OMFN Knew It Selected the Right Supplier When Perot Systems Expertly Handled a Deluge of Volume During Migration | Article

Best Partnership  

Outsourcing Excellence Award – Best Partnership – Old Mutual Financial Network and Perot Systems

When your peers perceive you as “one of the worst in the industry,” there’s only one way to go: up. Old Mutual Financial Network (OMFN), the marketing name for the US life insurance and annuity operations of Old Mutual plc, including OM Financial Life Insurance Company, knew it needed to “to turn our service around.” It was able to do that by simply changing outsourcing suppliers.

Today, the 450 Perot Systems employees that are dedicated exclusively to OMFN issue 275,000 insurance policies a year, handle $3.6 billion in premiums, answer 1.2 million calls and support 50,000 insurance brokers.

“OMFN has always wanted to focus on what it does best and outsource the rest,” says Mike Kerrey, Executive Vice President of Perot Systems’s insurance and business process solutions group. “They want to introduce new insurance products and take care of their agents.” That’s why OMFN outsourced its back office (with the enabling technology) and call centers to Perot Systems. This includes life and annuity new business administration, policyholder services administration, life and annuity claims, commissions, complaint processing, mail services, and imaging.

The Situation Before Perot Systems

For the 10 years before it began its relationship with Perot Systems, OMFN outsourced all its back-end services to another third-party administrator (TPA). “We had a business model that didn’t support our objectives,” Smith says. Things that were wrong included:

  • Its overall service delivery was perceived as “really poor.”
  • The solution wasn’t cost efficient and it was primarily a fixed-cost model in which resources and costs escalated unpredictably with volume increases versus. a variable cost model in which unit (per policy) prices are specified for volume changes.
  • There were no incentives for the supplier to outperform service levels.
  • The insurance company no longer wanted to bear the entire risk in the outsourcing relationship. “We wanted to put a bit more risk on the third party,” Smith says.

What OMFN desired was to pay predictable unit costs in a variable cost structure. “We wanted incentives to encourage them to outperform their service level agreements (SLAs),” Smith explains.

The need for a new supplier became pressing in 2002 when OMFN purchased Fidelity and Guaranty Life Insurance Company in Baltimore, Maryland, now known as OM Financial Life Insurance Company since January 2007.This was its first foray into the American market; the company wanted to do it right from the start.

Supplier Selection

Outsourcing was nothing new to OMFN executives. Smith says the key factors were simple. “We wanted someone to deliver services that were predictable, scalable, sustainable, and acceptable to our customers. We wanted best of breed.”

OMFN selected TAG, (acquired by Perot Systems in 2005), because of its size and management style. “TAG wasn’t a huge, blue-chip company. It was a company that was hungry for our business,” he says. He liked the fact that the supplier wasn’t so top heavy, allowing the insurance company to negotiate with the real decision-makers. “We felt there was the possibility of a true sense of partnership as opposed to a typical outsourcing relationship. We knew they cared about us,” comments Smith. “We’ve been extremely pleased that this attitude has not changed a bit since Perot Systems acquired TAG.”

The fact that Perot Systems’s cost structure was “extremely attractive” helped, too.

The two signed an eight-year contract for US operations in 2002. “We got the tiny Americom block. The other supplier continued to service 600,000 policies,” Kerrey recalls.

Skyrocketing Volume During the Transition Period (2002-2004)

Kerrey says Perot Systems was able “to build the process from the ground up” once OMFN had purchased Fidelity and Guaranty Life Insurance Company in 2002. Perot Systems had to add OMFN’s products to its systems because it didn’t have the same types of products on its current platform. “We wanted them to do this swiftly because the sooner we left the prior arrangement, the better,” says Smith. This process took 18 months.

To test the waters, the insurer asked Perot Systems to process just its new annuity business. “It was very much a ‘prove it to earn it’ exercise,” says Kerrey.

Perot Systems started the migration in year one of the agreement. To ensure a successful working relationship, Smith rented an apartment in Lincoln, Nebraska, near Perot Systems’s center during the year-and-a-half migration. “We were in business to make sure neither one of us failed. So we had to spend a fair amount of time with them. I wanted to make sure I gave them all my tools to help them develop their organization. I wanted them to have a comfort level,” explains Smith.

At that time the economy changed drastically and the product OMFN offered–a fixed annuity product–skyrocketed. “Our sales volumes went from 1,000 applications a week to more than 3,000,” recalls Smith. Perot Systems held its own.

Smith was excited that service to its brokers “didn’t deteriorate though volumes tripled. “Status quo with growing volumes? That was a huge win. Right away I recognized this was really going to work because they were able to ramp up from 50 to 150 employees on the turn of a dime in year one,” he says.

Once OMFN considered the annuities business with Perot Systems a success, it moved forward with moving its new life insurance business to Perot Systems. When the migration began, it wrote 1,000 applications per week. Shortly thereafter, a few carriers went out of business and the volumes spiked again. They tripled! “We said, ‘Is this possible? Could this be happening again?’ It was dÈj‡ vu,” marvels Smith. He asked Perot Systems to ramp up to 400 employees from 200 to manage the new volumes.

The insurer had originally decided to keep its in-force block with the existing supplier. But after the job Perot Systems did on the new business side, it decided to give Perot Systems its in-force block of business too. That meant migrating 600,000 policies. “No small task considering we wanted to complete the migration in less than one year,” says Smith.

Smith and Kerrey put their heads together and figured out a way to move 600,000 policies in nine months. “We went live before the technical people were done,” says the Perot Systems executive. His staff handled things manually for a short time so it could move the block of business on time.

“When you move business, you craft project plans,” says Kerrey. “But plans are subject to constant change and require flexibility. You have to have people who care. We had that in 800 people on both sides.”

“This migration was surprisingly easy, the easiest I’ve ever experienced and I’ve experienced a lot. There were struggles. But at the end I said, ‘Could we have experienced anything better or quicker?’ It was a remarkable accomplishment,” says Smith. Today, OMFN has Perot Systems service all its in-force and new business.

Kerrey says outsourcing was key to handling this increased volume of work. Perot Systems was able to move people to OMFN when the volumes went up. “This was easy because our people already knew our system,” he explains.

Bumps in the Road, Then Clear Sailing

There were “bumps in the road,” notes Smith. OMFN’s 10 product-development teams were accustomed to working with the original third-party administrator. Now they had to start from scratch and work with another team. “Our teams faced challenges at the beginning because they had an attitude of ‘this isn’t the way we used to do it,'” recalls Smith.

Smith realized he and Kerrey “had to get creative to get them to play well in the sandbox.” As a professional incentive and relationship-building event, Smith took every team member and their spouse on a three-day cruise. On board the team spent two mornings focused on what they needed to accomplish as opposed to ‘here’s what you do and here’s what we do.’ “The goal was to understand each other and how we each do business,” says Smith.

The voyage was also an odyssey of awareness; the groups got to learn about each other as individuals. “I couldn’t have asked for a better outcome. The next business day everyone was on the same page,” says Smith.

The two leaders also decided early on to celebrate every little win. “We realized we would never be done because we were always going on to the next project. So we celebrated as we went,” says Kerrey.

The Perot Systems executive adds, “The leadership of both groups laid out the ground rules at the beginning.” They stopped referring to each other by their company names; instead they used the team name. “Being one team is a big reason for our success,” says Kerrey. “We had so much going on, we knew we would always have problems. So we wanted to create a ‘we’ versus an ‘us-versus-them’ approach so we could work things out.”

Kerrey says he and his wife went to a movie and spotted a Perot Systems employee a few people ahead in the queue. “I was shocked and pleased when she told her friends she worked for OMFN, not us,” he recalls. “That was the kind of culture we created.”

Kerrey says both organizations were going through “a tremendous amount of change. Most people view change as scary. We viewed it as a way to get where we wanted to go,” he explains.

Managing Expectations to the Brokers

One of the primary goals in changing suppliers was to improve service to OMFN’s agents and brokers. “We made a commitment to our distributors our service would improve,” says Smith. However, he told them they had to give the company three years to turn around. “I set expectations to give Perot Systems some breathing room,” he continues.

Kerrey says the first promise to the agents was “predictable, sustainable service.” He says he couldn’t promise to be the best at the outset. “It was like hospital triage. We had to stop the bleeding.”

After 10 years of poor service, it took two years to establish predictable service. Then Perot Systems tailored its service by product line and distribution channel. For example, OMFN had a term life product that had a turnaround SLA of three days. But within that market, there were different expectations. So the team changed the SLA delivery time on type A to two days and the delivery time on type B to four days. “We used our knowledge to tailor our delivery to market expectations,” says Kerrey. And the two implemented the change in just one day. “Dave and I decided to do this on the phone and we made the change that afternoon,” reports Kerrey.

Perot Systems also holds open houses in Lincoln for OMFN agents. “We want to build a personal relationship with them, since they are the lifeblood of an insurance company,” says Kerrey. The big benefit: now the agents know who to call if they have a problem.

Governance Built Around Metrics

Smith says “you can outsource activity but you can’t outsource accountability.” He says the well-structured contract holds both parties accountable. “Governance is easy because it’s all built around metrics,” he explains.

In addition to SLAs, the two created dashboards and focused on constant improvement. The daily dashboard gives leadership of both groups the pulse of the entire organization. Two individuals at OMFN look at the metrics and make sure they’re in line. If they aren’t, they communicate with Perot Systems management. At the end of the week, Smith gets a summary so he knows what happened.

Perot Systems puts together a monthly packet listing accomplishments, issues, and what’s to be done the next month. Then the management of both sides discusses them in a conference call.

Twice a year the OMFN Chief Operating Officer and Smith meet with the senior management at Perot Systems insurance and business process solutions group. We talk strategy. “We make sure the strategies of both organizations remain aligned,” Smith says.

There are no incentives but there are penalties, which the contract calls service credits. “I’ve never once considered penalizing them, especially for things out of their control. I put myself in their shoes. I want this to be a win-win for them as well as us,” says Smith. He reports Perot Systems routinely exceeds their SLAs.

Kerrey says when a problem occurs, no one focuses on blame. Instead, “we figure out how to work together to resolve it.” If the issue is critical, the two men have a cell phone conference immediately; they avoid the use of e-mail.

While the two leaders have “clear, overarching responsibility,” they created subteams–someone in Lincoln worked with someone in Baltimore. Together they had individual accountability for the task at hand. “They had to work on their relationship and resolve the issues,” says Kerrey. He says the subteams resolve 95 percent of the issues.

Business Benefits

Outsourcing to Perot Systems saves 25 percent compared to the bills from the previous outsourcer. Smith says these savings give OMFN the “ability to deliver an extremely competitive price to our customers that can’t be matched. We could never do that without outsourcing.”

The two companies share the savings from the efficiency enhancements in a 50-50 gain-sharing model. “We’re constantly trying to drive down our unit costs. We have done this every year of the contract,” says Smith. The team has been able to do this by converting paper documents to easily accessible digital information, for example. They have also automated processing from application to claims.

Introducing new products is the key to an insurance company’s profits. Smith says Perot Systems has reduced product development time to market from three-six months to three-six weeks. “We were able to introduce 15 new products in one year,” he says. “That’s a tremendous amount of new products,” adds Kerrey.

Together, Smith says the commingled team has “been able to build a service model most insurance companies can only dream of. We tapped the strengths of each other’s business to build a scalable infrastructure. This type of relationship gives us a competitive advantage because we can react quickly to our clients’ needs since we eliminated the bureaucracy.”

Smith says Perot Systems is “a tremendous technology asset.” For example, the insurer now relies on Perot Systems’s data about its customers. “We need them to give us even more data, and they’re engaged in taking that forward. Our distributors and policyholders want to know as much as possible. Until now we weren’t in a position to help them. Now we want to extract as much information as we can,” says Smith.

The supplier has been intimately involved in OMFN’s ability to grow. “We could not have met our growth challenges growing as rapidly as we did by ourselves,” says Smith. “Only Perot Systems made that possible.” He adds that OMFN plans to grow organically and through acquisitions in the future. “Perot Systems is going to be engaged in that process,” he says.

Why This Relationship Works:

  • The two leaders are always accessible to each other, whether it’s 10 pm on a worknight or 8 am Saturday morning.
  • The team addresses problems when they surface “so they don’t grow large and fester,” says Kerrey.
  • Both groups focus on “what is right for the business” not what is in the contract, notes Kerrey. “This has never been about the contract,” adds Smith. “Their word is their bond. When they commit to doing something, they do it.”
  • The supplier was able to handle growth by being able to ramp up swiftly. For example, its service center went from five people to 500 in three years. “When we did have staffing issues, we kept OMFN apprised of our progress,” says Kerrey. He adds Smith “helped us with branding and recruiting.” Referrals formed 60 percent of its new staff.
  • The two organizations make decisions together. “They are a key player for making decisions within our organization. We always collaborate with them in product and technology development,” says Smith.

Smith says this outsourcing relationship “only becomes more powerful as we proceed.” And that’s a good policy to have.

Lessons from the Outsourcing Journal:

  • Changing suppliers is your only choice if you have a business model that doesn’t meet your business objectives.
  • During the negotiation phase, the buyer liked negotiating with the real decision-makers, not merely a sales team.
  • The buyer gave the supplier small amounts of business in the beginning. The supplier had to “prove it to earn it.” Perot Systems earned additional business when volumes tripled during the migration.
  • The buyer’s representative rented an apartment near the supplier’s office during the migration to provide support and ensure the relationship didn’t fail during the challenges of transition.
  • When the two organizations weren’t working well together, the buyer conducted an offsite team-building event. Employee relations on the unified team experienced clear sailing when they returned to the office. This also created a “we” versus an “us-versus-them” attitude.
  • OMFN passes the savings it garners from outsourcing on to its customers, giving it a competitive advantage in the marketplace. It also worked with Perot Systems to streamline the process. This also provides a competitive advantage.
  • Select a supplier that can ramp up quickly. You never know when volumes are going to triple!


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