Discuss, debate and exchange ideas on latest trends and opportunities in the Business Process Outsourcing (BPO) landscape. Deliberate on adding “business value” to clients, vendors, employees and various other stakeholders to enhance customer satisfaction and sustain long term partnerships.

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October 31, 2012

The Harbinger for Global Sourcing's Success or Failure - the Misery Index

I wonder at times about the limited knowledge of vast majority of Sourcing and Category Managers in one area - global sourcing. Now I don't want to create a controversy here and make a large fraternity cynical of my writing the preceding statement because obviously, all Sourcing managers will have to their credit, some or the other successful global sourcing case study. However, I promise that this post will compel you to think "Do I know this ?", "Have I applied this ever ?" and then validate whether my statement claiming "general limited knowledge" is correct or not.

So, let me explain in detail now. I have seen so many sourcing and category management folks driving global commodity sourcing projects and declaring $ benefits at multi-year TCO level (often multiyear) post completion of Sourcing exercise. However, 9 out of 10 times, most of such TCO analysis misses including one most important discounting factor in this called the Misery Index (MI). MI -- A measure of economic well-being for a specified economy, computed by taking the sum of the unemployment rate and the inflation rate for a given period. An increasing index means a worsening economic climate for the economy in question, and vice versa. The index was invented by economist Arthur Okun and used to characterize the current economic condition. MI was popularized by none other than Jimmy Carter during his presidential campaign in 1976 in the US.

The main assumption in this index is that an increasing unemployment rate and relatively high inflation have a negative impact on economic growth. At its highest, the misery index for the U.S. was at 21.98% in June 1980. At its lowest, it was 2.97% in July 1953. In March 2006, the index was at 8.1% and in August 2012, it was 9.79% (Source). Similarly, for India and China respectively in August 2012 it was about 15% each. In economic terms, a rise in inflation coupled with high unemployment leads to lower consumer expenditures and contributes to an economic slow-down. The adjective "misery" alludes to the negative connotations associated with the unemployment and inflation rates. Adding them together takes care of the trade-off--one rate may go up and the second may go down, but the misery index captures both. Thus, the higher the value of the misery index, the worse are the overall economic conditions.

Another similar term was recently coined called The Augmented Misery Index (AMI). The augmented misery index is an indicator that combines the inflation rate, the unemployment rate, and the change in housing prices to capture the national economic mood of bad times (a high index number) or good times (a low index number). In 2012, the AMI in US for second half of the year moved to 14.2 (sharply from 8.5 in the second half of 2011; (Source) .

So MI = Unemployment Rate + Inflation rate while AMI = MI + Change in housing prices. But then how come interconnection of both with Sourcing and TCO ? Should be simple by now. A consistently higher MI in the past and projected as well (say in India and China during 2011 to 2012) might indicate that the low cost countries are becoming medium or higher cost and business conditions of suppliers getting tougher to operate putting pricing pressures and supply risks for buyers. However, like every other change, there might be some opportunities too in a rising MI or AMI. A rise in MI or AMI attributed mainly to the unemployment rate rise and with steady inflation rate, change in housing prices may indicate opportunities to negotiate lower wage rates for manpower cost intensive commodities. At its' extreme, a global sourcing decision taken in the past to source say from an emerging market may need to be proactively reviewed for reversal based on projected impact of MI/AMI on TCO for future.

So the final take away ? Design your TCO's for a global sourcing decision incorporating MI / AMI forecasts. Take help of your firm's chief economist and CFO while computing cash flows due to a multi-year global sourcing decision. Keep computing projected TCO based on projected MI/AMI to know beforehand should you need to change your sourcing from a particular country if the advantages are diminishing. You may have to combine these indices with others too (e.g. PMI, Business confidence index etc.) separately for each country from where you are sourcing. Should you be unclear but want to design a program quickly for at least key globally sourced commodities/planned to be sourced shortly, contact an expert procurement partner for help.

Send me your views and add to the body of knowledge. Cheers !!

October 25, 2012

In the Wonderland of Your Suppliers

Knowing your Suppliers well is the key to effective sourcing and procurement. A Sourcing or Procurement Specialist must have a good knowledge of the suppliers. "Information, as we all know, is power". 

We have varieties of suppliers and these suppliers have to be managed in different ways to obtain the desired results. Years ago, a senior acquaintance mentioned that we can classify the suppliers based on their behavior. I found his description quite interesting and thought I should share the gist our discussions with you all. Different categories of suppliers according to him are:

  1. Globe Trotter - Is a frequent traveller. Is in touch with the developments in the industry. Can, hence, provide what is current. Is perhaps not available or traceable when urgently required.
  2. The Copy Master - Is very good at replication. Give this supplier an item, machine or equipment and the supplier reproduces it without much trouble! Such a supplier can perhaps handle even complicated needs easily. Such a supplier may not however be creative or innovative. Such suppliers are usually not capable of creating something original. 
  3. Mr. Articulate - Is very expressive and believes in being eloquent. Could be quite persuasive. This may be treated as a positive trait. This kind of supplier may not lose hope so easily and like to keep things moving. On the downside, there is a likelihood that they are just articulate and may fail miserably during execution
  4. Mr. Confident - Is confident of what he / she does and believes in sticking to the commitments. Because of the positive attitude, has no doubt about the capabilities. Most often succeeds in the endeavors. The buyer, however, must ascertain that such suppliers are not overconfident while making commitments.
  5. Mr. Nervous - Such a supplier could be very good at supplying quality product or service, but because of nervousness may have failed very often in the past. Could be an useful source of information but may not be very expressive because of some hidden fear or apprehension. Buyer dealing with such a person has to manage him/her cautiously. The buyer has to instill courage in such suppliers to ensure that they succeed.
  6. The Fly-by-Night Operator - "Fly-by-night" is a mocking term for businesses that appear and disappear rapidly. Some suppliers are 'here today, gone tomorrow.' Such suppliers try to exploit the situation and may take advantage of any weakness that the buyer has. They may not be reliable. They can be used only when in severe trouble, to meet any urgent requirements. A buyer has to beware of such suppliers.
  7. Mr. Gold Digger - Is a supplier who is primarily interested in material benefits and not in relationships. This supplier cares more about his / her own financial health than that of the buyer. He / she believes in 'making hay while the sun shines' and takes advantage of the situation like the Fly by Night Operators. But the Gold Diggers do not disappear once their objective is fulfilled. They usually invest their money only in those ventures where they can make money quickly. As a result, they keep changing their businesses.
  8. The Philosopher - Is calm & rational and believes in moral self-discipline. Is also keen on investigation of the causes, principles of reality, or values based on rational thinking rather than realistic methods. Such suppliers are easy to deal with. But, they could be at times too philosophical and hence, may not see reason.  
  9. The Change Agent - A change agent leads a change project or business-wide initiative. Change Agents must have the belief that they must state only the facts based on data, even if the consequences are linked to unpleasantness. A supplier who is change agent believes in continuous changes that usher in improvements. Such a supplier is more modern in his/her outlook.
  10. The Karma Yogi - Karma Yoga basically consists of completely selfless service. The self-esteem is given up to oblige the mankind, animals, plants etc. Karma Yoga is also the pathway for doing the right thing. Karma Yogi is a supplier who accepts responsibility without bothering much about remunerations like wealth, name or fame. Such suppliers are very few in number, but it is good to have them around!

Do you want to add few more categories to this list? Please feel free to do so.....

October 23, 2012

Choose a wizard-like procurement partner to succeed or else? Fail...

"We have been sold Dummies!!" - exclaimed Mr. X, flaring nostrils et al. "But Sir, we have a plan and I'm sure the C-Sat scores will definitely come up", muttered Mr. Z, the Account Manager from the Model Services. Mr. X, now all the more worked up - "When we signed this deal, you had provided us with the best of your people to design the plan, process and now people who are working on these requests are stuck at basic terminology and on top of it make elementary grammar mistakes." "Do you even understand as to how I face the CEO with all the ensuing escalations when I am the one who sold this 'brilliant' outsourcing idea to him? What am I supposed to do now?!! "

The above situation  may well be from a movie or sitcom, but it's the reality of what's keeping the CPOs awake at nights; especially during and after a procurement outsourcing decision has been taken.

To make understand this scenario better, let me take you back to the same story, only some six months back when Mr. X was still toying with the idea of outsourcing the entire Procurement and Sourcing landscape, leaving only the strategic area to his category managers to focus on. He thought to himself that this was the only way he could reign-in the operations costs under targeted limits and bring the much needed centralization to the Procurement organization, where-in different regions were working like silos. The thought of excellent RoI was just too enticing! So there he went on - inviting proposals from best service providers, getting detailed information on how the whole transformation would unfold. While reviewing all these proposals, he told himself not to be overly concerned with the cost and sell this proposal, within the organization, based on quality, efficiency, customer service and expertise that outsourcing will bring in. He also thought that getting the most established and top of the stack service provider will make his job that much easier and will also calm the gale of doubts from the BUs that think of him as the proverbial horse wearing blinkers to anything but Cost! All things nice, you might think! Then what went wrong? Read on...

Expectedly, Mr. X was very pleased meeting with the top of the brass consultants from Model Services - who had excellent domain expertise, were high performing,- added to his excitement. Also, rest of the Procurement organization was equally impressed with the experts deployed for the knowledge exchange sessions. And as it unfolded, the Project was perfectly managed by the transition team that had laid down the perfect wave-by-wave go-live plan.

Project Live! And Mr. X started planning for his next vacation to Hawaii (where else :-)!).

But wait, what were those flurry of emails bombarding his inbox? Escalations!  ... Processing agent wrongly sending the contract for signatures to another competing supplier with all the details on price, pay terms .... Process agents grappling with their grammar/pending PRs/process and what not!

As for Mr. X, the scene had dwindled into existential questions with the much dreaded "Why me?"!

Now, let's sit back and see what REALLY happened behind the curtains:

  1. The top brass, the high performing wizards that Mr. X met and got sold on were not the people who were actually supposed to work on the day-to-day process requests.
  2. The sourcing experts who received the key-stroke level, onsite training on SoP were not retained in the team and they went back to train a team, belonging to a different BU, recruited to work on operational requests (a process popularly known as RKT or Reverse Knowledge Transfer). Hence:
    a. The knowledge that the process agents received was not primary.
    b. The talent was not retained in the team as these experts flied away to a different deal, by the time the work actually begun.
    c. And the well-known - 'Lost In Translation'!
  3. Personnel hired by Model Services for this deal were not judged on their domain expertise. 40% of the staff was internally promoted who did not know the 'P' of procurement or 'S' of Sourcing! These resources were BPO resources who knew a lot about operations but nothing about Procurement outsourcing.
  4. Talent management for domain specific deals like this was not managed by domain experts. Hiring for the remaining 60% of these resources was done by the BPO team that itself did not know much about Procurement and Sourcing.
  5. The banding of the FTEs was done on similar lines as any other transactional deal. However, in Procurement and Sourcing operations, one requires highly skilled resources with good domain expertise and experience and hence a higher banding is warranted.
  6. Every effort was made to industrialize the process. This is nothing unusual; BPOs are traditionally supposed to do that, right? It's, as they say, the very essence of their DNA. However, what the Model Services failed to understand was the fact that clients would have their own domain specific nuances and that the operations team should be equipped to take that into account.
  7. Model services had a strongly driven Operational Excellence regimen that reflected in its processes, practices, feedback mechanisms and service frameworks. While their teams/processes were declared stable, capable and optimal based on above, they failed to represent the ground realities specific to the project. At some level, the sheer overhead of conformance took away focus from the core issues.

So; what happened next?!

Mr. Z ruminated really hard and worked with his team to charter the six commandments to the so called 'Wizard of Procurement Operations' Hood!

  1. Centre of Excellence: The category and domain experts with strong experience of  Sourcing and Procurement would form a council for :
    a) Domain Specific Talent Management: Including, but not limiting to, hiring, training, promotion, IJPs, promotions, transfers, etc.
    b) Category Expertise: Provide in-house repository of category expertise on complex projects and designing roadmap for handling categories and driving savings. Provide benchmarks, Price Forecasts, Commodity Intelligence reports.
    c) Knowledge Management: To continually update and enhance the domain knowledge in through series of certifications, courses, webinars, etc.
  2. Resource Allocation: Operations and delivery team resources will attend on-site trainings with the client and would be involved right after solution has been formulated. Of course, this might not be possible all the time due to hiring and availability constraints. Still, at least 60% of the resources should be process team leads that will be retained and will be accountable-for the knowledge received/transferred in the long run.
  3. Right-banding: Domain specific and Knowledge Services delivery deals would have a higher branding compared to other transactional deals. The obvious rationale being, the higher skills that these resources would be required and expected to have, because of their role.
  4. Balancing the Operational Excellence Rigor: Retaining only the aspects that can be applied to the specific process and not just adhering to a cookie cutter framework. They would ofcourse continue to leverage the holy charms of RCAs, DMAIC, Voice of Customer to ward off evil spirits of customer wrath, queries, doubts, etc.
  5. Retaining Talent: As a strategic initiative - ensure that the talent hired for knowledge specific deals would be provided with their share of avenue to grow, contribute and learn. The resources should be leveraged appropriately rather than just managing the 'shop' and its people. They would be allowed reasonable lee-ways to get involved with other sourcing and procurement 'grass-root' activities such as help design strategy before an auction, frame supplier selection criterion, discuss challenges with stakeholders, analyze spends, etc.
  6. On-site support: Provide domain and client facing executives to generate that "near you, for you" feeling in clients. Obtain pipeline of work, report to each stakeholder the progress of their requests and promote the work done by off-shored operations center.

... their first but firm steps to the Promised 'Procurement & Sourcing' land ....Sounds familiar and just ? Do let me have your "for" or "against" views through comments...

October 22, 2012

Employee Engagement and The Why of Work

Employee Engagement has been in the forefront of a lot of discussions around HR outsourcing nowadays.Successful leaders are able to connect individual aspirations with what the organization is up to.

Employee Engagement has been in the forefront of a lot of discussions around HR outsourcing nowadays. Just as I was exploring the topic deeply a few weeks ago, I chanced upon 'The Why of Work' - a fantastic book by one of the finest HR author, Dave Ulrich along with Wendy Ulrich. The book is an excellent treatise on how great leaders create a culture of abundance around them that translates to superior performance from employees and infuses the organization with enthusiasm. The shift from money to meaning was a paradigm shift in context.

Just the other day, I heard the famous story about the two stone cutters. Though I had heard the story before, after reading 'The Why of Work', I could relate to the story very strongly. The story talks about how two workers were busy cutting stones in a worksite. While one was full of energy day after day, the other was tired and often exhausted. Intrigued by this, a passerby who went by the site every day for his morning walk asked each stone cutter what they were up to. While the first worker said that he was earning his living cutting stones, the second said that he was helping to build a cathedral that will be home to the Lord.

I look back and find the same is true when I have worked with successful leaders. They were able to connect individual aspiration with what the organization was up to. I remembered the conversation with my current leader when he took over the business and wanted to meet me. After a brief introduction, he asked me what I was passionate about. I hesitated because it had nothing to do with the business we were in. I told him a few things after a pause. He then asked me what were my proudest moments in my career. I told him a few things I was proud of. I still remember what he said after that. He asked me to forget everything else and create a few proud moments in the next few months as it will be the only thing I will ever remember in my career. Today, I do a lot more than I had been doing before that conversation. It was a real "Employee Engagement for Dummies" moment for me.

October 19, 2012

Purchasing functions: Hulky and Decrepit v/s Right sized and Healthy

As I meet more and more clients/prospects (CPOs, Purchasing Directors, Managers, Buyers) during sales, services delivery, service review etc.; I see two common issue categories bothering them in their function.

As I meet more and more clients/prospects (CPOs, Purchasing Directors, Managers, Buyers) during sales, services delivery, service review etc.; I see two common issue categories bothering them in their function - hulky and decrepit issues. Some will complain having too many people (and also ones from old school not having modern purchasing skills) while some will say the same about procurement applications. Some will say we need to modernize, make things slim, fitter etc. to a degree which makes us best in class. You analyze all the issues a bitand you bet, you can classify them into these two issue buckets.

So what is the solution ? Simple. Make all these worrying infrastructure elements which constitute procurement department (people, organization, delivery model, processes, knowledge etc.) right sized and healthy. A right business process management partner can help to identify, prioritize and put up a plan to achieve such end state. The art of possible is simply loaded with too many choices. The choice really lies with the purchasing fraternity to take these challenges head on and take advantage of supply base capabilities as opportunities to modernize. Taking the first step is most important i.e. call few procurement services providers right now to gauge what all is possible, what has been done with other clients etc.

What do you think ? Get me your views by commenting, which I am sure you will.

October 16, 2012

Can too Much Retailing be bad? - a Supply Chain Professional's View

Should we encourage retailing? And, should we have big players in retailing? Isn't inviting FDI in retailing akin to inviting trouble? Won't such a step spell doom for the economy in the long run???

Inviting FDI Investment in retailing may not really augur well for the economy of a country. Not because it is FDI but because of the involvement of large firms. Every retailer is a store room in a way. Too many retail outlets will result in too many stock keeping points. Stocks block the working capital and this certainly is not good news.

An aam aadmi's (Common Man's) basic necessities are: 3 rotis (Indian Bread) & dal (Indian Curry) per day (Food), decent kapda (Clothing) and makaan (Shelter) at affordable prices. All that a poor man needs is daily bread, simple clothing and a small roof over the head. Increase in the retail outlets will only push these basic requirements out of the reach of the common man. The retailers carry stocks of finished products like biscuits, noodles, chocolates, branded clothes etc. Poor anyway cannot afford to buy these or is simply not interested in these. The retail outlets also spend huge sums of money on land, buildings and good interiors. This too makes clothing and shelter more expensive for the poor!

Thus, what is essential may not be available and what may be slow-moving or is not so essential in order to lead a decent life may be available in plenty.  Stocks will be carried by the retailers expecting some business in future and Anticipatory Inventory is certainly dangerous. Cost additions would be rampant and value additions would be less frequent. To me, the 'real' value addition happens only when there is a repeat purchase by the Customer.

Every retail outlet obviously would want to keep stock of a variety of items so as not to lose a customer. The level of stock is usually proportional to the space available. A small outlet will tend to keep low stocks and a large outlet will always carry high stocks. Thus, bigger the space available, more dangerous it is to the Country and its economy.

So, should we encourage retailing? And, should we have big players in retailing? Isn't inviting FDI in retailing akin to inviting trouble? Won't such a step spell doom for the economy in the long run??? It is said that 'Information' should replace 'Inventory'. Instead of carrying 'Inventory' the retailers should carry 'Information' regarding Inventory. Inventory can be centralized and stored at fewer common warehouses. It is perhaps time for all the Big Retailers to join hands and practice collaborative Supply Chain with a view to bring down inventory and also inventory related costs.

What do you all think? Keep sharing your comments. Thanks in advance.

October 11, 2012

Customer Loyalty Management...in the Digital Age

The growth of showrooming...the practice of customers visiting brick-and-mortar stores to "experience" a product but ultimately purchasing it online in e-stores causes considerable pressure on brick- and-mortar stores.

Customer loyalty management with points/miles linked to rewards is a long standing strategy used in the services sector especially airlines and hospitality.  BPO vendors have responded by offering a slew of services to manage customer loyalty programs such as helpdesks to administration of miles and stays programs of most airlines or hospitality chains. Though somewhat limited in the manufacturing and retail space, we see a new conundrum being posed with the growth of ecommerce and e-retailing. The growth of showrooming...the practice of customers visiting brick-and-mortar stores to "experience" a product but ultimately purchasing it online in e-stores causes considerable pressure on brick- and-mortar stores. These stores due to their larger overheads (real estate, stocks, human resources etc.) cannot offer the lower prices or discounting that e-stores can offer but at the same time are robbed of their experiential advantage by the growth of showrooming. This at times can lead to a vicious downward spiral of larger overheads (more customer visiting the stores) not supported by growth in sales (done mostly on e-stores) leading to the collapse of the profitability and sustainability of the stores. Retail chains have only begun responding to this phenomenon by introducing various initiatives:

  • Reducing the price differential on stores and e-stores (keeping online prices artificially high)
  • Branding and offering value added services in stores
  • Loyalty programs for in store purchases

The third initiative of customer loyalty programs for purchases made in-store is where the maximum innovation is seen and where BPO vendors need to focus on. Unlike the loyalty programs they manage for the services industry, the programs designed by the retail sector are more specific to the market it addresses and supported by customized technology platform. Take the example of "shopkick", the new application which tracks customer's purchases across shops by rewarding them with "kicks" which in turn can be accumulated and redeemed for goodies and preferential treatment in stores. BPO vendors need to take into account these nuances, build strategic alliances with providers of these technology platforms/applications and devise suitable process flows to accommodate the market that they service. But can they extend their expertise from managing customer loyalty programs in the services sector and build on it or is a fresh approach in order? Do we put on our thinking hats and create this new approach or extrapolate our current learnings'?

October 8, 2012

Transforming Corporate Travel Programs through Technology

Technology has a key role to play in transforming the tiring travel experiences of the past to one of eager expectancy. In today's time sourcing the right technology combination for one's workforce has become imperative.

As a person in the proud possession of a passport with 2 additional booklets appended and with almost all pages freckled with the entry and exit evidences of numerous visits to numerous countries over the past 15 years, I consider myself to be a seasoned traveler. 15 years back, I took my first international flight to London.

On a more recent travel to Charlotte, USA, via Paris, for some strange reason, I found myself comparing the present travel experience with that first experience. First tryst is supposedly the one which everyone remembers the most. For me, that first travel experience had a lot of good memories and a few bad. But, what really awestruck me, while I was sitting on that aisle seat of the Boeing 777 flight, and with little else to do, was the significant changes that advent of technology and Web3.0 brought about to ease the travel experience.

Right from the time I started to plan, book my ticket till the time I checked into my hotel room, technology made every part of this earlier complex process easy and also enabled me to sync my preferences with actual real touching experiences.

Whether it is the meta search sites for finding the best travel deals and the review sites for ensuring the selection of the right hotel, the booking tools for booking the air, hotel and car components tied back to your corporate TMC, the mobile device which has our booking confirmations, itinerary, alerts, and reviews, technology has altered the whole experience so much so that it is now a breeze to change your existing bookings without making, and being kept on hold on those endless phone calls. Modern technology, ever-growing list of Apps and our inclination towards gadgets have made everything much more easy and accessible. Using maps for selecting the hotel, planning your evenings by pre-booking shows or in fine dining, no surprises or shocks await to spoil your day or your visit.

Technology has a key role to play in transforming the tiring travel experiences of the past to one of eager expectancy. In today's time sourcing the right technology combination for one's workforce has become imperative. Today's Travel category manager is left to grapple with questions like:  which Booking tool? Which Smartphone? What technology? Whom to integrate with? How to do all this securely? Etc.

A truly optimized corporate travel program utilizes the right mix of technology, agency provider, and suppliers. A one-size-fits-all approach typically results in lost savings opportunities that will go unrealized until every aspect of your corporate travel supply chain is analyzed and optimized. Today, many companies rely on its vendors for important program decisions. What clients are increasingly looking for someone who represents them, not vendors. an expert at Strategic Sourcing - from travel agency to technology vendors to supplier negotiation. Our Strategic Sourcing practice helps to optimize your corporate travel program, helping in sourcing best fit technology of any area of your business that touches travel.

Clients have increasingly shown interest in Individual consulting projects that are comprehensive and actionable. Providing corporate travel benchmarks, internal key performance indicators against industry standards, perform necessary fee and service audits, and finally provide a roadmap to drive additional ROI from the program in terms of traveller satisfaction and net savings for the corporation.

In my next post I will be talking about recent Mobile technology advancement in Travel and how today corporate traveller is using them.

October 1, 2012

Closed Books Outsourcing - what will the future have in store?

Can the cumbersome burden of Closed Books be shifted to a different quarter to increase efficiency? That's the question playing in the minds of US insurers. Or most of them.

Over the last two years there has been increasing dialogue and viewpoints on Closed Book outsourcing. 'Closed book' refers to policies and variations of products that insurance carriers have stopped selling. However, these books continue to have a service commitment to the insured. Over time and with modernization of technology these books have become cost ineffective for insurance carriers to maintain.

A recent survey conducted by a global research firm1 indicated that the United States contributes up to 25% of the annual global Life insurance revenues. This market is 3-4 times the size of the UK market, which has seen significant traction in closed book outsourcing and evolving servicing models such as BPO and SaaS. With an estimated 400 million policies in force the closed book market in the United States is estimated to be 40%. 

So where does it go from here?

Over the next two years, insurers will face challenging times. With an aura of uncertainty in employment levels in the US, new product uptake and sales are expected be rather flat. Many of the actuarial assumptions that were made while these products were initiated would have changed post the 2008 meltdown. Insurers will be saddled with the task of improving revenues and premiums, as well as reducing costs and combined ratio's to help achieve financial results. 

What strategies will insurers adopt to address this business challenge?

We can expect to see increased activity in books of business moving inorganically between insurers. A large section of multiline insurers will engage with specialist service providers to help improve financial efficiencies of closed books. Service providers usually draw expertise from multiple engagements across the value chain and are able to deploy effective solutions. Benefits that can be derived from this are:

  • Simpler streamlined process for the end customer: Even though closed books remain closed to any new business there still exists a service commitment towards the insured. Archaic systems and processes often result in end customers being constrained and leaving with a negative experience. Service providers, through expertise deploy methodologies through LEAN to focus on customer expectations and build processes and systems centric to those. 
  • Shared service benefits / workforce rationalization: Service providers usually manage core processes. Over time and with engagements there is also a reduction in support roles which help bring down the overall cost of operations, without any service impacts. Estimates are that role and workforce rationalization can bring in benefits to the extent of 10%-12%. 
  • Simplification of IT portfolio: Significant M&A activities over the last two decades have resulted in insurance carriers developing a huge IT estate and inventory of systems. Investment in technology with the expectation of incremental sales also has led insurers to create more modern systems alongside the existing ones. The reality of this today is that insurers have a big IT portfolio that needs to be maintained to keep the business going, which has resulted in unpredictable cost escalations. Closed books are otherwise profitable books of business with higher premiums and higher persistency levels, because these are typically policies which were sold years ago.
  • Scalability and Flexibility: Insurers globally see volumes of business and customer contact fluctuates. Some of this is predictably attributable to seasonality, while some of it is unpredictable and attributed to market and index movements. 
  • Global Sourcing Benefits: Insurers today have reached out to the global market for sourcing options. Global sourcing helps insurers tap and attract talent from the global market, to achieve specialization at attractive costs. The global delivery model also helps mitigate business continuity risks and can sometimes be the starting point for an insurer to expand footprint in the global market.

The potential for insurers to address some of the challenges associated with closed books is ever increasing. Service providers today have evolved and are reaching out with innovative engagement models, which can help insurers achieve objectives alongside balancing the risks and issues with outsourcing.

Insurance carriers that have been so far closely run will now need to evolve to the ever changing needs of a global consumer. With the advent of faster and quicker communication systems and information, profitability and products that deliver, will be the focus. Will insurers look to more closed books outsourcing?


References:
1. Everest Research: Closed Books Insurance BPO

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