Outsourcing: The Who, What, When, Where, How, Why and Maybe?

By Chad McGee

(Education Content Featured at March 2013 Membership Meeting);

During the AIRROC conference in March, a great deal of time was spent on the topic of outsourcing.  Issues such as, why do companies outsource, when should it be used, how to do it effectively, outsourcing myths, and is outsourcing a good idea, were addressed.  The panel discussion was moderated by Matthew Moore of Inpoint.  The four panelists came to the conference with robust experience and an array of backgrounds.  AIRROC board member Frank Demento, counsel with XL Reinsurance, provided differentiation on outsourcing, insourcing, and offshoring.  Phillip Proost of Catlin Holdings provided an expert perspective from his experienced vantage as CIO and sourcing officer, living and breathing sourcing on a daily basis.  The panel also included CJ Coolidge of Insperity.  CJ has been engaged by numerous companies in a consulting role focusing on all aspects of corporate operating platforms and strategies.  The final panel member was Chad McGee of Artex Risk Solutions. 
Chad’s expertise is claims and risk management. Much of his focus is on proper matching of third party administrators to a clients specific risk profile to optimize risk program results.

To properly engage a thoughtful conversation on outsourcing we need to define the term.  What is outsourcing?  Outsourcing is transferring specific internal corporate functions to an external third party.  Unfortunately, the word outsourcing tends to convey a negative connotation.  At times, outsourcing and offshoring were linked with loss of jobs and movement of internal functions to the lowest bidder, ultimately resulting in a subpar service.  There is no denying that outsourcing ventures have led to biases against the practice.  However, the panel discussed in detail their individual thoughts and experiences with outsourcing and all agreed that outsourcing is a business practice that is here to stay and, in the end, has positive outcomes.

To properly understand, we must first differentiate between outsourcing and offshoring.  As mentioned above, outsourcing is the utilization of a third party to provide a service.  Offshoring is the utilization of company employees but at a different location, usually chosen based on reduced labor costs.  In recent years we have observed companies implementing a hybrid form of offshoring within the continental United States.  Companies have moved headquarters from New York to Atlanta or Chicago to Salt Lake City on the premise of labor cost reductions. 

As a business owner or someone in a position within the company making an outsourcing or offshoring decision, there are several important considerations: The needs are different for each firm; expense reduction is usually the primary motivation. Can a qualified third party perform the function at a lower cost than in-house staffing? Business necessity is also a dynamic influence behind an outsourcing decision. Chad McGee provided an example of an underwriting team producing new business at a higher pace than the claims department could manage.  Out of necessity, a third party for claims management was utilized until the claims department was able to stabilize their in-house resources.  Is a qualified third party available that has a level of expertise equivalent to what can be produced in-house and at a lower cost? That brings us to operating strategy as the final primary consideration. An in-depth analysis, that includes an examination of corporate operating strategy, should be conducted in order for a comprehensive outsourcing decision to be made.  A combination of cost, expertise, and business necessity will have significant persuasive influence on the short and long-term strategies of an organization.  The ultimate objective for most corporations is to attain profitability which is established in a number of ways.  Providing a better product or service than another organization can lead to profitability.  However, no matter how great the products or services are, competiveness and profitability concerns can occur if overall operating strategies and production costs are inefficient or too expensive.  Informed decision making with regards to outsourcing or offshoring may be part of operating strategy decision making. 

The panel discussion pinpointed specific operating areas to consider for outsourcing.  Information Technology Services is one of the more common segments utilized by companies to gain a higher level of expertise, lower costs, and to have more resources at their disposal.  A $130,000.00 salary may provide a company with an excellent IT employee.  Outsourcing the same $130,000.00 might provide a company with access to an IT team that is accessible 24/7 and provide a better IT platform to service their client base.  Human Resources and Payroll were also identified as prime services for outsourcing.  The discussion of outsourcing Human Resources sparked varying opinions on the panel.  HR is largely managed on a statutory basis, thus it is a function that can be easily outsourced at a lower cost.  Each firm has to make their own determination of whether HR is a function that provides enough intrinsic value to employees that the firm is willing to forgo the potential cost reduction that would be achieved by outsourcing.  Claims Administration, because of its statutory relevance, was also a service identified as a prime target for outsource consideration. The utilization of an MGA for underwriting was a question posed to the panel during the discussion.  The panel agreed that underwriting could be ideal to outsource for cost reduction however this was an area that AIRROC members and the panel agreed was too complex a proposition to address in this forum.

Outsourcing anything that is intricate to your core business is tricky.  For example, if a firm is known to be the foremost expert in handling executive liability claims, then it would be an unusual decision to hire a TPA to handle claims.  Backroom functions that are not core to a company are an easy first step to take in outsourcing.  The discussion yielded a common theme relative to effectively outsourcing a business function.  First, the right partner must be chosen and secondly, the process must be effectively managed.  If a carrier is looking to utilize an MGA, it is imperative to choose an MGA that is proven, effective, and understands your risk and the platform you wish to follow.  Precise planning needs to be completed on the underwriting model.  Project implementation is not simply turning over the reins.  Once the outsourced project has begun, proactive relationship management needs to include audits of risk, processes and procedures of the MGA.  It is now the carrier’s job to stay actively involved and manage the required adjustments as the outsourcing relationship expands. 

The AIRROC panel discussion concluded that outsourcing can be an effective business strategy.    Anytime outsourcing or offshoring is being considered, it is imperative that a company focus on an incorporation of cost, strategy, necessity, and expertise.  Outsourcing is a highly valued proposition that, with careful planning, flawless execution, and continued maintenance can greatly benefit the overall profitability of a company.  

Chad McGee is Division Vice President Claims Analytics at Artex Risk.  Chad_McGee@artexrisk.com