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From Resource, September 2004
Copyright by LOMA
Keys to Competitive
Advantage
Could outsourcing and mobile technology be the keys to competitive advantage for
your company? Get some expert advice from Dr. Ravi Kalakota.
By Tammy J. McInturff
Are outsourcing and mobile technology
keys to success? Can they give your
company the competitive advantage that you are looking for? Outsourcing and
mobile technology are two areas that insurers are looking at very closely. Dr.
Ravi Kalakota will offer his expert opinions on these subjects at LOMA’s
Distribution and Emerging Technology Conferences, which will be held
back-to-back, October 18-20 and October 20-22, 2004, in
Washington
,
DC
. Kalakota, the CEO of research and consulting practice E-Business Strategies,
is a leading authority on business technologies and market execution. He has
authored several books considered to be “e-commerce classics.” His most
recent book, Offshore Outsourcing: Business Models, ROI and Best Practices,
explains the transformations taking place in business processes such as IT,
customer care, finance and accounting, back-office processing, and human
resources. Recently Resource had an opportunity to talk with Kalakota and gain
some insight into the recent trends in outsourcing and mobile technology.
Outsourcing
Resource: Why are so many companies
beginning to outsource?
Kalakota: Primarily to reduce operating costs. Competitive pressure is
increasing and a lot of companies have discovered that their products have
become primarily commodities. So the only way to show better results is to
reduce your overhead and back office costs by changing the way you conduct
business.
Resource: How has outsourcing
changed over the last five years?
Kalakota: Five years ago, a
lot of the outsourcing was primarily onshore outsourcing—outsourcing done
within the
United States
. The next evolution, after onshore outsourcing, was near-shore outsourcing
where companies went to
Canada
(or
Mexico
) primarily to get a lower cost structure. Then companies realized that onshore
or near-shore outsourcing was not delivering the 30 percent cost reduction that
they were looking for, so they began to look at offshore outsourcing to India,
the Philippines and other areas. So today the word outsourcing incorporates the
blending of onshore, near-shore and offshore components into the broader
picture. The strategy has become much broader, especially on the execution side.
Resource: What trends have you
seen around offshore outsourcing vs. onshore? Are more companies choosing to go
offshore?
Kalakota: Well, companies are
in search of what they call the best cost solution. I won’t call it low cost,
but best cost. So they are weighing their options. I think companies are getting
a little smarter about the offshore spending. They realize that not every task
can be sent offshore, some tasks are better done onshore or even onsite. So as
companies mature and gain experience, what we are starting to see is a more
blended model, where they are picking a strategy that is more appropriate to the
task. In phase one, they blindly went offshore, thinking that every task could
be taken offshore; but now they are starting to be more selective about what
they take offshore.
Resource: What are the negative
impacts or draw-backs of outsourcing?
Kalakota: A lot of companies try to pawn off their problems to the third
party vendors. What they can’t do well in house, they think that a savior is
going to come and fix their problems for them. The drawback there is from a
strategy side; if you are not able to fix your own problems then don’t expect
somebody else to fix the problems for you. From the people side there are also
drawbacks. Companies are definitely going to see a hit in terms of productivity,
because their employees are going to start questioning the motives a little
more. So they are going to see some element of productivity lost there. The
third aspect is more the longer term issue, which is the risk of eroding some of
the foundation of the company. Companies need to be aware that they might be
chipping away at the knowledge base of the company. I think we don’t really
have a good understanding of the impact of the longer term knowledge aspects of
the company. I think that is dangerous, because if you start losing the
knowledge of how to do certain things, then it might cost you a lot more to get
the knowledge back into your entity and train all of your employees about that.
Resource: Some companies
outsource but lack a corporate sourcing strategy, what thoughts or advice do you
have for those companies?
Kalakota: A lot of companies try to do outsourcing or even offshoring
with a project by project view. When you take a project by project view the
decision making is further down in the food chain. It is not a strategic
decision; it is more a tactical decision. But when you are doing 30 different
projects, which are all being offshored, then it is no longer a tactical issue.
You need to have a strategy. Are you going to pick one vendor who can probably
do all 30 projects and give you a better price? Or, are you going to establish a
captive shared services center and migrate work to a low-cost country?
When multiple projects are
involved it becomes a more strategic sourcing issue and there are not that many
companies who have taken a more strategic perspective of the outsourcing issue.
We are finding that in the majority of cases that a lot of them are more
tactical in nature. We have to remember that this whole phenomenon is not more
than 10 or 15 years old, so our understanding of it is really in the early
stages. As we mature in our thinking it is moving more from a tactical
orientation to a strategic orientation. It is becoming part of the corporate
strategy.
Resource: What factors should
companies consider when offshore outsourcing?
Kalakota: The first factor is the perspective. Is it really a long term
perspective that you are going into this with or is it just a short term
two-year, three-year type perspective. If it is a longer term perspective, then
you are not looking at an immediate ROI—an ROI that starts emerging after
maybe 18 or 24 months. From my experience, I have found the companies that go
for an immediate ROI, where they are trying to get a return on investment within
about six to nine months, are normally disappointed by the results. Whereas
companies who have really taken a longer term perspective are getting much
better results.
The second factor is you have
to weigh whether you want to partner with a vendor and let the vendor do
everything; or whether you want to invest in building your own captive vendor,
where you control the product more. For companies in the
U.S.
who are trying to outsource to
India
, trying to have a captive model from day one is a very difficult task. So they
may be better off partnering with a third party vendor and then gradually
bringing it in house. So there are three options in terms of the business model
that you choose; you could either choose a captive center model, where you own
everything from day one, everybody is your employee. Or you could choose a third
party outsourcing model, where you are basically handing it over to a vendor who
owns everything and is basically working on a time and material basis. Or the
third option that is emerging is what is called a build-operate-transfer model,
a more joint venture model, where you both partner and you create a separate
entity. Then the American company has the option of acquiring that asset after
two or three years. With this option, there is less start up risk involved.
What we are finding is that the
smaller
U.S.
companies are normally starting with IT, but they are gradually expanding into
call center, help desk, or data entry. But again companies need to consider
whether they are only going into it for one task, or a collection of tasks over
time.
Resource: What is the greatest
risk involved in offshore outsourcing?
Kalakota: People think it is
easy. The greatest risk is that management thinks it is easy. Execution is a
nightmare. The biggest challenges are project management related, the day-to-day
project management. Because from a strategy standpoint it looks great to see the
possibility of a 20 or 30 percent cost savings, but to get a 30 percent cost
savings requires a tremendous amount of management skill and day-to-day
operational skill. And a lot of companies are finding out that that particular
project management skill is something that they underestimated when they got
into it. For example, when you offshore to
India
and you are located in
San Francisco
, then your meeting hours tend to be nine o’clock at night or six o’clock in
the morning. So if you don’t have managers who are comfortable with meeting
hours from eight to ten o’clock at night and six to eight o’clock in the
morning, you are not going to get work done. These are what you would call
international meeting hours; everybody has to get together at that time period.
Then there are always the
cultural issues that come in. Simple things like a misinterpretation could
create a lot of havoc with projects. It all comes down to people management—
those are the biggest risks. How do you manage people, who you don’t see
face-to-face but you still have to get along with to get the job done?
The risks are not in the technology. The risks are not in the integration
or process. The risks are very much centered around managing people and getting
people to do the right thing.
Resource: Are you seeing any
trends in the types of companies that are outsourcing?
Kalakota: The trend is pretty
much toward the large companies. It really started with the global 1000
companies. What you see in the banking industry right now, and I am sure it will
be the same in the insurance industry, is that the big banks did it first. The
CitiGroup, JP Morgan, HSBC, the banking part of GE, American Express, these mega
companies have been doing offshore outsourcing for the last 10 years. The larger
companies in turn have started to put a lot of pressure on the next tier of
banks. So the next tier of banks like SunTrust, Wachovia are seeing that these
large banks have a 10 percent advantage over them; so they are trying to figure
out how to minimize that advantage. A 10 percent cost advantage is quite
significant in any industry. So the second tier of banks has been forced to
offshore in order to minimize their peer group’s advantage. We are starting to
see that second group move now. Once the second group moves, it is going to put
pressure on the next tier of banks, like community banks.
So that is sort of the
cascading migration through the market that we are starting to see. The big
companies are going to do it first, because they are already global in nature.
For them it is just an extension of what they do. Then when the large companies
do it, it puts a lot of pressure on the medium size firms. But right now, a lot
of the smaller firms are not really ready for outsourcing because there is also
a lot of management overhead associated with outsourcing that the small firms
don’t have the capacity to deal with.
Resource: For insurers who are
outsourcing in the
United States, what is the likelihood that they will move it offshore in the future?
Kalakota: I would say it’s very high in the IT side—application
development and maintenance, quality assurance and testing and legacy system
maintenance. On the business process side, we are seeing a lot of
paper-intensive activities like claims processing move offshore. Tasks having
lots of people and paper currently are ideal candidates for moving offshore.
Because as you move things offshore you tend to reevaluate your own existing
processes and reengineer them and you also digitize them to get the efficiency.
So the motivation behind offshore activities is not just cost-cutting but also
process reengineering. In the insurance sector we are definitely seeing that IT
is moving offshore more and more. Because the insurance companies deal with
large mainframe systems and a lot of mainframe systems are in the maintenance
mode and the maintenance work is typically done cost effectively offshore. So
that is a big trend. With insurance companies we are also seeing multichannel
contact center activities such as inbound and e-mail customer support starting
to go offshore.
Resource: What advice would you
give to a life insurance company that is looking to outsource?
Kalakota: I would ask the
question is offshore a ‘need to do,’ or is this a ‘nice to do?’
Companies must approach it from a strategy standpoint and ask, is this something
that we have to do because our competitors are doing it; or is it just a nice to
do where we are looking to save a few dollars here and there. If it is a nice to
do then what we are finding is that the strategies seldom work because the
management interest dies down after a while. But if it is a need to do, then we
are finding that the offshore outsourcing or even outsourcing for that matter
tends to have a much higher chance of success. So the first question I would
raise is how committed is management to this?
And usually we are finding that management is doing it typically because
they heard at a cocktail party that this is something that they need to be
doing. And that usually is not the right way to do it.
The second issue or question is
what kind of tasks are you considering taking offshore?
On the IT side one task that we often find that people take offshore is
quality assurance. So you might want to think about the number and nature of the
tasks that you want to take offshore. Because offshore really starts making
sense if the tasks that you are taking offshore involve at least 50 to 75
people; anything below that is not worth the effort. But if you can move 100
development jobs over there, then you might see a good return on your
investment. But if you are doing only 20 jobs, then the economics are not that
attractive. So the scale and scope is a very critical decision.
The third decision is vendor
and country selection. Picking the vendor is a process filled with a lot of mine
fields. Be very careful how you pick a vendor. If you pick a vendor in
India
, one of the big challenges right now is some of the large vendors are extremely
busy. So you might not get the quality you are looking for, or the attention
that you are looking for. Vendor selection is very critical. Country selection
or location is also very critical, because in the tier one cities in
India
right now like
Bangalore
, the costs are prohibitive. The costs can be as high as a major
U.S.
city. But if you go to a tier two city you might get costs that are much lower.
So you have to pay a lot of attention to those types of decisions.
And then number four is, how
good is your project and program management skill set?
If you don’t have very mature project and program management skills,
forget it, don’t even bother going offshore.
Mobile
Technology
Resource: How can mobile
technology streamline distribution for life insurance companies?
Kalakota: Well, the whole
point of mobile business is that you are becoming more real-time, you can
respond to the customer almost immediately. Customer sales and service is the
big driver of mobile business. Companies are already making a lot of the
business processes faster. So in situations where and agent is sitting across
from the customer and you are saying, ‘you know what, I don’t have the
information with me. I will get back to you,’ those are situations where
mobile technology can play a bigger role. Because if you are able to instantly
connect to your back-office and be able to retrieve that information and present
it to the customer, your chances of selling become much higher. Because often
when you leave the customer and walk away, statistics have shown that your
ability to sell tends to go down. The more up-to-date information you have at
your fingertips and the better you are able to answer the customer query, the
higher the chance of selling.
Mobile technology is all about
that real-time, fast feedback to the customer. That is really the value in
distribution. It could be in a sales type process or it could be in a service
type process. For example, if you are traveling and suddenly a customer calls
you, without a mobile device you may not have the specific information with you
to answer the customer’s questions; which could frustrate the customer who
wants a fast response. But an agent armed with a mobile device, could look up
the customer information while on the road and be able to respond to the
customer’s request right there. It is all about the concept of better customer
service and better customer interaction; that is really the foundation of mobile
business.
Resource: Do you think using
mobile technology could give life insurance companies a competitive advantage?
Kalakota: It could give them a competitive advantage and keep the
customer satisfied.
Resource: How can companies
align their mobile technology priorities with their business goals?
Kalakota: Two standard business goals are improving customer satisfaction
and increasing revenue. I can’t think of any company not having those
priorities. You have to ask the question, how can mobile technology support
those two priorities? Are there
tasks that we or our agents are requiring in the field that they are not able to
get using the current way of doing things? And
the example that I use here is agents are being asked questions, but they
don’t have information with them. Can mobile technology solve that?
There are situations where the agent could be a representative for multiple
lines of businesses. In these situations, they might not have information
regarding all of the products at their fingertips. The mobile technology allows
them not to have to carry bundles and bundles of information with them. Instead
they can carry a small device that allows them to retrieve information on an
as-needed basis. So it makes the agent much more prepared in the field.
Resource: Do you feel there is
still a gap between what vendors are offering in wireless applications and what
corporate users are looking for?
Kalakota: I think the technology has gotten a lot better in the last
three years. Three years ago I don’t think we were ready for building
enterprise quality solutions where you are able to support thousands of agents
in the field and maybe seven or eight different products or product lines and so
on. The complexity of the agent work is phenomenal and I don’t think the
devices or the infrastructure was ready to deal with that kind of complexity.
Today, I think the situation is a lot better; we are finally at a point where
the technology is not a barrier to solving the agents’ problem.
The barrier today is
understanding the needs of the agent. We still do not understand how to look at
mobile technology from the agents’ perspective or the field workers’
perspective. We need to ask, what is it that a field worker truly needs to do
their job better and then overlay the technology to solve that problem. So it is
what I will call an outside-in approach. It is not a technology driven approach;
it is a need driven approach. What is the need out there and how do we address
that need? It may seem like common
sense but unfortunately common sense is not often the one that wins out here. A
lot of the solutions that are being pushed out are more technology centered
solutions. It is not about that, it is about supporting the agents’ needs and
the customers’ needs. So that is really what is missing in the market today.
Resource: Many insurers,
especially in the life insurance industry, are not planning significant
investments in wireless technology right now. Do you expect this will change?
Kalakota: I think the
insurance industry is really looking at other industries and saying ‘show us
the value, you show us the value of mobility then we will adopt it,’ which I
think is really a right approach. When it comes to mobile technology, insurance
companies are willing to be followers, just not the early adopters or leaders.
Once they see what value is being created, then they will adopt it. So that is
the right approach in my opinion in terms of how to adopt mobility. Now that
being said, there are certain insurance companies where I think pilots are being
conducted.
Resource: What advice would you
give a life insurance company that is considering the use of mobile technology?
Kalakota:
I would ask the
needs question. Again, is there a need to do this or is it just nice to do. Is
it a need to do, where the agents are saying they need connectivity in the field
and real-time information in order to be able to serve customers? Agents may
tell you they need real-time access to policies so that they can answer customer
questions better when they are mobile. The agents by definition are mobile. So
if the agents are saying they have to have this capability and this information
then the company must invest in that. Because the agents are really the revenue
generators, you want to do whatever is possible to support them. The insurance
firm has to ask the question is this a ‘need to do’ in order to support my
agents or is it just a ‘nice to do’ where the agent might or might not use
it.
If it is just nice to do then
you are probably better off holding off on that solution. We are finding that
more and more companies are realizing the importance of giving their agents
access to mission critical tasks, such as e-mail, while they are in the field.
That is why we are seeing a tremendous investment in Blackberrys at a lot of
companies. So the primary question to ask is, is there a need or not?
If there is a need, then the technology is there to support that
need.
NOTE: for more information on
the LOMA Distribution Technology and Emerging Technology conferences, go
to http://www.loma.org/IndexPage-Meetings-Events.asp
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