Investing outside the box

Outsourcing - paying another company to provide services that a company might otherwise have employed its own staff to perform - has been happening forever. Examples of outsourcing services that brokers use are: training, technology, compliance issues, risk management, staff recruitment and the handling of brokers' business books.

The emphasis on costs, service and technology in today's professional broking environment means it is natural for brokers to investigate saving time and potentially money by investing outside their traditional workspace.

While many brokers complain about declining service standards from call centres, some are benefiting from setting up their own.

One way of outsourcing is to use offshore facilities in countries such as India. The first UK independent insurance broker to establish an Indian call centre was the Caerphilly-based Moorhouse Group. The contract lasted six months, ending in March this year, and helped generate enough leads and business for the broker to hire around 30 additional staff. Chairman Lyndon Wood said: "It was worthwhile and, after the initial teething problems, it worked well. Training was provided within the contract, while we sent two members of staff to India for five weeks to monitor the process."

Since then, The Moorhouse Group has set up its own call centre and Wood comments: "We do not do any outsourcing at the moment. I prefer hands-on management." Although he found the process successful, he cites 'communication breakdowns', 'hidden agendas' and 'deterioration in service from companies that do not have the same appetite as your business' as potential pitfalls when it comes to outsourcing. However, he said, if the right opportunity arose, he would consider offering an outsourcing service to others.

Some brokers are already providing these services. Smart & Cook is looking after the majority of the Halifax Bank of Scotland's commercial insurance division broking book. The bank said it was happy with the arrangement, which began on 1 January, but declined to give further details.

Tim Rankin, managing director of WNS Assistance, a claims management company that handles 250,000 motor claims a year on behalf of brokers, insurers and large commercial fleets, comments: "According to our own commissioned research, while almost one-third of brokers feel that both service levels and control suffer as a result of offshoring, more than two-thirds nevertheless see outsourcing growing in the future. The competitive case for outsourcing claims management to specialist providers is so strong that those brokers that do not outsource will be left behind. It is a case of survival of the fittest."

He continues: "Where the question of choice comes in is not whether they should outsource certain aspects of their claims management but to whom. And there have been improvements in the market over recent years."

Small books

One attractive option for brokers is to outsource books of personal lines to free up more time for commercial business.

The majority of brokers handle small books of personal lines with an annual premium income under £1m, though more than half consider this business to be uneconomic. Research commissioned by underwriting agency PlusOne, which provides an outsourcing broking service for household business, found that only 4% of brokers were outsourcing small books of personal lines.

Managing director of PlusOne James Wallis says: "The main reason they keep this business in-house is to accommodate commercial clients. According to the survey, 42% of brokers handle such accounts for this reason alone, with the approach especially prevalent among provincials and super-regionals."

The survey found that brokers are aware of outsourcing and some are seriously considering it. Wallis says: "Thirty-seven per cent of brokers expressed interest in outsourcing their personal lines books in full and a further 30% are interested in outsourcing certain functions; 33% said claims handling, 33% mid-term adjustments, 44% renewals and 33% policy renewing."

Wallis is confident his business will grow, and predicts a 50% growth in the gross written premium that PlusOne handles next year.

A host of companies are battling to improve 'workplace efficiency'. One such company is Clear Technology, which has been working on sub-rogation for handling claims at Norwich Union in the UK. Graham Dawkes, managing director of Clear, believes the logic behind outsourcing and offshoring is flawed. He advocates improvements in in-house technology to avoid the implications of outsourcing. Though, ironically, Dawkes is advocating outsourcing in the short term to avoid outsourcing in the long term.

He says: "The assumption that people are essential for getting certain jobs done is flawed. The second flawed assumption is that direct labour costs can be cut with limited impact on revenue, customer satisfaction or other costs."

Dawkes adds: "Research shows that labour is not the biggest cost; the main driver of costs is the very high error and rework rate in many of these processes. They rely on a high level of manual effort to conduct low-value tasks, while consuming valuable time that could be applied to high-value, revenue-generating customer interaction. Management should really be looking for a solution that deals with the error rate and low-value tasks, not simply transferring typically inefficient processes to a lower-cost environment."

Takes time

Richard Smith, managing director of The PCMS Group, which manages IT services for brokers and insurance companies, believes the development of IT systems for mid-sized brokers has given them the opportunity to gain a march on the competition by using software that previously was only available to the larger players.

PCMS can offer an offsite server that allows brokers to tap into new software that they might not necessarily be able to afford, especially given the costs of a server. PCMS also undertakes consultancy work onsite and, a spokesperson said, "anywhere in between".

Smith also feels that poor service from call centres has unfairly bestowed a poor image on the outsourcing industry. He comments: "It is essential to ensure the move to outsourcing is not just moving a problem, but that the provider delivers a stable service. Therefore, a true managed service provider to the broker sector must be able to offer both cost reduction and the added-value capability to give clients better focus on customers than the internal resource would be able to provide."

Mark Grice, head of the brokers' group at Mazars, believes the introduction of contract certainty will mean brokers will be looking to make policy production slicker and, therefore, will look for methods to produce policy documentation faster, hence outsourcing their IT demands. He also believes outsourcing will be used by brokers to store backup data offsite. Grice added: "Brokers are ideal clients for IT companies because of the nature of the paperwork and electronic data involved."

Roop Singh, head of banking financial services insurance Europe technology at Wipro, which offers integrated business, technology and process solutions, says: "Outsourcing, specifically business process outsourcing, has undoubtedly helped the insurance industry to weather the effects of natural global disasters and new regulatory regimes over the last few years. The insurance industry was an early adopter of offshore BPO and we have seen the market begin to mature over the last few years."

Singh believes that insurers that do not have a BPO strategy, risk falling behind the non-differentiating functions, scale services and cost structures of their competitors. He says: "Many of the perceived downsides of offshore outsourcing come about simply because, when selecting a suitable BPO service provider, businesses do not ask themselves the right questions: namely, whether that provider has relevant experience and expertise in the processes being outsourced and whether those processes have unique industry-specific aspects."

Singh continues: "Although the key benefits of BPO, focusing on core competencies, improving service levels and reducing costs, and its disadvantages, perceived loss of control, are common for most business processes and industries, individual characteristics can vary widely. For example, the main driver of BPO in financial institutions tends to be improving shareholder value, whereas in another industry it might be the threat of regulatory intervention."

Insourcing

Although a trend in outsourcing is apparent, there has already been a backlash at the top end of the 'food chain', suggesting this industry may ebb and flow as firms experiment and readjust.

The National Out- sourcing Association has seen evidence that the trend of outsourcing might be in decline. Commenting on new research, a spokesperson says: "Insourcing is a growing trend and could have a significant impact on outsourcing, with large organisations pulling operations back in-house. Sixty per cent of those questioned believed that insourcing posed a significant risk to outsourcing contracts and was not a passing fad."

The survey was conducted with more than 60 of the UK's top outsourcing professionals, 30% of which felt that insourcing was a knee-jerk reaction to bad outsourcing experiences. The spokesperson comments: "It has recently been reported that some outsourcing contracts have failed to meet expectations. This is usually down to a number of reasons: hidden costs that reduce cost efficiency of the contract, relationship breakdowns between the supplier and the end-user; and failure to meet service level agreements."

One reason insurance companies and brokers may choose to insource in the near future is that a European directive, planned to take effect in January 2006, is set to introduce a VAT charge on outsourced services. Consultation between the insurance industry and HM Revenue & Customs was completed at the end of September and a government White Paper has been published. The Association of British Insurers is calling for the changes not to be rushed.

Andrew Torrance, chief executive of Allianz Cornhill, says Allianz Cornhill's VAT bill will be around £1m and he believes around 25% to 40% of claims-handling outsourcing could be brought back in-house as a result.

Nigel Roxburgh, founding director of the NOA, has predicted the insurance BPO environment is expected to grow by £1.1bn in the next 10 years.

Whether it is contract certainty, regulation, the search for new business or the realignment of existing business, outsourcing is always an option for brokers, especially given the wide offerings available. However, as with Moorhouse, the outsourcing may be temporary but the effects could benefit your business over a longer period. Grice believes, as the large outsourcing players snap up the leading insurance players, it will then look to target smaller clients. WNS Assistance, for example, whose clients include Marsh, Aon, Willis, Jardine Lloyd Thompson and HSBC, has recently started targeting regional brokers.

And, if you do decide to outsource aspects of your business, remember it must be carried out under compliance obligations. The Financial Services Authority has recently issued a letter to chief executives, stating: "When considering outsourcing arrangements, and in line with good industry practice, we expect recognised bodies to undertake appropriate due diligence including, where necessary, by obtaining expert advice. As part of this, outsourcing arrangements should be documented by means of appropriate contracts, service level agreements, including appropriate performance measures, escalation procedures, and continuity arrangements and operations manuals."