost effectiveness Cost effectiveness Cost effectiveness Process efficiency Process efficiency Process efficiency Optimize labor rates (location cost differential) Leverage multi-client site organization Achieve economies of scale through centralization Improve use of working capital Achieve economies of scale through standardization Simplify, eliminate, reengineer processes Automate manual processes Typical cost savings 10 30 0 5 0-10 0-10 0-5 0 10 0 5 The value proposition for BTO is different than traditional Business Process Outsourcing (BPO) as indicated in the table below. Processes Technology Service levels Benefits Pricing BPO Client processes (with some changes) Status quo to slightly improved Cost savings from labor arbitrage and economies of scale Minimal technology investments Resourcebased BTO Outsourcer-derived processes (substantial changes) Signifi cant technology deployment Oriented toward leading practice business metrics Cost savings also from process and technology transformation. Other benefi ts include improved fl exibility, performance and information visibility. Business-metric based
The value of BTO Insurers around the globe are seeking BTO solutions to achieve greater value more quickly than with traditional approaches like BPO. Outsourcers are able to offer improved and more innovative economics, including a contractual surety of benefi ts, investment smoothing and lower transformation risk. With a BTO approach, insurers are able to accelerate and sustain business transformation by capitalizing on the outsourcer s repeatable, sharable operations and transformation expertise. Leadership is attainable by leveraging a partner s expertise in process domain, business transformation, and technology experience and deployment. Once the risk is reduced for the operation of the business processes, people, and technology, the insurer is able to direct focus on the core competencies that truly make or break the business. Outsourcers are able to leverage larger investments across multiple insurers, as these outsourced functions are indeed the provider s core functions. This allows insurers to capitalize on opportunities for continuous innovation and improvement. What are life insurers doing? In the life and annuity business, outsourcing has moved to the mainstream. Companies are increasingly recognizing that their core competencies are product manufacturing, underwriting and/or distribution but not administration or support. The outsourcing of life insurance administration is a natural extension of outsourcing applications and IT infrastructure. There is real experience among life insurers demonstrating the feasibility and value proposition of outsourcing. Standardized processes and systems are driving efficiency, economies of scale and faster transformation. Globalization is increasing opportunities to improve the benefits and some insurers are establishing captive centers. The industry is being offered more compelling BTO solutions because supplier capabilities have matured. As BTO solutions gain popularity, insurers are shifting from narrow outsourcing to integrated, end-to-end solutions. Functional out-tasking for areas like application entry, imaging, billing and so on is being expanded to integrated, end-to-end solutions involving new business processing through claims management. The scope is shifting from traditional products like whole life and fi xed annuities, to more complex variable life and annuity offerings. The traditional focus on cost savings is being expanded to include parameters such as customer service levels, time to market and satisfaction. In the past, suppliers of outsourcing typically had competency in either process or IT, not both. Today, suppliers are offering insurance companies expertise in both the process and IT areas. Insurers who were only able to realize marginal improvements or incremental ongoing changes are now seeing regular improvements through continuous innovation.
BTO results The results of BTO efforts are impressive and deserve the attention of the industry. Enabling capabilities including global process delivery, sophisticated software solutions, advanced application management, specifi c insurance industry tailored research, advanced infrastructure solutions and customized fl exible fi nance structures are increasing the options for economic and transformational models. One relatively early adopter, a major American multi-line insurer, began using a BTO solution in 1998 to administer 1.2 million insurance policies. This company needed to improve its cost structure, enhance customer service and consolidate infrastructure. By leveraging BTO services, both operational and IT expenditures have been reduced and attention has been refocused on the fi rm s core competencies of sales and marketing. This organization has been able to create a difference in the marketplace by delivering superior customer and distribution service, and creating a new business platform for continued growth. One of Japan s largest life insurers embarked on a tenyear BTO contract in 2004, with the objective of creating a next generation service center. Already, customer service improvements are being achieved through the overhaul of this organization s contact center infrastructure. In addition, administrative effi ciencies are being achieved through initiatives such as the introduction of mobile terminals for sales representatives, installation of a supporting broadband infrastructure, digitization of all paper-based forms, and the implementation of workfl ow technology throughout the back office. Improvements include not just increased customer responsiveness and faster call routing, but also reduced handling time, a tailored approach to customers and faster claims processing. A top fi ve global insurance and annuities writer is using a BTO approach to provide comprehensive administrative services for a block of 60,000 fi xed and variable annuities. The insurer s administrative platform was lifted and moved to a BTO service center. Leveraging the existing platform, a costly and time consuming large-scale conversion was avoided. Today, BTO services are providing complete annuity operations services and showing a signifi cant improvement in service levels and signifi cant reductions in operating expenses.
Where to start? The fi rst step is diagnostic in nature. A high-level assessment should be done to develop baseline data, requirements and objectives. This phase could be short in duration as little as one to three weeks. A Component Business Modeling (CBM) approach can be used to help identify and prioritize opportunities. The next step is to evaluate BTO as a viable option. Could BTO deliver the desired results and meet the target objectives? During this phase, targeted savings are identifi ed, and service model and transformation opportunities are clearly defi ned, along with a transformation timeline and approach. In the life and annuity business, a cookie-cutter approach will no longer meet the demands of the market environment. As the business continues to globalize and customer needs and demands become increasingly sophisticated, BTO has the potential to offer a fully customized approach enabling insurance organizations to compete more effectively in the ever-widening and deepening pool of competition. About the authors Peter Corbett is a Partner with IBM s Business Consulting Services. He is a senior practitioner focusing on policy administration and business intelligence applications for Life and Annuity companies. Peter has over 20 years of insurance company experience, working for 10 years in the application software business before entering consulting, twelve years ago. Bob Evans, a former life insurance company CEO, has 29 years of industry experience in product design, marketing, operations and general management. He currently leads business development for IBM Insurance Outsourcing Services Patrick Wiltshire is a Sr. Business Solutions Consultant at IBM supporting the Life, Health and Pensions segment of the insurance industry. Prior to joining IBM in 1998 he spent 22 years working in the industry in various roles in I/T applications development, product development and marketing, insurance and customer service operations management, and strategic program management.
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