The price of outsourcing

Opinion

The price of outsourcing

By Philip Lieberman, the founder and president of Lieberman Software

At a recent CIO conference in Phoenix for insurance industry executives, I gave a presentation on how to improve the relationship between CIOs and their IT management.  At the end of the presentation I received exasperated responses from some of the CIOs about how there was little to no need to enhance the relationship because for some of the attendees, all of their IT management and IT staff had been long ago outsourced and there was effectively no "relationship" or vision collaboration to improve.

What I saw was the logical end to an evolution of the USA insurance industry to minimize costs to the degree that essentially all IT was now the domain of non-employees for many insurance companies.  With this delegation and discharge of employees has been the lost of corporate knowledge, loyalty, and innovation as well that ability to use the combination of CIO vision and IT technology to achieve a competitive advantage.

The road to this evolution was paved by the greed and shortsightedness of CEOs running some of the largest insurance companies to achieve maximum profitability by gutting their IT operations (some have virtually no in-house employees in IT), and outsourcing the work off-shore.  Effectively assuming that IT is nothing more than a commodity that can be reduced at will and to the maximum extent possible with little to no effect on the operations of the company.

Having completed this over-optimization of IT these large organizations (most of which use SMB insurance agents), find themselves being challenged and beaten by newer entrants into the business that are totally on-line with no agents to be beholden to.  In essence these new competitors have used IT as a technical/business advantage whereas the big guys have destroyed their IT investment and are now reaping the harvest of their money saving ways.

The ultimate conclusion of some analysts at this conference (and which I agree with) is that the insurance industry as it now exists with agents, small agent offices, and paper and pencil ways will be dead in 15 years or less as the next generation of consumers that are Internet savvy become financially dominant.

The lesson to be learned is that loyalty to employees and the ability to exploit the synergistic relationship between the CIO and IT can still be a powerful force for competitive advantage.  For those that fail to plant their seeds for the future will end up in the mining or dust business.  This appears to be the model for the future of companies where CIOs have no loyal IT staff that are full time employees.  In the new model for many CIOs, they are nothing more than hanging ornaments at the C-level that used to be visionaries and leaders, but are nothing more than hatchet men to reduce costs and tidy up the deck chairs as well as pass out iPads to clueless executives as the Titanic slowly sinks.

As I understand it, this brave new world provides great financial incentives for CIOs that continue to drive down costs.  Like a car that accelerates to a thrilling speed and then plunges off a cliff, these CIOs will be in for a hell of a ride...all the way to the end of the line.

This was first published in November 2010

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