Joe Lesko, CPCU on "Outsourcing: Perspectives in Today’s Insurance Industry"

You may be surprised to learn that leaders in the Property and Casualty industry, surveyed in 1998, indicated that they consider nearly all core and non-core operations as potential candidates for outsourcing. And did you know that the total dollar volume of the outsourcing market for 1998 was $ 250 billion? (Source: Outsourcing Institute) Moreover, outsourcing across all industries is expected to grow 25 to 30% annually, over the next five years. These are just a few of the trends which Joseph Lesko, CPCU, AM, and General Manager for Insurance Mgmt Resources, LP, discussed at the Chapter February breakfast meeting.

Indeed, industry experts are predicting the following growth scenario for outsourcing, looking well beyond the year 2000:

Lesko, who has seen outsourcing from both sides (as customer and service provider), offered several definitions of the term. According to The Yankee Group, outsourcing consists of: "Any service-related purchasing decision by management that includes: a) work normally done by salaried employees assigned to a vendor; b) any specific subset of business services with a finite scope; c) negotiated agreement with a third party vendor." An alternative, simpler definition, from The Outsourcing Institute, is: "A conscious decision to move internal business processes or personnel to an external supplier."

Lesko then drew a diagram of outsourcing as a 6-step, circular process. (1) strategic analysis® (2) vendor identification® (3) request for proposal® (4) vendor selection® (5) transition implementation® (6) relationship management, then back to (1). After elaborating on each of these steps, he provided a "Lesko Lesson" : Remember that stuff happens. No matter how well you’ve done your homework, and developed the best plans, always expect the unexpected in an outsourcing relationship.

Next, Lesko reviewed factors that are driving outsourcing growth in the Insurance Industry. The reasons most often given by companies include: competition; complex regulations; expense pressures; profitability concerns; limited resources; and available expertise. Another study revealed that the "top 8" business operations outsourced by the 100 largest P & C companies are the following: Disaster recovery; Employee benefits; Claims litigation/defense; Premium audit; Loss control; Investment management; P&C adjusting; Actuarial services.

So what should a manager look for when evaluating and choosing a Third Party Administrator ("TPA")? Lesko discussed the qualities that are key to a "good" TPA.

In closing, Lesko offered helpful hints and lessons based on his personal experience with outsourcing. If you (or your company) are considering an outsourcing project, these tips may increase the potential for a successful outcome.