Transformational outsourcing has long been hailed as the next big step in the evolution of outsourcing and offshoring. But what exactly is it all about? Bigger and more integrated deals? New service and operating models? Deals with SLAs focused around business value rather than traditional metrics?

During our recent Global Outsourcing & Offshoring Conference in New York we discussed this matter and focused on the insurance industry. Some carriers have broad experience outsoucing entire lines of legacy business, including IT systems, business processes and customer interfaces. The contracts often exceed $500 million in value and 10 years in duration.

Recently, we had the opportunity to speak with a major provider of outsourcing and offshoring services to the industry and wanted to share some of the highlights of our discussion. We learned that in these so-called legacy book or closed book deals, outsourcing providers, by virtue of their scale and unique range of skills, are able to deliver performance improvments that individual  insurance carriers acting on their own  could not. Among the points of leverage are:

1. More effective workforce management and professional cost control;
2. Disciplined application of lean methodologies, process redesign, staff redeployment, and management of redundancies;
   
3. Consolidation of IT system stacks previously supporting the legacy books of several carriers.
   

While carrying out these activities, providers also build upon their legacy skill sets and resources, often in areas that individual carriers would find difficult or where investments would be prohibitive. They include the migration of legacy IT system stacks, consolidation of shrinking legacy books, better management of assets, and better resource utilization.

When providers transform an outsourcing arrangement by  by applying these tools and principles, they deliver real value to insurance carriers – often beyond what is typically seen in traditional O&O arrangements. It arises in three ways:

1. Radical cost reduction and process improvements that result from granting the provider management rights over the entire vertical
   
2. Reduction of capital requirements flowing from the  shift from higher fixed legacy stack costs to lower and guaranteed per policy costs.
   
3. Improved ability to predict and manage future business costs via true output-based pricing for legacy policy administration

In fact, somewhat surprisingly, it emerged from our discussion that the traditional value levers such as  labor arbitrage, did not play any role in some cases where there were benefits. In our experience we have seen savings from these strategies that range from 20-30 percent of total cost. On top of that, carriers gain greater control and flexibility over legacy costs,  and have a greater ability to focus on true  transformation and their core value proposition.

Ferruccio Lagutaine also contributed to this post.