An Insurance Conglomerate Figures it Out and Enjoys a 20 Percent ROI
Outsourcing to two different suppliers is tricky but doable. But cutting your IT into six different pieces? Sounds like a guarantee for a migraine — but not for the Alliance Group, a large global provider of insurance and financial services. It has written an outsourcing policy that insures great benefits, including a return on investment of 20 percent.
As recently as 2007, two of its members — Fireman’s Fund Insurance Company and Allianz Life Insurance Company of North America — maintained separate IT departments. This was not the most cost-effective use of already strained internal resources.
Instead of ramping up with more internal staff at both companies, Allianz pursued an ambitious outsourcing strategy and brought on six suppliers for functions as different as help desk support and Web site management from 2003 through 2007. The goal: to save about $150 million in the next three years.
The lion’s share of the business went to IBM ($330 million over 7.5 years) and AT&T ($70 million over four years).
According to Oliver Bussmann, chief information officer for Allianz of America (AZOA), the parent company of Fireman’s Fund, both companies leverage IBM data centers in Argentina and Brazil for their mainframe and midrange computing as well as other IT services in Europe and Asia. “That’s good to know going forward that the data centers will remain there. But certain activities we can do remotely because we need only a network connection,” says Bussmann.
It also helps that they are in the same time zone, he adds, since Allianz is in California and staff can collaborate contemporaneously.
Many of these services were already available at Fireman’s Fund, and AZOA renegotiated the contracts to cover Allianz when it received appealing price/performance offers. The companies also combined their IT departments and created teams from the staff to interface with the respective suppliers.
A wealth of suppliers
To achieve the savings Allianz targeted, Bussmann says the two companies are sharing infrastructure and services to leverage scale and external staff expertise. There are joint service level agreements (SLAs) to guarantee performance. They also reorganized their internal staff into teams to support platforms, applications, and network infrastructure that’s common to both companies.
Bussman explains that the strategy works for several reasons. The first is savings. “We realized in doing internal and external benchmarking that we needed to control unit cost,” he says.
One way to do that is through economies of scale — the second reason the strategy works. By achieving greater scale, Allianz not only cuts its unit cost but also allows for business growth. Scale is especially important because Allianz is dependent on mainframes in both companies. Bussmann claims that a company needs its processors to achieve a critical mass of 3000 MIPS (millions of instructions per second) to operate at a level that keeps the infrastructure supported cost-effectively while still being cost-competitive with comparable companies.
Third, it also doesn’t have to rely on hard-to-get expertise in Silicon Valley to add talent to internal teams since the supplier supplies the needed workers. Finally, by negotiating SLAs, it can tailor them to the exact needs of both companies.
To ensure the suppliers meet the SLAs, Bussmann has a comprehensive scorecard he reviews with IBM every month. It records how well the supplier performed according to key performance indicators like system availability and response time to repair. “We have tools and statistics in place that we review with them every month; and if they don’t deliver as promised, they have to pay penalties,” Bussman says. He also has regular governance meetings with the IBM executives; they discuss actions IBM must take if it doesn’t meet its SLAs.
While IBM provides infrastructure management, data centers, desktop and help desk support, AT&T offers network-related services. It provides data communications as well as Voice over IP (VoIP), security in the form of network firewall management, local area networks, Internet Protocol telephony, remote access, and mobility management services. As with its other suppliers, Allianz negotiated SLAs to guarantee network service levels.
While IBM has first-line management of general structure and most applications, Tata Consultancy Services backs up IBM from offshore, performing any legacy system maintenance from India.
For its part, Accenture complements the larger suppliers by developing and maintaining new applications.
Two other suppliers offer hosted services: ACS hosts Allianz’s FileNet document management system from an offsite data center, while Hewlett-Packard hosts the two sub-companies’ Web sites offsite also. Strict SLAs are in place in any hosted environment, and the same is true here.
Managing multiple suppliers
Managing six suppliers could bring with it some migraine headaches. This is not the case with Allianz. Rather, says Bussman, the insurer now “has access to state-of-the-art technology and expertise. We can’t afford to support a big research department to find out the best technologies to use, so we rely on our suppliers.”
Due to economies of scale, Allianz has also achieved a major goal set out at the start of the outsourcing project: unit cost. It’s now quite competitive, claims Bussmann.
“We also have access to extra capacity and resources we might need,” he adds. “Sometimes you get requests to scale up components and systems and internally it takes much longer to find the expertise and execute,” he explains. “Our suppliers can configure and execute quicker. They have a bigger resource pool of qualified staff than we could have internally.”
He says “It’s much easier to monitor performance and delivery now. It’s a huge step forward” for both the computing infrastructure and network.
Spend a lot to save a lot
Part of Bussmann’s multi-supplier strategy is having as many suppliers as required to keep the lead ones on their toes. “This promotes better quality of work through competition,” he explains. But his mantra for successful outsourcing is this: keep it simple. Allianz may have many suppliers, but each is best of breed and manages its own well-demarcated slice of the IT business.
These strategies seem to be working for him. While cost for all services is in the millions every year, Bussmann has managed to spend a lot of money in order to save a lot. He’s achieving an ROI of 20 percent overall.
Lessons from the Outsourcing Journal:
- Having multiple suppliers helps guarantee the best service, as the threat of competition promotes better quality of work.
- The best way to manage multiple suppliers is to have each one be best of breed and make sure the lines of business are clearly demarcated.
- To achieve savings, the suppliers involved should, if possible, share infrastructure, services, and SLAs to leverage scale and staff expertise as well as guarantee performance.