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Cost savings only the beginning of offshoring advantages


As insurance industry companies look to maintain profitability in the face of softening market conditions in many lines, one concept they frequently are looking toward is offshoring certain business functions.

The benefits of offshoring can go beyond cost savings, however, according to many experts. Outsourcing certain functions to offshore locations can free up company resources to pursue core activities, or expand the resources available to companies so they can expand their book of business.

And, done properly, offshoring can also produce improvements in service and quality and allow companies to tap specialized workforce expertise in certain countries.

Dan Epstein, chief executive officer with ReSource Pro L.L.C., a New York-based remote staffing firm with a facility in Qingdao, China, serving managing general agents and retail agents, noted that his clients typically face issues that lead them to consider outsourcing some functions.

They often struggle to find skilled staff for processing tasks, Mr. Epstein said, and many often find that as they try to simply keep up in a competitive business environment, many have little time to focus on innovation. Meanwhile, in a soft market, many agencies are feeling pressures on their margins.

"The fact that it's 30% to 50% cheaper to use a full-time member of staff with us in China...they can basically write new business at a considerable cost advantage," Mr. Epstein said.

He cited the recent experience of one client that had a new market opportunity but lacked the staff to work with the new business. Meanwhile, existing staff was already working considerable overtime to keep up with the agency's existing business, negatively affecting staff morale.

Working with ReSource Pro, the agency was able to bring on 26 people in the staffing firm's China operation in addition to its staff of 23 in the United States. "Now you could imagine what those 26 people would have cost" in the United States, Mr. Epstein said.

Another potential benefit of offshoring is increased productivity, Mr. Epstein said. "It's very powerful," he said. "We're doing quite complicated tasks."

Despite the cost savings companies can realize by offshoring, that shouldn't be their sole consideration, said Russell J. Pass, a member of Chicago-based management consultant Bridge Strategy Group L.L.C.

"There's no denying that cost remains prominent, but cost savings result from more than just wage arbitrage. They also result from a commitment to continuous improvement," Mr. Pass said. "That's something of which these highly motivated offshore workforces are very capable. The benefits of learning to do the job better are obviously not limited to cost alone. They encompass service and quality as well."

There are other potential benefits.

"Where we've worked, offshoring has also been a reason to standardize and centralize functions that had previously been decentralized, largely for historical reasons," Mr. Pass said. "Standardization done intelligently brought significant benefits and would never have happened without the spur of moving the work offshore."

Ultimately, companies need to keep in mind that the wage benefits in an offshore environment won't last forever.

WAGE benefits fleeting

"If wage arbitrage is your only reason for going offshore, you're probably making a mistake," Mr. Pass said. "Eventually, it's going to go away, and probably sooner than we think, given wage inflation and currency appreciation in many of our trading partners."

"Going offshore is really about tapping into the specialized expertise of other countries and the competitive advantages of their workforces," the consultant said.

Mr. Epstein noted that the approximately 200 employees at his company's China facility--who provide outsourced services to agency clients such as data entry, underwriting assistance, policy handling and report management--all are college graduates.

He said ReSource Pro hires only about 5% of those who apply and looks for applicants with strong English language skills as well as those who will fit into a team culture and demonstrate a strong work ethic.

Mr. Epstein noted that his company is considered an attractive employment option in Qingdao, and that the company has a 90% employee retention rate.

"The employee comes first, the client comes second," Mr. Epstein said. "Customer service is critical for us, but it starts with good employee morale and training."

And, while a common view is that functions to be offshored are limited to such tasks as call centers, skilled workforces in many areas provide opportunities for more complex tasks.

In a recent report titled "Getting more out of offshoring the finance function," McKinsey & Co. Partners Michael Bloch and Shankar Narayanan and Associate Principal Ishaan Seth said, "The quality of offshore providers of finance and accounting services has never been higher."

More sophisticated vendors offer companies an opportunity to not only cut costs but to increase productivity and improve control and risk management, the McKinsey consultants wrote. "Yet very few companies have come close to capturing the full potential of offshoring finance operations."

Bridge Strategies' Mr. Pass also sees potential for offshoring more complex tasks.

"A common misconception is that offshoring is for simple, repetitive tasks that people onshore have little interest in doing. The reality is that offshore workers, given the right training and hands-on experience, are every bit as capable as individuals here in the U.S.," Mr. Pass said.

Varied Opportunities

In terms of types of tasks best suited to offshoring, "The best candidates are those that can be easily decoupled from the work that will remain onshore and don't complicate customer relationships," Mr. Pass said. "This includes IT and back-office tasks such as finance, accounting, and parts of HR, but we've also had a good deal of success with front-line functions."

There are other areas that insurance industry companies might do well to consider, he said.

"Premium accounting and a number of actuarial services, though complicated, work well because they can be easily packaged into work units for someone offshore to perform," Mr. Pass said. "Even something as potentially sensitive as claims, at least those that don't require much in the way of negotiation, can work. Companies uncomfortable offshoring a front-line function like claims can dip their toes in by starting with runoff claims, where we've had success."

For all the potential benefits in offshoring some operations, companies must actively manage the process.

In a February white paper titled "Insurance Outsourcing: Managing the Risk Paradigm," Alan Hanson, a partner in the Global Financial Services practice of Technology Partners International Inc. in New York, noted that insurers face reputational risks should their outsourcing initiatives fail, and so must rigorously manage outsourcing initiatives and related exposures.

But ReSource Pro's Mr. Epstein said transparency and client reporting is one of the areas his company emphasizes in its business relationships. "One of the things I think we're very good at is transparency reporting," he said. "The team leaders are trained to communicate to the client and there's typically communication on a daily basis."

The company provides productivity reports to clients on a daily and monthly basis, including analysis of how actual productivity compares to the client's initial estimates.

"They don't have that sort of transparency with their own staff," Mr. Epstein said. "So, in a sense, even though they're outsourcing work, they're really gaining control. And someone's accountable."

As insurance industry companies seek offshoring partners, "The first thing to understand is that it is possible to offshore without outsourcing, and vice-versa," Mr. Pass said. "Companies that are comfortable outsourcing are increasingly getting out of the business of deciding where the work is going to be performed. Whether or not they are offshoring is less and less visible to them."

"Offshoring services is really an HR play, and what you want in an offshoring partner is a company that will be able to sustain itself even as the war for offshore talent intensifies, one that can explain how its recruiting and retention strategies will enable it to maintain a competitive advantage over time," he said.

"You also want what you would want from any outsource provider--a good reputation, a commitment to more than just fulfilling minimal contractual obligations, and a willingness to be flexible as needs change." IF