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Compliance: Finance's Bridge to the Enterprise

Risky Business: Are You Taking Unnecessary Chances with Your Outsourcing Investment?

In 1998, Lincoln Financial Group went on a buying spree. The Hartford, Connecticut insurance company purchased the individual life policy portfolio from both Cigna and Aetna. However, the new business opportunity came with a major problem: now the insurer needed 10 different software programs to run its portfolio. Obviously, Lincoln had to consolidate and integrate its policy operations. "We needed an outsourcing partner who could divide and conquer the problem and do it quickly," says Dede DeRosa, senior vice president.

In addition, the acquisitions meant Lincoln now had three operations centers: two in Hartford and one in Fort Wayne, Indiana. The insurer thought it was a good policy to have everything under just one roof.

The executives set a term of two years to complete the integration, which was done in phases. A third party administrator approached Lincoln and suggested outsourcing. DeRosa says this was the first time the company began to research outsourcing as a universal solution to its problem.

Lincoln initially considered giving this company one-third of its business to see if there were any benefits to outsourcing. But the negotiations led Lincoln to believe it "didn't study the problem as thoroughly as it needed to. We decided not to use the first person who showed up on our doorstep," says DeRosa.

Rethinking What To Outsource

While the insurance executives were convinced that outsourcing was the answer to their complex challenge, they were a bit wary about the process because they had had some unhappy experiences with outsourcing before. So they decided to educate themselves on the newest directions in outsourcing.

They attended an outsourcing conference in New York City and were impressed with the presentation of the Everest Group, Inc. They enlisted Everest to help them select an outsourcing supplier. "We quickly shifted gears," recalls DeRosa.

Originally, the Lincoln executives were going to divide the business according to its company of origin. But after a review with Everest, Lincoln came to the conclusion to outsource its older and inactive product lines (term and whole life policies). They decided to outsource a horizontal slice across all three companies instead of break up the business along company lines. "This idea made things much simpler," says DeRosa.

Then Lincoln, with Everest's help, penned a Request For Proposal (RFP), which DeRosa says was "a comprehensive process." The insurance company used Everest's model which included detailed service level agreements (SLA) and a proposed contract. DeRosa says doing all the research and hard work up front was "a bit painful, but it made us think what we were asking for. It was an invaluable exercise."

The Benefits Of Thinking Things Through

Firming up the SLAs made Lincoln answer these questions:

• What are we asking the outsourcing supplier to do?
• What are we going to monitor?
• How are we going to know if things are going well?

Lincoln discovered 12 different suppliers who could solve its problem while it researched its RFP. But it only wanted to send the request to four companies. So it established 10 high level criteria to whittle down the list. These included the supplier's Business Process Outsourcing (BPO) experience, its technical competency, the size of its organization and its knowledge of the insurance industry.

The insurer selected two finalists. It invited the two suppliers to its headquarters so they could understand exactly what the underwriter wanted them to do.

Everest suggested conducting the contract negotiations with both companies during the selection process. Once Lincoln and EDS wrote a contract that both parties liked, Lincoln awarded the business to the Dallas supplier. DeRosa says this approach "was a valuable lesson learned."

In the past, she says Lincoln had done a good job of assessing the capabilities of its suppliers. It would then select a finalist and begin contract negotiations. Now she realizes Lincoln lost leverage because it could not pit one candidate against another.

Hire An Outsourcing Consultant

She says customers are well served to hire an outsourcing consultant. "We did in three months what other companies would need six months to do," she says.

DeRosa made sure representatives from all areas of Lincoln were involved in the supplier selection process. She feels this was critical when it came time to implement the plan. "Outsourcing can be threatening" to staffers, she explains. Also, executives understand why the selection committee made the decisions it did.

In fact, implementation was the most difficult part of outsourcing. "Doing a great job up front doesn't eliminate all the problems. We had our share of surprises," she says. The first phase tackled the system in Fort Wayne. Both customer and supplier had limited experience with this system, which caused the first set of problems.

DeRosa credits EDS with having the depth of talent and the willingness to make the relationship work. "It got pretty ugly. But EDS had the strength to step up to the plate. We felt if we had chosen any of the other vendors, we might have had to abandon the initiative," she says.

Assemble An Implementation Team Carefully

The only other difficulty was personnel. Neither side really thought clearly about who was going to work with whom on the implementation team. The managers had to make some personnel changes and do some damage control as the implementation progressed. "We should have thought about personalities earlier," DeRosa observes.

Overall, Lincoln was pleasantly surprised at how well the outsourcing process went. "The Everest model really worked well for us," she says.

Lessons from the Outsourcing Primer:

• Research your decisions thoroughly. Don't necessarily use the first supplier that shows up.
• Do all the research up front so you can write details service level agreements in the RFP.
• Take all your finalists through the contract negotiations before you make a selection. If you don't, you will lose leverage.
• Hire a consultant to help you through the process.

Publish Date: July 2000

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Copyright © 2000 - Everest Partners, L.P.

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