Outsourcing and offshoring - a blessing or a burden?

Striking a fine balance between maintaining customer service levels and reducing cost base is not a new problem to the broking industry, although new issues affecting brokers often exacerbate it. The Insurance Mediation Directive and potential implications arising from the Spitzer inquiry in the US are good examples.

However, the solutions facing brokers to improve their business models are changing both in terms of the number of different paths that are open to them and the varying degrees of risk attached to each. While choice is often seen as a good thing, the more options available does make life more difficult in terms of deciding on which route is best. Two of the most talked-about options in recent times have been outsourcing and offshoring, and these controversial fields remain key areas for consideration.

There has been much press coverage about both of these options, and opinions as to the merits of each have often been formed on the basis of what is reported in the media, individual personal experience and anecdotes from colleagues and friends (often following receipt of a sales call believed to have been made from India). Occasionally, the merits of each form part of an objective, fact-based study, which is arguably the best approach to take.

In a recent survey of claims managers and directors of leading insurers and brokers, RAC explored some of the views that the industry holds on these hot topics, yielding some very interesting (and varying) results.

While the survey was conducted on an in-depth, qualitative basis, the results may not be viewed as statistically significant. However, it provides a compelling insight into the views of the industry and highlights that there are key differences between the ways in which insurers and brokers have approached the outsourcing/offshoring debate.

Who is outsourcing?

While outsourcing has been a growing trend in the insurance sector over the past 10 years, the extent to which companies outsource can vary greatly.

While nearly 70% of insurers in the survey have considered outsourcing some or all of their motor claims service, only 38% of brokers have done the same. However, the survey also reveals that a quarter of brokers questioned had already outsourced parts of their claims handling to another provider.

So what are the reasons for this, and what benefit is perceived by brokers for making this move?

Almost two-thirds of brokers surveyed believe that outsourcing would remove the hassle of an in-house claims function. This can be linked to the second-most-important reason for outsourcing, which is to better control administration costs. It will be of no surprise to most senior managers in broking houses that outsourcing provides an opportunity to reduce the expense base.

Where an outsource provider can offer an infrastructure that a business could not replicate themselves, they can benefit from the potential economies of scale and be contracted to deliver tough service-level agreements, an option that can be seen to make a lot of sense. The key question for a broker is whether they lose control of some of their key competencies - customer service and delivering their brand promise.

There is often an assumption that outsourcing involves losing control of the business, and that it means the end of the end-to-end process.

In the survey, 50% of brokers who outsourced a part of the claims process restricted this to first notification of loss. The other 50% stated that it was uninsured loss recovery, something that is considered 'the norm' in the market rather than necessarily outsourcing. So, is the debate merely one of shifting perceptions of what outsourcing means?

When looking at what is actually outsourced by brokers, on many occasions it can be used to deliver an out-of-hours service or, for larger brokers, it can provide a consistent level of customer service at the first point of contact. Both of these can hardly be classed as losing control, in fact it is often about delivering a more flexible service to the customer but without necessarily reducing the bottom line.

Comparing the view of brokers to insurers in the survey provides an interesting picture. Over one-third of insurers stated that saving money was the key reason for outsourcing, but less that a quarter felt that it was taking the hassle factor out of the business or that it improved customer service.

In addition, while more than one-third of brokers saw outsourcing as a way to gain access to higher-skilled claims staff, only 15% of insurers felt the same way. The market often talks about a shortage of skilled claims staff - brokers' response to the survey may suggest that they feel that the number of skilled staff has not actually changed, rather that many have moved from insurers and brokers to companies that offer outsourced services to them.

The offshoring debate

If the word 'outsource' can cause a sharp intake of breath in the boardroom, then 'offshore' certainly does. Of course, offshoring does not always mean that a company outsources. It can often take the form of establishing a satellite office in India or South Africa rather than working with an external partner. This issue was covered in-depth in the survey and, once again, there were some interesting views from respondents.

Often the debate about offshoring assumes that there is a natural trade-off between cost reduction and the lowering of service levels. Although the survey explored this, it is true to say that this is a very dangerous assumption to make. If the correct measures are in place to assess the quality of the contact centre - and these measures are being met - it should not matter where it is based. Interestingly, when a call is handled well, people often do not consider from where the call was made. If it is handled badly, the assumption is that the call was made from India.

Overall, the benefits and impact of offshoring generally received a mixed response from the survey, and it varies between brokers and insurers.

Although over half of insurers agree that offshoring will reduce costs and that this is the most important factor, 75% of brokers disagree with this statement. The same percentage felt that offshoring could be successful, but only if the level of customer service is maintained, a statement that was agreed with by only 54% of insurers.

When asked if they thought that "some customers will leave because of offshoring, but that this is a risk worth taking to reduce costs", 63% of brokers agreed, compared with 37% that disagreed. When insurers were asked the same question, 38% agreed and 38% disagreed. The surprising fact about these statistics is that brokers seemed to have more appetite to risk a reduction in customer service, despite the fact that this appeared to be a more important factor to them when delivering their claims service.

Perhaps the appeal of cost reductions is just too tempting in the current climate.

To compound the contentiousness surrounding the issue, 71% of respondents agreed that offshoring would have a negative impact on their brand, which breaks down to 75% of brokers and 79% of insurers. It is all the more interesting then that 95% of respondents believe that offshoring will increase in five years' time - 100% of brokers and 31% of insurers. Clearly, there is a feeling that offshoring is a case of 'when' rather than 'if', and the key decision for those broking houses with sufficient scale to warrant an offshore presence is 'how'.

An alternative view taken by a some brokers is that by not offshoring, they can increase the retention of existing customers through improved customer service, while gaining new customers from those that have become disillusioned by their existing provider. This of course makes an assumption that the service provided from the UK cannot be matched overseas due to culture and language difficulties. Again, this misses the point about ensuring that the right service levels are in place and measured.

The attraction of offshoring is clear though. One-third of companies surveyed - 38% of brokers and 31% of insurers - say that offshoring will be cost-effective, will improve profitability, reduce costs and bring down premiums.

But if money is the main draw, the downside is still considered to be poor customer service, lower standards of service and customer satisfaction, with insurers (31%) being more negative than brokers (13%).

While the issues of outsourcing and offshoring continue to dominate the boardroom, it is clear from the survey that the role of the broker in motor insurance is also a key topic. Again, this has been influenced by major changes in that marketplace over the last few years, particularly through the dominance of direct writers and the role that the internet has played in customer acquisition.

While eight out of 10 companies surveyed believe that brokers are still a force in the sector, the breakdown of this statistic provided very interesting reading. All of the insurers surveyed felt that brokers would continue to be a force in this market, yet only half of brokers agreed with this opinion.

Almost half of insurers feel that the key strength of brokers is that they are close to customers and provide face-to-face contact, but only 14% of brokers actually felt the same. The mismatch between an insurer's perception of broker strengths and the perception of the broker themselves was highlighted here, and may be a reason why there is sometimes a lack of understanding between the two.

Brokers gave a wide number of reasons for why they still had a role to play in the sector, including: a high-street presence; local service; specialist in areas such as motorcycles or classic cars; and more in-depth market knowledge.

Additionally, both insurers and brokers agreed that, when handling more complex risks such as large fleets, brokers were in a much better position to add value.

The growth of direct insurers and customers buying insurance products via the internet are seen as the major reasons why brokers may see their influence diminish over the coming years. Yet, nine out of 10 insurers and two-thirds of brokers believe that brokers arranging motor insurance can compete against the direct-sales channels.

The reason for this upbeat opinion is likely to lie in the demand for niche insurance products, such as young drivers or classic cars. Three-quarters of brokers say that they are better suited to providing niche insurance products, a statement that is agreed with by the same number of insurers.

Whatever may lie ahead for brokers, it is clear that the way that business is conducted will continually change. With regard to the outsourcing debate, the key criteria should be how to create the most value from the business.

Outsourcing can often provide access to new technology, cost reductions through achieved economies of scale and best practice, as well as access to more highly skilled staff. Only those inside the business who take an objective approach to this issue will be best placed to consider whether it is right for them.

- Phil Chapman, Managing director, RAC Claims Services.