This paper seek to address the concept of outsourcing information and technological products and services, as a structural business change that will enhance the delivery of quality and tailored insurance products and services to our clientele. This report substantiates the economic benefits of outsourcing information and technological products from India, against the risks involved and the best recommendations that will effectively guide the process.
IT needs in the insurance industry:
Across the insurance industry, there are a number of important IT needs, which include systems maintenance and repair, system development, training, research and development, data engineering and consultancy services, data mining, network management and others (Joshi, 2013). It is through these systems, applications and services that analysts, economists and forensic auditors utilize in performing risk analysis, assessments, and risk mitigations, and develop a practical risk management model.
According to a World Bank study, India has been documented as the second most favored country in the designing and provision of IT services across the globe. Indian companies have exhibited their competence in delivering mega projects, on timely basis and at lower costs, while utilizing state of the art technologies and the modern global quality standards (Chaudhuri, 2014). The software industry in India is rated at USD 10 billion strong, and has consistently developed at a steady rate of 54 percent. Over 2000 global insurance companies are sourcing their software needs in India, due to its free market-oriented business environment, supportive government policies and an investor friendly market.
Merits of outsourcing:
Outsourcing is a strategic tool adopted by firms to enhance them focus on their core competencies, while delegating the non-core operations to an external entity, such as a consultant or a subcontractor, that specializes in that operation. As a business decision, outsourcing is done to lower operational costs or to allow the firm to increase productivity in its core competencies. Therefore, the process is about creating value (Cromie & Zott, 2013). It involves reengineering operations towards creating the optimal benefits to the customers, at a reduced cost and enhanced quality.
Through outsourcing, companies have managed to focus on risk sharing as a deeper issue in the insurance industry. It has helped companies relocate their resources in geographical locations where labor costs and policies are more affordable and favorable, a leeway that has generated more revenue in cost-effective contractual agreements. In such an arrangement, a firm collaborates with another firm to create new technologies, under new procedures and methodologies that are profit oriented, and with quality guarantee.
Over time, the outsourcing process has expanded in scope and complexity, covering information and technology, finance, human resources, administration, transportation, healthcare, customer service and many other sectors. Across the information and technology sector, many companies have entered into outsourcing, with the growing technological needs and the rapid technological evolution (Deering, 2015).
With a vast experience in software engineering and development, the Indian companies have innovatively created advanced systems that meet the needs of the competitive insurance industry. As new risks emerge, such as terrorism and corporate fraud, firms have continued to seek technological solutions that will effectively cover such risks that induce overwhelming financial implications (Chaudhuri, 2014).
Factoring that these IT solutions can be sourced from the overseas market at affordable pricing, this will enhance the forensics auditing procedures, a much needed product across the American insurance industry. This technological adoption will tap new clientele, especially from the corporate and legal domains, where the auditing software forms an essential component in investigating corporate fraud and related risks coverage.
Low cost-quality products:
On the basis of currency conversion and pay-scale, the American dollar features a higher market value as compared to the Indian Rupee. The dollar amount on the on-site IT services stands at 59 percent more than the offshore services. This implies that it will be possible to secure more quality software projects at much discounted rates, approximated at 30-40 percent cheaper, than on the American market (Chaudhuri, 2014). Factoring that most of the Indian software company holds a level 5 rating as per the global Capability Maturity Model (CMM) standards, this guarantees the delivery of quality projects.
Reduced waiting time on emergencies:
Across the United States, most clients and insurance companies report of protracted waiting time when sourcing technological solutions or claims, from their service providers during emergencies. The delay is often attributed to technical and human capital limitations. In India most of the IT factories are run on virtual machines and programs, and this speeds up feedback between the two firms (Deering, 2015). Also, considering the 11-hour time difference between India and USA, this will allow a 20- 24 hour workdays, with higher prospects of responding to highly prioritized elements or emergencies.
Improved internal competence:
Across the insurance industry, information and data are inherent attributes that enhance the pricing of risks. This implies that investing in superior technology that has the ability to capture the relevant data, as accurately as possible and with the least cost implications, is a precedent endeavor in this industry (Cromie & Zott, 2013). As the demand for the risks analysis, pricing, coverage, assessment and risk mitigation services intensifies, the adoption of information and savvy technology proves inevitable.
As Triad Insurance Company strives to manage the aforementioned information and technological faculties as a single vendor, the firm has in the recent past reported poor internal systems control, which has considerably escalated the inventory costs (Pearce, 2005). This evidently reveals that the firm must have registered declines in its overall productivity.
Comparatively, as the firm strives to balance the requirements of the diverse information and technological elements, while meeting the demands of its clientele, these obligations have stood overwhelming to its internal capacity. Furthermore, as the functional responsibilities multiplies, this consistently diminish the value of the insurance products and services. Therefore, the firm is seeking to enter into an outsourcing relationship with software companies across India and overseas. This decision will ensure that the firm concentrates on its insurance claims and coverage services, with full expertise and competently.
Demerits of outsourcing:
Loss of managerial control:
Upon signing the outsourcing contract, Triad Insurance Company will relinquish its managerial control of the entire IT department to another company. If the operational standards between the two companies are incompatible, this will prove challenging in harmonizing the goals and objectives set thereof (Deering, 2015).
As the two companies sign the binding agreement, any regulation or procedure, such as the legal parameters, that might be missing on the contract will be met by the outsourcing company. In addition, the outsourcing company will need to hire an attorney or lawyer to oversee or review the contracts signed (Deering, 2015). To Triad Insurance Company disadvantage, the firm will be compelled to meet these additional costs.
The risk of exposing confidential information:
As the firm is outsourcing, pertinent information such as: IT assets, licenses, leases, financial details, internet protocols among others will be transferred between the two companies. The sharing of proprietary data or knowledge is sensitive, and must be adequately considered, especially with the ultimate concerns of IT systems hacking (Deering, 2015).
The outsourcing process will require the initial service providers to give room to a new list of service providers. Many employees will lose their jobs, a fact that may generate negative publicity and ill-will. In addition, the remaining work force might be demotivated, on the fact that their job security prevails at stake (Cromie & Zott, 2013).
Uncertainties of a financial well-being:
The two outsourcing companies will remain tied to the economic operations and financial well-being of the other. If one company sinks into bankruptcy, the other company will suffer losses as well (Cromie & Zott, 2013).
Despite the benefits that arise from outsourcing activity, the entire process carries a significant set of risks that must be addressed appropriately. This section therefore documents two important processes, risk analysis and risk management, as essential tools in fostering a successful outsourcing process (Siepmann, 2014).
Risk analysis is a point-in-time evaluation process. It is conducted prior to the selection of prospective suppliers, mainly to define their risk profiles. Potential suppliers will be ranked according to a risk ranking criteria, where quality, performance, technical and financial competence will be used to rate the company (Siepmann, 2014). The regulatory, legal and environmental parameters across the IT industry will be assessed, with more focus on constraints and compatibilities between the two companies.
The best supplier may in fact be the one rated high risk. In this setup, the managers will be compelled to demand a more rigorous risk management process from the supplier into the contract terms, which would not exist in a medium or low-risk rated supplier. In such an event, the two companies will remain committed to the contractual agreement, based on its high penalties and financial implications on breaching the stipulated terms (Siepmann, 2014). The desired supplier rapport will be defined during this phase, therefore, due diligence is a prime requisite.
The concept of risk management is a continuous process that encompasses three core elements: supplier and contract management, the service level management (SLA), and the billing accuracy. The supplier and contract management monitors the statistical data on all transactions, and the entire outsourcing activity over time. The statistical data is used as an advantage tool to assess and enhance the performance, while sustaining or reviewing the relationship between the two companies (Deering, 2015).
The SLA determines what statistics to be retained and outlines the necessary requirements between the parties. Depending on the contractual terms, the SLA must be reviewed and updated frequently, to ensure that informed decisions can be reached on a timely basis. The billing accuracy is a system that records the financial transactions during the outsourcing activity. The system generates auditing provisions against inconsistencies that may introduce grave financial errors (Deering, 2015). It is the role of the outsourcing company to continually review the billing data to guarantee compliance with the contract terms.
In the insurance industry, the main distinguishing element among the players is the level and quality of services provided to the clientele. Being the largest industry on the basis of clientele base, the key challenge among the firms is to keep the policy holders, as retention commensurate to quality service delivery (Pearce, 2005, p. 89). Factoring the intense competition and industrial growth, insurers must be better placed to manage the growth and offer better customer services.
Although the information and technology has significantly propelled the efficiency of Triad Insurance Company to quality products and services delivery, outsourcing opportunities can generate more opportunities. Time being an important aspect in evaluating the validity and benefits of the outsourcing activity, the best practices for safeguarding value from the information and technology prevails the same: accurate problem diagnosis, rigorous assessment of potential suppliers, sound contract negotiations, and proactive post-contract management.
Chaudhuri, B. (2014). E-governance in India: Interlocking politics, technology and culture. London; New York: Routledge.
Cromie, J., & Zott, L. M. (2013). Outsourcing. Detroit: Greenhaven Press.
Deering, A. (2015). Outsourcing: Strategies, challenges and effects on organizations. New York: Novinka
Joshi, G. (2013). Management information systems. New Delhi: Oxford University Press.
Pearce, L. M. (2005). Encyclopedia of American industries. Detroit, Mich: Gale.
Siepmann, F. (2014). Managing risk and security in outsourcing IT services: Onshore, offshore and the Cloud. Boca Raton, FL: CRC Press.