Abstract
Outsourcing has been the topic of great interest within large organizations worldwide. Dictionary defined outsourcing as a practice used by organization to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Many reliable sources have different definitions of outsourcing and thus, the term is used inconsistently. However, despite this factor outsourcing is often viewed as an act of constricting a business function to an external provider whereby two organizations may enter a contractual agreement involving an exchange of services and payments. The reason behind the decision taken by organizations to outsource is to seek several benefits and that includes the lowering of overall cost of the service to business and also involves reducing the scope, re-pricing and cost re-structuring. Organizations also choose to outsource so that they could focus on core business, improve quality by achieving a step change in quality through contracting out the service with a new service level agreement and also to allow them to have an access to intellectual property and wider experience and knowledge. Moreover organization also can gain operational expertise and operational best practice that would be too difficult and time consuming to develop in house. Nevertheless, organization can use external knowledge service providers to supplement limited in house capacity for product innovation to enhance their capacity for innovation.
IT outsourcing in the other hand has also gained popularity almost everywhere around the world and to some extent has received approving responses from big organizations in mostly developed countries like United Kingdom, United States and Denmark. However, there a very few stories or only little are known about IT outsourcing in Malaysia and that too that concerns IT outsourcing within insurance companies in Malaysia. This study highlights the research carried out to evaluate the impact of IT outsourcing within Insurance companies in Malaysia.
Table of Contents
Table of Contents ii
1 Introduction 3
1. 1 Overview 3
1. 2 Problem statement 12
1. 3 Research objective 12
1. 4 Research question 13
1. 5 Research methodology 13
1. 6 Data Collection and Data Analysis 14
1. 7 Chapter summary 15
List of Tables
Table 1: Insurance Companies in United States of America 4
Table 2: Insurance Companies in Australia 5
Table 3: Insurance Companies in Singapore 6
Table 4: Insurance Companies in India 7
Table 5: Insurance Companies in Germany 8
Table 6: Insurance Companies in South Africa 10
Table 7 Insurance companies and IT outsourcing acceptance 11
List of Figures
Figure 1: Research methodology cycle 14
1 Introduction
1. 1 Overview
The continuous advancement of technology has increase the intensity of competition between organizations whose operations or core competence is based on information technology. Consequently this has force them to decide to either outsource or insource in order to survive the competition. Information technology (IT) is indeed has been acknowledged that it has become the engine that drives the modern organization. Over the past years, one of the more widespread developments in meeting an organization’s IT needs is the practice of outsourcing. IT outsourcing is defined as the process of procuring services or products from sources that are external to the organization (Lankford and Parsa, 1999). The most common IT services outsourced are the application and software developments and as far as the service is concerned, this usually involves the transfer of operational control to the suppliers. Therefore, IT outsourcing is a practice of transferring IT assets, leases, staff and management responsibility for delivery of services from internal IT functions to third-party vendors (Larcity and Hirschheim, 2000).
Many organizations are indeed considering IT outsourcing as one of the contributing factor in meeting the companies IT demands and this definitely had also brought some influence in insurance companies IT needs in sustaining their business. As this paper focuses on IT outsourcing within insurance companies, I would like to showcase the acceptance of IT outsourcing within insurance companies in a broader global perspective which includes insurance companies in United States of America, Australia, Singapore, India, Germany and South Africa before focusing to Malaysia.
United States of America
There are over 80 Insurance companies in United States of America and these are the companies with strong national or regional presence. These companies handles different types of insurance business and that includes annuity, business insurance, dental insurance, general liability insurance, disability insurance, health insurance, life insurance, medi-care, long-term care insurance, travel insurance, supplemental insurance and also property and casualty insurance. I have listed some of the insurance companies in accordance to the different types of insurance business in this table below:
Annuity
Allianz
Aviva
Jackson National Life
ING
Prudential Financial
Business Insurance
Allstate
American Family Insurance
CNA Financial
Wells Fargo
Disability Insurance
Allstate
American Family Insurance
Colonial Life
Standard Insurance Company
General liability Insurance
Allstate
American Family Insurance
Amica
CNA Financial
Health Insurance
Aetna
American Family Insurance
Health Net
Wellpoint
Life Insurance
AIG
Allianz
Allstate
American Family Insurance
Aviva
ING
Jackson National Life
Prudential Financial
Long-term care insurance
Allianz
Allstate
Genworth
John Hancock Insurance
Prudential Financial
Medicare
Aetna
American Family Insurance
Premera
Regence Group
Supplemental Insurance
Aflac
Allstate
Colonial Life
Conseco
Table 1: Insurance Companies in United States of America
Australia
Most of the multinational companies in the insurance business have their operation in Australia. Insurance in Australia is largely guided by the Commonwealth Law. The insurance tax charged in the country is the highest in the world. There are large numbers of companies in the country dealing with insurance business.
Major life insurance companies
AMP Insurance
MLC Insurance
AXA Insurance
Citicorp Life Insurance
Challenger Life Insurance
Aviva Life Insurance
Major Non-Life insurance companies
QBE Insurance
Promina Insurance
Suncorp Insurance
Zurich Australian Insurance
Westfarmers Insurance
RACQ Insurance
AIG Insurance
Table 2: Insurance Companies in Australia
Singapore
Insurance companies in Singapore and its intermediaries in Singapore are licensed by the Monetary Authority of Singapore under the purview of the Ministry of Finance. The insurance businesses in Singapore are broken to Direct Insurers, Captive Insurers, Professional Reinsurers, Authorised Reinsurers and Reinsurance brokers. General insurance and life insurance are handled by the Direct Insurers and there are about more than 50 insurance companies in Singapore that manages general and life insurance businesses and here are the lists of some of the companies in Singapore.
General Insurance
Allianz Insurance Company of Singapore Pvt Ltd.
AXA Insurance Singapore Pvt Ltd
InterGlobal Insurance Company Limited
Swisscare Insurance
TM Asia Insurance Singapore Limited
Tokio Marine Pv Ltd
Zurich Insurance Company
Life Insurance
NTUC Income Insurance Co-operative Limited
TM Asia Life Assurance Society Limited
AXA Life Insurance Singapore Pvt Ltd
Great Eastern Life Assurance Pvt Ltd
Manulife Pvt Ltd
Transamerica Life Ltd.
UOB Life Assurance Ltd
Composite Insurance
American International Assurance
Aviva Limited
Great Eastern Life Assurance Company
HSBC Insurance Singapore
NTUC Income Insurance Co-operative
Prudential Assurance Company
Captive Insurance
Alps Insurance Ptd Ltd
Amcor Insurance Ptd Ltd
BG Insurance Company Singapore
Crescent Insurance Ptd Ltd
CSR Insurance Ptd Ltd
LMI Insurance Ptd Ltd
Woolworths Insurance Ptd Ltd
Zinifex Insurance Ptd Ltd
Table 3: Insurance Companies in Singapore
India
In India, Insurance is a national matter, in which life and general insurance is yet a booming sector with huge possibilities for different global companies to venture. The Indian Insurance sector has gone through several phases and changes, especially after 1999, when the Government of India opened up the insurance sector for private companies to solicit insurance. Since then, the Insurance sector in India is considered as a flourishing market amongst global insurance companies. However, the largest life insurance company in India is still owned by the government.
Life Insurance
Bajaj Allianz Life Insurance Company Limited
Birla Sun Life Insurance Co. Ltd
HDFC Standard life Insurance Co. Ltd
ICICI Prudential Life Insurance Co. Ltd.
ING Vysya Life Insurance Company Ltd.
Life Insurance Corporation of India
Max New York Life Insurance Co. Ltd
Met Life India Insurance Company Ltd.
Kotak Mahindra Old Mutual Life Insurance Limited
SBI Life Insurance Co. Ltd
Tata AIG Life Insurance Company Limited
Reliance Life Insurance Company Limited.
Aviva Life Insurance Co. India Pvt. Ltd.
Shriram Life Insurance Co, Ltd.
Sahara India Life Insurance
Bharti AXA Life Insurance
Future Generali Life Insurance
IDBI Fortis Life Insurance
Canara HSBC Oriental Bank of Commerce Life Insurance
Religare Life Insurance
DLF Pramerica Life Insurance
Star Union Dai-ichi Life Insurance
General Insurance (Property & Casualty and Health)
Agriculture Insurance Company of India
Apollo DKV Insurance (Health)
Cholamandalam MS General Insurance
HDFC Ergo General Insurance Company
ICICI Lombard General Insurance
IFFCO Tokio General Insurance
National Insurance Company Ltd
New India Assurance
Oriental Insurance Company
Reliance General Insurance
Royal Sundaram Alliance Insurance
Shriram General Insurance Company Limited
Tata AIG General Insurance
United India Insurance
Universal Sompo General Insurance Co. Ltd
Table 4: Insurance Companies in India
Germany
In Germany, insurance is compulsory for every citizen. The financial market in the country has grown fast. Insurance business in Germany has also experienced a steady growth in a similar direction. There are around 500 insurance companies operating in Germany. Some of the leading insurance companies in the country are as follows:
Leading Life Insurance Companies:
Allianz Leben Insurance
Aachenmunchener Leb Insurance
DT. Herold Leben Insurance
Victoria Leben Insurance
Debeka Leben Insurance
AXA Leben Insurance
Leading Non-Life Insurance Companies:
Allianz Vers. Insurance
AXA Vers. Insurance
R+V Allgemeine Vers. Insurance
Zurich Vers. AG
Victoria Vers. Insurance
Wurtt. Vers Insurance
LVM Sach Insurance
Table 5: Insurance Companies in Germany
South Africa
There is a vast range of insurance companies in South Africa, offering both short and long term insurance. Long term insurance includes Term Life which covers you for a specified period of time, Whole Life which remains in force until death or surrender of the policy and Universal Life which includes an investment component. Provision for retirement and disability insurance also fall under this category. Whereas short term insurance covers against loss, damage and personal liability and that includes household insurance, house owner’s insurance, vehicle insurance, personal liability and personal accident insurance. Below is a comprehensive list of Insurance Companies in South Africa, some well known, some fairly newcomers to the market:
Long Term Insurance
1Lifedirect Insurance Ltd
ABSA Life Ltd
Alexander Forbes Life Ltd
Allan Gray Life Ltd
Assupol Life
AVBOB Mutual Assurance Company Ltd
BoE Life Assurance Company
Capital Alliance Life Ltd
Channel Life Ltd
Charter Life Insurance Company Ltd
Clientele Life Assurance Company Ltd
Discovery Life Ltd
Guardrisk Life Ltd
Hollard Life Assurance Company Ltd
HTG Life Ltd
Investec Employee Benefits Ltd
Investment Solutions Ltd
Liberty Group Ltd
McLife Assurance Company Ltd
Medscheme Life Assurance Company Ltd
Metropolitan Life Ltd
Momentum Group Ltd
Miway
New Era Life Insurance Company Ltd
Old Mutual Life Assurance Company (SA) Ltd
Pinnafrica Life Ltd
Professional Provident Society Insurance Company Ltd
Prosperity Insurance Company Ltd
Regent Life Assurance Company Ltd
Rentmeester Assurance Ltd
Safrican Insurance Company Ltd
Sage Life Ltd
Sanlam Life Insurance Ltd.
Short Term Insurance
ABSA Insurance Company Limited
AIG South Africa Limited
Auto and General Insurance Limited
Alexander Forbes Group (Pty) Ltd
Alexander Forbes Insurance Company Ltd
BoE Insurance Company Ltd
Compass Insurance Company Ltd
Constantia Insurance Company Ltd
Emerald Insurance Company Ltd
Guardrisk Insurance Company Ltd
Hollard Insurance Company Ltd
Lion of Africa Insurance Company Ltd
Lloyd’s
McSure Ltd
Monarch Insurance Company Ltd
MUA Insurance Company
National Insurers Ltd
New National Assurance Company Ltd
Nedcor Insurance Company Ltd
Nedinsurance Company Ltd
Nova Risk Insurance Company Ltd
Outsurance Insurance Company Ltd
Pinnafrica Insurance Company Ltd
Rand Mutual Assurance Company Ltd
Renasa Insurance Company Ltd
SA Eagle Insurance Company Ltd
Safire Insurance Company Ltd
Santam Ltd
SASRIA Ltd
Sentrasure Ltd
Stanbic Insurance Ltd
Standard Insurance Ltd
Unitrans Insurance Company Ltd
Unity Insurance Ltd
Unity Insurance Ltd
XL Insurance Company Ltd
Zurich Insurance Company SA Ltd
Table 6: Insurance Companies in South Africa
IT outsourcing is a full transfer or delegation of an organization’s facility management functions to an external firm. Pinnacle Systems Inc. quoted that Outsourcing has emerged as an effective tool to revamp strategies and is beneficial to business in a financially viable and proactive manner. IT outsourcing is an effective strategy for gaining and maintaining competitive advantage when it is executed as part of an overall program to build a high performance IT organization (Lankford and Parsa, 1999). Based on the above insurance company list for the respective countries, I have picked 5 major insurance company in each country to find out their compliance and acceptance for IT outsourcing. Below is the table with the findings:
Country
Insurance Company
Insurance Type
IT Outsourcing
Yes
No
USA
Allianz
A
√
American Family Insurance
G
√
Prudential Financial
L
√
ING
L
√
Aetna
H
√
Australia
AMP Insurance
L
√
AXA Insurance
L
√
QBE Insurance
G
√
Zurich Australian Insurance
G
√
AIG Insurance
G
√
Singapore
Great Eastern Life Assurance Pvt Ltd
L
√
Aviva Limited
L
√
Allianz Insurance Company of Singapore Pvt Ltd.
G
√
Tokio Marine Pv Ltd
G
√
Alps Insurance Ptd Ltd
C
√
India
Bajaj Allianz Life Insurance Company Limited
L
√
ING Vysya Life Insurance Company Ltd.
L
√
ICICI Prudential Life Insurance Co. Ltd.
L
√
Apollo DKV Insurance (Health)
H
√
Reliance General Insurance
G
√
Germany
Allianz Leben Insurance
L
√
Aachenmunchener Leb Insurance
L
√
AXA Leben Insurance
L
√
Zurich Vers. AG
G
√
LVM Sach Insurance
G
√
South Africa
Old Mutual Life Assurance Company (SA) Ltd
LT
√
Discovery Life Ltd
LT
√
Zurich Insurance Company SA Ltd
ST
√
AIG South Africa Limited
ST
√
National Insurers Ltd
ST
√
Table 7 Insurance companies and IT outsourcing acceptance
Insurance Type Legend:
Annuity
A
Captive
C
General
G
Health
H
Life
L
Long Term
LT
Short Term
ST
1. 2 Problem statement
Although outsourcing is not something new and in fact it is not a recent phenomenon but an evolution due to the global IT growth worldwide, I found that they are lack of theoretical research done on IT outsourcing. Some of the previous researches done are more focused on the financial data and global economic as well as political trends and less known about the theoretical point of view. So far the most relevant research conducted is done by LOMA, which narrated the pros and cons of outsourcing and off-shoring and the main focus of the research is IT outsourcing and off-shoring to IT services companies in United States and India.
Very little are known or researches done in Malaysia regarding IT outsourcing and from my observation many IT industries looking at outsourcing as an economic phenomenon. On 29th July 2009, MalaysiaCo Business Company Information posted the list of companies in Shared Services and Outsourcing (SSO) for its business process operations range from local Malaysian company to Multinational companies and there is about 60 companies altogether including NTT MSC Sdn Bhd, Intel MSC Sdn Bhd, HCL technologies, Fujitsu and Nokia Siemens Network Multimedia Sdn Bhd and amongst these list only one insurance company is listed and that is Prudential Services.
Despite the beneficial factors that lie behind the reason of IT outsourcing, it is still considered as a major problem by employees in most of the developed countries who had to lose their jobs as their jobs were outsourced by their organizations to external parties or vendor or even to relatively cheaper off-shore destinations like India and China. Global outsourcing is a phenomenon that has come up because of increased technology, better communication and information system as well as competition. We cannot blame the companies solely for outsourcing and who knows it could give rise to improved economic conditions and better paying jobs in all countries that take part in it.
1. 3 Research objective
This research aims to empirically investigate the impact of IT Outsourcing on firm level performance metrics that has lead to some success stories behind some of the major insurance companies worldwide and also to especially evaluate the impact of IT outsourcing within insurance companies in Malaysia, describing and analyzing the reason for IT outsourcing.
In addition, this research also aspires to explore the factors to consider before outsourcing, whereby we will be looking at what are the considerations and measures taken by a company before deciding on to outsource their IT to a third party vendors. Nevertheless, this study also will investigate how an organization manages a successful IT outsourcing and the impact of IT outsourcing on an organization which consists of the advantages (benefits) and disadvantages (risks) of IT outsourcing and also providing evidence about outsourcing influences on a firm’s cost-efficiency, productivity and profitability.
1. 4 Research question
The very first question that arises in discussing this topic is what is the level of acceptance of IT outsourcing within insurance companies in global perspective? This question will lead to why does organization and in particular insurance companies outsource their IT?
This two questions will assist this research in finding out what are the impacts of IT outsourcing within Insurance companies especially in Malaysia taking into consideration the reasons and factors for its successful implementation? What are the benefits and differences it made to the organization prior and post of IT outsourcing? And last but not least how does it impact in longer term?
Many organization outsource their IT functions because of management, cost, IT performance, IT resources and corporate strategy and nevertheless change of strategic planning into a more effective and profitable manner. Lacity and Hirschheim (1995) narrated that the outsourcing phenomenon evolves from two trends and firstly, IT has evolved to utility and thus it is easy to obtain good services from specialized vendors and secondly, there is a bandwagon effect on outsourcing due to the fact of early success by Eastman Kodak “ Kodak effect”. This paper is meant to analyze these questions and to evaluate the impact of IT outsourcing in insurance companies.
1. 5 Research methodology
This study will combine both exploratory and descriptive analysis targeted to major insurance companies operating in Malaysia and also targeted to employees working in this companies and also customers acquiring their services.
Primary data collection method will be used whereby a survey will be conducted using questionnaires. The questionnaire will consist of the characteristics of the company such as industry classification, ownership, total employee, IT staff and revenue and also IT budget for the local organization and also resourcing. It will also include information pertaining to IT components that are outsourced and vendor preference. Respondents are also will be required to state their reasons for IT outsourcing and also covers what are the possible reasons why organizations would outsource their IT services.
This study will also include interviews as form of data collection whereby it includes:
Interviewing the Head of IT in an insurance company;
The line managers who are respectively in charge of their teams which consist production and development; and
The different team leaders who reports to the line managers as they are the assistants and also at the junior management hierarchy.
Figure 1: Research methodology cycle
1. 6 Data Collection and Data Analysis
The questionnaire will be distributed either via email or hands to the head or IT or senior managers with IT responsibilities in the selected insurance companies in Malaysia. Meanwhile interviews will be conducted face to face with the Head of IT, line managers as well as team leads. Responses and feedback from these respondents will be recorded with their permission and documented for analysis pertaining to the reasons and parameters for outsourcing their IT components.
1. 7 Chapter summary
As per the beginning of this study where I mentioned that there is little or few known about IT outsourcing in Malaysia and leave alone within insurance companies in Malaysia. This definitely had created a great interest in me to analyze and to bring forward the awareness of IT outsourcing and the impact it has created within an organization. Globally, the banking, financial services and verticals are the fastest growing segments in outsourcing whereas insurance companies ranked the slowest in adapting to IT outsourcing.
It is clear that many insurance companies worldwide have adapted to IT outsourcing in order to improvise and enhance their IT business. Many major insurance companies from countries like United States of America, Germany, South Africa, Australia, India and Singapore have adopted IT outsourcing from a third party to manage the IT function as it is a critical part of the business process that requires technical competence beyond the scope of current management.
It is definitely undeniable that the decision to outsource IT processes implies a much heavier reliance on the quality of the services provided by the outsourcer. Many large and renowned organizations in countries worldwide have followed the outsourcing path with spectacular success. A few others have discovered the hard way that the outsourcing can be a complex process and difficult to adapt. Some of these companies even retreated from outsourcing and tried to bring their systems back in house. They discovered that reversing the process is not simple as they still lack both skills and resources.
This research is attempting to a noble notion in bringing awareness to insurance companies that it is just not merely cost saving but shifting to organization’s need to have access to advance technology and expertise. This study is also to help companies to identify major factors that can help to implement a successful IT outsourcing and to show and optimistic approach to insurance companies to experience benefits that will outweighs any potential risks or cist in an IT outsourcing.