Finnish insurer LähiTapiola reveals outsourcing secrets behind €180m deal

Outsourcing played a critical role in the merger of two Finnish insurers and will transform the IT at the newly created organisation

Outsourcing decisions are often driven by cost reduction, but in the case of Finnish insurance group LähiTapiola, outsourcing was chosen to support IT integration after a major merger.

And it has been a success. The insurer formed a joint venture with global IT services firm CGI called LTC-Otso and is now extending the agreement until 2021.

“When LTC-Otso was founded [in 2013], the focus was on the execution of the merger [of Tapiola and Lähivakuutus] which created LähiTapiola,” said Mikko Vastela, CIO at the unified company. “Now it has been finalised and we realised with LTC-Otso and CGI that the agreement we did back then does not serve our post-merger needs the same way. We had a joint motivation to update it to match our current business plan and ICT challenges.”

The new outsourcing agreement is valued at about €180m. It has been modified to allow for a leaner operational model as LTC-Otso continues to provide banking and financial IT services (consulting, application development and integration) to LähiTapiola Group and its subsidiaries.

“LTC-Otso is our strategic partner and produces most of our ICT services,” said Vastela. “Our [LähiTapiola’s] own production is less than 10% of our whole IT budget, which means we lean heavily on our partner network.”

While joint-venture outsourcing has been an effective solution for LähiTapiola, it was not what the insurer had originally planned. LähiTapiola (then Tapiola) had chosen CGI as its outsourcing partner after a long tendering process, but its merger with another Finnish insurance giant, Lähivakuutus, speeded up the co-operation.

“When the merger happened, the focus of the outsourcing tender shifted to the system integration process,” said Vastela. “We understood that to integrate all the different [IT] systems, it was easier to take them into the same environment. Neither Tapiola nor Lähivakuutus had the resources to do it alone, so we needed a partner.”

The decision to form a joint venture – with LähiTapiola as the majority owner – was done after considering several outsourcing models. While a major factor was the model’s cost-efficiency (services bought from a company’s own joint venture are exempt from value added tax), it has brought additional benefits.

“When services and applications have been developed internally for years, or even decades, they aren’t as standardised as expected,” said Jukka Tarkiainen, managing director at LTC-Otso. “There are many risks associated with outsourcing these kinds of non-standardised services. These risks can be better managed in a joint venture where LähiTapiola’s representatives are a part of the board of directors and can guide and monitor how the company operates.”

A major challenge with outsourcing is safeguarding existing knowhow. In LähiTapiola’s case, this meant transferring 220 staff, almost all of Tapiola’s IT division, to the newly created LTC-Otso. Some CGI employees also moved to the joint venture and were joined by external hires to create a team which today numbers 315. But transferring people was only one part of the equation. 

“As with all outsourcing cases, the cultural change in moving people to work for a new company is huge,” said Tarkiainen. “This is particularly true when your role changes from a customer to a service provider. Old colleagues are suddenly clients. 

“This was demonstrated by our service attitude which, at the start, did not quite compare to buying services from someone like CGI. It has been a long process and taken a lot of time to carry out this cultural shift and learn our new roles.”

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One way LTC-Otso has tackled the issue has been by implementing CGI’s service provider processes and operational models. However, the cultural shift has not only been a challenge for LTC-Otso. After the merger, LähiTapiola Group has just over 100 people working in IT and focusing mainly on management.

“We still have project expertise, system specification, testing, and so on, but we don’t do any coding or configurations ourselves any more,” said Vastela. “It has been hard for us as well – previously we did everything ourselves and then almost everything was outsourced. Our role has changed to that of a service buyer.”

"There was some thinking that as this was now outsourced, LTC-Otso will take care of it. We didn’t fully understand our roles or how important good ordering is for good delivery. We have continuously improved these methods.”

The solution was to lower the barrier between buyer and service provider. LähiTapiola and LTC-Otso have created a joint development portfolio, which means the two companies share tools in small development and bug fixes, for example. 

When LähiTapiola adds something to a database, LTC-Otso uses the same database to process the data, thus minimising the resources needed to manage information between the two companies.

The past two and a half years have been a learning experience both for LähiTapiola and LTC-Otso, but the extended outsourcing agreement has been a positive move towards a post-merger world. “The current challenges are in ensuring cost-efficiency and the continuous enhancement of our services,” said Vastela. “The new agreement is different because a big part of it has been giving LTC-Otso a wider mandate to ‘do it how you like, but get the job done’. 

“Previously, LähiTapiola had tight control over how everything was done. While it is good to have control, we noticed it is also expensive, difficult to maintain and we didn’t really need it in the end. Now LTC-Otso decides how it allocates its results.”

Consequently, the core of the agreement comes down to new co-operation models based more on lean development and less on time-consuming committees and working groups. It is an approach LähiTapiola believes will support all its future IT needs.

“The digital world brings new challenges,” said Vastela. “Systems need to be available 24/7, which puts a lot of pressure on development speed. Also, regulation is increasing at an unprecedented rate and our systems have to ensure improved monitoring.”

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