Underwriting a New Method of BPO | Article

Hands holding a stock reportIn 1995 the stock market was beginning to take off. Fidelity & Guaranty Life Insurance Company, based in Baltimore, Maryland, wanted to introduce new products as quickly as possible to take advantage of the public’s growing excitement with insurance products tied to stocks.

Being first to market with a new product gives the insurance company a decided advantage. But F&G Life’s operations department needed 18 months to launch a new product. That was way too slow in today’s competitive world.

So the insuror, which wrote its first policy in 1959, decided to outsource part of its IT operations department so it could get new products to market quickly. As it began to explore outsourcing, the company realized it could benefit by outsourcing its back office, too, recalls Steven Kennedy, who runs the F&G Life service center in Greenville, South Carolina. “Outsourcing both functions provided us with economies of scale we couldn’t get ourselves,” explains the vice president of operations.

Kennedy says five years ago outsourcing both the IT and back office functions was viewed as revolutionary. “No one had ever gone that far in one leap,” he recalls. However, after realizing the economic advantages, “we decided to go forward with all guns blazing.”

The outsourcing provider is Computer Science Corporation’s (CSC) Financial Service Group, which is based in Austin, Texas. The original contract was for 10 years.

Competing with Bigger Insurance Companies

Kennedy says outsourcing allows F&G Life to compete with other insurance companies that are much larger. In fact, last year it was one of the top three equity index annuity underwriters. (An equity index annuity is an insurance policy whose cash value is tracked to a specific equity index. It has been a very popular policy type during the recent bull stock market.)

In addition, outsourcing to CSC gave the insuror access to tools “we couldn’t touch on our own,” continues Kennedy. Now, for example, F&G Life can communicate new product information to its sales force via its Web site. Agents also have real time processing and electronic applications.

And the company didn’t have to worry about recruiting and retaining IT experts. “We can dip into their core pool of IT professionals,” he adds.

When F&G Life wrote its original outsourcing contract, the costs were fixed. The insurance company paid a flat amount per policy to CSC. But it didn’t take long for the buyer to realize that creating an adversarial relationship with its vendor didn’t work. To protect its profits, CSC tried to service the policy as cheaply as possible. “This doesn’t guarantee the best service to the client,” says Kennedy. The insurance company realized both buyer and vendor “need to sit on the same side of the table.”

So in April, 1999, the two parties went back to the conference table and rewrote the outsourcing contract to create a partnership. The new contract, which now expires in 2012, is worth approximately $425 million.

Now members of the management team from both companies decide what the cost should be and measure that against the kind of customer service they want to provide. “This decision was a big breakthrough that led to big successes,” reports Kennedy.

Doubling Sales Volume in One Year

The numbers demonstrate the difference. In 1998 the insurance company wrote $500 million worth of insurance policies. The following year, new business sales totaled $1 billion. This year that number should top $1.1 billion. Kennedy attributes these numbers to the company’s ability to bring new products to the market, the new partnership agreement, and the outsourcing partner’s ability to handle the doubled volume.

Speed to market has increased, too. Eighteen months has been compressed to six. F & G Life was able to introduce 15 new products last year.

In addition, Kennedy appreciates the flexibility the company has because it has outsourced these functions. He says his vendor is able to adapt to his changing needs. “This is crucial in today’s business environment,” he says.

In January, Kennedy became the boss for all CSC employees who work in F&G Life’s service center. “I can set direction, hire and fire,” he explains. This management decision gives him the leverage to deploy resources as he sees fit. In addition, Kennedy now has the ability to judge CSC departments and individual performers to see if they qualify for a quarterly bonus from F& G Life. Now, CSC employees in his service center can be rewarded like F&G employees. “We are seeing more productivity and greater agent satisfaction because of the incentives,” he reports.

The goal here it to create one common corporate culture from two diverse groups. “To me, we are the operations department. We all have a job to do. I don’t distinguish between the two companies,” Kennedy says.

On the flip side, F&G Life had some bright employees who were experts in their back office fields. Kennedy didn’t want to lose them because his agents needed their continuity. So they joined the CSC staff at an appropriate level.

The companies also established a training department, using employees from both companies to develop the curriculum. Now every new employee must pass the training course.

Searching for New Customers at the Service Center

The two partners are proud of their cutting edge BPO process. They hope to apply their skills to other clients. Right now F&G Life is the only CSC client in the Greenville service center. They hope to add other clients who can use the mail room or accounting services. F&G Life will benefit from lower costs for the services it uses.

Whenever CSC brings in a prospective client to the Greenville center, Kennedy makes sure he can spend an hour with the buyer. “I go into the history of the relationship and explain what we’ve learned,” he says.

One of his chief lessons for new buyers is to make sure they have a management presence in their vendor’s service center. That’s because no matter what the vendor does, the customer still holds the buyer accountable. “You don’t want your customers to think you have pawned them off,” he says.

Kennedy believes the key to outsourcing success is “open and honest communication.” When a problem arises, he tries to work it out as soon as possible. Of course, having a flexible approach to the outsourcing contract was a pillar of the success here.

Lessons from the Outsourcing Primer:

  • Balance the level of service you want to provide your customers with the cost you are willing to pay.
  • Buyers should have a management presence in their vendor’s service center.
  • Creating a common culture between buyer and vendor leads to a successful outsourcing relationship.
  • Outsourcing alliances allow both parties to prosper when they bring in new buyers for BPO services they have already developed.

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