Insurer fails to find offshore outsourcing's crock of gold

Cut IT development costs by 90% - are you being serious? But the directors of Royal & SunAlliance (RSA) were perfectly serious....

Cut IT development costs by 90% - are you being serious? But the directors of Royal & SunAlliance (RSA) were perfectly serious. They had been told that it was possible to get all of the company's development work done in India for 10% of what it costs in the UK, writes Tony Collins.

If it was true, and the directors' hunch was correct, RSA would achieve an industry first. No organisation with a multi-million pound IT budget has cut its overall IT development costs by 90% - not without going into receivership.

"It's the sort of talk at very high level that people have," said Jo Myland, a senior IT executive at RSA. "People at high level get that idea fixed and we needed to work through the details to see if that was the case."

So began a review of three major exercises in contracting out IT work to India. None of the projects went exactly according to plan but, says Myland, "we have learnt as much about ourselves as about outsourcing offshore".

Now in its fourth century of trading, RSA is the UK's fourth largest insurer, with major operations in several countries. Its chairman, US lawyer Bob Mendelsohn is said to have been paid more than £1m in 2000, making him the UK's best-paid insurance industry chief.

But the company is under pressure to cut costs. Its operating profits fell 16% to £476m for the year to 31 December 2000, after storms and floods, mainly in the UK, created an extraordinary level of claims, costing the company £180m.

Against this background, the board has insisted on cuts in IT spend for the past two years. Targets for savings in 2001 have also been set. Thus, RSA has looked towards India, where programmers have a reputation for technical excellence and are paid about a third of UK wages - and cost savings are not the only attraction.

RSA has merged four IT departments into one and is building a suite of new strategic systems to replace a spaghetti of legacy applications. Outsourcing legacy work to India could free UK staff to work on strategic systems and cut the cost of local contractors.

"On some systems, some of the skills are available only from contractors. We are paying quite a lot for these skills," Myland told a conference on offshore outsourcing in London recently.

The first major difficulty was deciding which systems to contract out. "Many of our team managers thought outsourcing to India was a really good idea but their particular systems were definitely not candidates," she said.

Even so one senior manager, involved in legacy systems that supported management information, was particularly enthusiastic about outsourcing. One reason was that it would free up key people for strategic work.

After visits to India by several RSA people, the company drew up a shortlist of suppliers last year and chose Hexaware, which has 24-hour technical operations in India, and offices around the world, including the UK. Its customers include the BBC, Colgate-Palmolive, EMI Music, British Bakeries, British Midland Airways, IBM and Standard Chartered Bank.

RSA underestimated the time needed for planning but, in all, the project was a success. "The Hexaware people arrived before we had completely finished our planning. Luckily we had underestimated how flexible their people would be. The plan became an iterative process and Hexaware became productive in a few weeks," said Myland.

As they had hoped, RSA business managers were able to release key staff. "They'd be dying to get on with other work and now they could," said Myland. "The Hexaware people integrated well into the team and had process and methodology skills which they were able to share."

A senior Hexaware executive said, "We have a good understanding of their [RSA] business. We have been at the mercy of their change, which is a difficult position for a supplier to be in. But a lot of the hesitance [about outsourcing] has gone away".

RSA studies to see whether two more important systems could be contracted out to India have gone no further, however. One involved an old and simple insurance claims system that was due to be replaced but still handled hundreds of thousands of policies. More than 30 man-days of RSA time went into planning the outsourcing of the system. By end of study, RSA was convinced that Hexaware would be capable, technically, of supporting the system.

Another study was conducted on a larger, more modern and complex system. Although not a strategic system for the future, it was "critical" to the business. This evaluation involved 113 man-days of RSA time.

Contracting out either of these systems would have involved up-front costs which were incompatible with the savings promised for 2001. In the case of the larger one, staff also felt that the system was probably too big and complex to be transferred, said Myland.

But she added that all three exercises were worthwhile. They "highlighted the better suitability of outsourcing a simple system rather than a complex and unusually-designed system". Rather than being seen as a failure the studies have "helped identify types of candidate for offshore outsourcing, and helped us understand why we might want to do this in future".

After reviewing the projects Myland has been able to confirm to the RSA board that offshore outsourcing has a number of important advantages, which do not include 90% cost savings.

This is partly because of the up-front costs, including infrastructure and networking systems, and the time spent by RSA staff on managing the transition. It may take up to five years to achieve savings on contracting out old, complex support systems, said Myland.

Continuing the existing relationship with Hexaware, however, is part of RSA's business plan. "It is providing real benefits," Myland reported.

RSA is now reviewing all of its sourcing arrangements, although no decision has been made about outsourcing more work to India.

Reality check shows true benefits of outsourcing
Lessons learned from three exercises to outsource development work to India for Royal & SunAlliance (RSA)

  • Huge cost savings are elusive - payback for old, complex support systems could take four to five years
  • The supplier's staff may surprise you with their flexibility
  • Successful in releasing key staff for other work
  • User's staff impressed by skills, knowledge and approach of Indian supplier
  • New work has better cost case, plus opportunities for access to leading edge skills
  • Maintenance of existing systems have high handover costs
  • It is easy to underestimate the time needed for planning work to be transferred
  • Existing staff may see offshore outsourcing as a threat - but this can be avoided by not moving "plum" work
  • A good way to secure legacy maintenance, but if this is all that is contracted out, outsourcing companies may struggle to retain staff too
  • RSA's staff are now more questioning and challenging, indicating that they might need to remain involved in agreement of user requirements, governance and prioritisation
  • It is easy to underestimate the cost and complexity of setting up communications links
  • Need to understand the regulations in India about networks between locations and carrying voice traffic on data lines
  • RSA is more likely to gain advantages in capability and security of support than
  • short-term cost savings.

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Tony Collins - [email protected]

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