Insurance BPO is currently a USD 3. 5-4. 5 billion market, and is expected to grow at 10-12% year on year (YoY). The growth potential for of Insurance BPO is a whooping 30 times the current market size – USD 120 billion. Geographical mix of insurance industry revenue and insurance outsourcing value (Source – Everest research) Intensely competitive environment and bottom-line pressures made insurance carriers seek low cost locations as a competitive advantage.
The challenge however has been the choice between setting up an in-house center also known as a captive unit, or to outsource to a third party supplier. Initially, the insurance industry witnessed a mixed approach for the choice of an offshore model, while some insurance companies opted to establish captive units e. g. AIG, Allianz Cornhill a few others used the third party suppliers e. g. Royal and Sun Alliance, still others chose BOT e. g. Aviva. Around 2008, the industry started witnessing a shift from captive to third-party models with the monetization of Aviva to WNS and Prudential to Capita.
Insurance carrier Captive centre status Allianz Cornhill Operational AXA AXA Sun life divested to Capita, rest hybrid model Prudential Plc Divested to Capita Churchill Operational Aviva Divested to WNS Why the shift from Captive to a third party supplier? The shift from captive centers to the third party supplier has been a gradual one and is not reserved to the insurance sector alone. After the initial phase of creating and running a captive off-shore business unit, the businesses started to understand the off-shoring eco-system and the associated problems much better.
Capital intensive decision: Establishing a global delivery model is expensive. Some examples of the investment required include: – Complex and costly real estate – High infrastructure and technology investments – Recurring software and ERP implementing / licensing costs – High consulting fees for captives vs. outsourcing – High legal fees to establish the tax entity/ legal compliance – Steep talent acquisition and retention costs – Large transition costs with a dual role of ”catcher” and the ”pitcher” – High governance and management costs.
32% 11% 8% 41% 28% 42% 32% 6% Insurance revenue BPO Revenue Europe US UK Rest of the world Captive off-shore business units requires significant capital investment and management focus with a longer payback period Dilutes management focus: Today’s fluid environment, evolving technology and changing customer demand patterns, requires a higher focus on the core of the business Scale: Critical mass is essential for the captive to survive; Scale is not easy to achieve, it requires intensive management involvement to set-up as compared to commitments for a third-party supplier.
Large insurers have dominated the Insurance captives market but small and medium players are contributing strongly as new buyers of BPO services. In the last three years, the split between contract signings across large and small to mid-sized insurers is nearly 50:50. Finding scale for a captive is a bigger challenge for small insurers. Obtaining internal alignment to outsource to the captives across business units is challenging.
Hidden cost of captives: Costs for governance, management, travel and the incentives to divisions to outsource work often drive the costs beyond the market Macroeconomic factors: Recent economic developments have pushed organizations to cut down on bottom lines, resulting in monetizing of some of the captives for immediate capital influx Geo political: Uncertain political environment and policy flux at the base as well as off-shore location have proved to be detrimental towards establishing and scaling captive business units Currency fluctuations: Tend to limit a firms predictability and flexibility on cost.
For larger portfolios, this risk needs mitigation through letting a third-party deal with salary and currency shifts How are the third party suppliers doing in the current environment? Increased acceptability towards outsourcing: Several geographies outside the conventional markets such as the US and the UK have become increasingly open to the concept of outsourcing. Large IT and IT-enabled services firms in India have expanded and gained global foothold in the past few years. Supplier evolution: Third party suppliers have built a deep domain as well as horizontal expertise organically and also in-organically by acquiring captives.
The supplier market has evolved dramatically over the past decade, now there are a variety of suppliers who have the maturity and the capability in delivering the client services from multiple locations Global 3rd party Insurance BPO contracts signed over time: Source Everest Group (2011, TCV of 25 M USD Plus) More than 100 publicly announced Insurance BPO contracts signed between Jan 2008 and June 2011 12 21 31 28 2008 2009 2010 2011 The trust in outsourcing has increased, reducing the need for a “Do it yourself” model A Captive needs a well-defined strategy and continued management focus to survive Economies of scale: Captives “exclusive service” has been countered well with economies of scale;
The providers are able to manage well the volume spikes, incorporate the industry best practices and use innovative practices for the clients without the clients having to directly invest in building the same capability Evolution of IT-led BPO: The IT led BPO provides a platform to increase capabilities and a “Fit for Future” approach for insurers is dissuading them from a captive model to outsource Competition for talent.
The talent market in outsourcing destinations such as India, Poland, Romania and Philippines is getting increasingly competitive. 3rd parties do better in offering a career path and growth opportunities to develop, attract and retain talent Performance by the captives: Industry researches prior to 2008 by NASSCOM and McKinsey do not provide evidence of better work quality or information security through captive centers What is the case for Captives in the current environment?
Flexibility: Captives are more flexible than outsourcing relationships and changes are not hard to implement Risk management: Being an Extension of parent companies, captives are closer to business and manage risk more effectively by tailoring their risk management approach as required Breadth of services: Captives are seen as partners and it’s easier for them to gain a buy-in to off-shore high-end and more complex processes compared to the third party suppliers.
Managing attrition: Captives have more flexibility to manage attrition as they are not locked into contracts that they would need to protect the margins against Although captive growth has been significant, BPO / third party suppliers continue to dominate the market While some researchers believe there is a strong case for captives, the third-party suppliers continue to take a bigger share of the insurance sourcing pie.
It’s 25% more expensive to operate a captive centre vs. outsourcing – Gartner Talent market is competitive India captive BPO market- Source Deloitte 2011 Insurance sourcing 2011- Source Everest 2011 Analysis and recommendations: Advantages and disadvantages of both the sourcing models in insurance sector: Source Gartner Captive centers:
– Captive center strategies should only be perused if outsourcing options are unfeasible due to concerns over intellectual property, regulatory compliance or the availability of core business capabilities – Captive centers should be considered for business- and domain-centric and innovation-related work to retain this critical knowledge within the enterprise. – Captive center should only be considered if there is scale alongside the above two factors Third party suppliers: – Scope of anything less than 600 FTEs has a long payback period and insurance providers with such scope should opt for a third party supplier rather than opting to create a captive centre.
– Multi location and multi function sourcing requirements are best served by a third party suppliers – Business objectives of cost savings with value addition over a short period of time are best supported by third party supplier Deloitte writes: An increasing number of organizations are adopting a Hybrid model (mix of captive and third party) for very complex deals.
Complex deals:Model Description Rationale Examples Segmentation Using outsourced and captive in distinct areas IP in-house and no buy-in from business to outsource core work AXA, Prudential Farmers Competition Create competition with outsourced and captive units To improve performance and reduce risk, multiple demands Zurich, American Express, Dell Management Captives manage outsourced functions Leverage local knowledge and presence Ameriprise, American express Source – Deloitte In summary, the choice of a captive or a third party supplier in an increasingly dynamic business environment has become a complex process.
Organizations that do not formulate clear goals and reasonable long-term expectations for their sourcing face the risk of expensive mid-term course correction. As the industry faces new challenges, new sourcing solutions will keep evolving. Whatever the sourcing model chosen, the decision to build a captive should be well thought through. Third parties – Quicker time to market – Use suppliers experience and investment.
– Shared risks in outcomes – Lower sourcing risks – Operational agility – Low transition investments – Access to supplier best practices – Retained ownership of assets – Core competence retained – Single point of decision making – No inherent loss of intellectual property – Retained flexibility – Effectiveness dependent on service providers ability to deliver – Change is a tedious process – Potential loss of intellectual property – Potentially lesser control – Investments and re-investments – Absorption of geo-political / country risks – Talent acquisition and development – Time to market – Imperative for impact of scale Advantages Disadvantages Captives.
Captive sourcing or outsou References: – Comparing Captive Centers and Outsourcing, 2010-2011- Gartner – Captives at a Crossroad- TPI Information Services Group May 2010 – Webinar: Insurance Outsourcing –Ensuring a Brighter Future- Everest Group September 2011 – Trends in Insurance BPO Market- Everest Group 2008.
– Monetization of Captives Fueling the Outsourcing Marketplace: Aviva’s Recent Sale of its Captive Illustrates Common Motivations, Benefits- TPI Point of View August 2008 – Shared Services Vs Outsourcing- Deloitte September 2011 – Captive Centers- Strategic Assets or Disadvantages- Trestle Group Research – Captives in India: Is the Honeymoon Over? – Evalueserve 2009 – Research study of Captives in India and China: A Majority of parent organizations also rely on Third Party Relationships- Infosys June 2007 – Insurance 2020, Innovating beyond Old Models- IBM Global Business Services – Strategic Challenges.