CSC Increases Its Revenues by Helping Its Buyer Double Sales | Article

woman conducting meetingWhen the 1999 sales figures were counted, Fidelity & Guaranty Life Insurance Company in Baltimore, Maryland happily reported it had doubled its new sales. In 1998, it sold policies worth $500 million. The following year’s totals reached $1 billion, a 100 percent increase.

The insurance company credits this geometric jump to a change in the way it worked with its business process outsourcer, Computer Sciences Corp.’s (CSC) Financial Services Group in Austin, Texas. CSC suggested the changes so it could make more money, reports Ray Rasmussen, vice president of BPO for CSC.

Rasmussen believes this concept, value-based BPO, will change the outsourcing paradigm in the insurance industry “because it allows the vendor to make money.”

CSC has been an insurance outsourcing provider since the 1970s. Rasmussen says outsourcing providers today have been plagued by the concept of per transaction pricing. Historically, the outsourcing providers have examined back office tasks — like answering the phone or issuing a policy — and attached a cost to them. For example, say the back office did 400 policies last week and spent $800. That means it must cost $2 per policy. And that’s what the outsourcing provider then charged the buyer.

Rasmussen says this kind of calculation made sense when the insurance companies were underwriting simple mortuary insurance policies that just had a death benefit. Rasmussen points out that simple death benefit insurance “is very different from the actuarial business of life insurance.” The equity index annuity policies that F&G Life sells require underwriting. Policyholders have claims. Therefore, the cost to service these policies is not black and white, so it cannot be accurately calculated the old way.

“Bidding Ourselves Into Bankruptcy”

To make matters even more complicated, the costs of revising a policy for Buyer A was different than the actual cost for Buyer B because the time customer service representatives spent with any one group varied considerably.

Rasmussen says pricing outsourcing services according to cost per transaction was making insurance outsourcing “a very difficult way to make a living. We were bidding ourselves into bankruptcy.”

Instead, CSC has adopted a value-based approach that it developed with F&G Life, which had $5.6 billion in assets at year-end. The goal of this approach is to allow both outsourcing partners to make money.

Instead of paying CSC per policy, F&G Life pays for the number of people CSC needs to get the result the insurance company wants. For example, if the life insurance company is introducing a new product, it will want more people in the call center to answer questions and is happy to pay more to provide the higher level of service this requires.

The value-added pricing model works because CSC uses a software program called Automated Work Director that allows the vendor to measure everything it does. “The mantra I have instilled in my people is, ‘You can’t improve what you can’t measure,'” says Rasmussen.

One outcome of the constant measurement has been improved employee performance. Every day CSC posts its employees’ productivity numbers from the previous day on a company bulletin board. Everyone gets to check out how they performed compared to their peers. In addition, CSC uses the production numbers to reward staff performance. The vice president maintains his employees are able to make more money working for CSC because of these performance bonuses.

The staff seems to like the friendly competitiveness. Rasmussen says his annual turnover rate is 15 percent, low by industry standards.

Capturing the Overflow Business

Since F&G Life has been the guinea pig for this new approach, CSC suggested a cost plus approach in the outsourcing contract, a five-year contract totaling $425 million. Now, the two parties are attempting to take this approach to the marketplace. Every other buyer in CSC’s service Center in Greenville, South Carolina, will have to pay for “fully loaded bodies” — a per hour charge for employees with specific skill sets.

Another benefit of value-based BPO is that it makes costs predictable. This is important in BPO relationships that tend to be long term. “We don’t want to be the cheapest provider,” says Rasmussen. “Instead, we want to guarantee a specific result at a set price delivered at the promised time.”

Rasmussen says CSC has attempted to broaden its offerings to make them more attractive to other insurance companies. One example is overflow processing. Like selling swimsuits, the insurance industry is cyclical, making it difficult for insurance companies to staff their back offices properly. They typically don’t turn to part-timers to handle the increased volume because they don’t have enough training. But keeping experts on staff during slow times is not cost effective.

CSC went after the overflow business. Now a few insurance companies are turning over their excess business to CSC whenever they become overloaded.

The Internet has also had “a big impact” on the way the BPO does business. Now F&G Life’s agents can go to the company’s Web site to order supplies, download their commission statements and find out their customers’ policy issue status.

Rasmussen notes the Net has simply added another channel rather than replacing the old one. So far, it has been more of an informational and inquiry tool, he reports.

Developing a Microportal

CSC originally created F&G Life’s Web site. Then the life insurance company took over the Web management. However, Rasmussen says CSC will take a bigger role in managing the site “because it doesn’t make sense to have a separate set of IT managers for the Web site since it doubles the cost.” Rasmussen says the two companies are looking at developing a microportal for the insurance company’s employees.

Lesson from the Outsourcing Primer:

  • Value-based BPO outsourcing allows the vendor to make money in insurance outsourcing. But the relationship is also beneficial to the buyer who can radically increase sales with the new pricing structure.
  • Value-based outsourcing charges by the person and skill set, not by costs. It allows buyers to determine their results and then pay for the results they want.
  • Buyer and vendor are taking this approach to the marketplace. Both will benefit from the addition of new clients.

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