Primary Source: An Outsourcing Decision Stands the Test of Time

How one company learned if their outsourcing decision was the right one.

Any CxO who stood up to mainframe complications or operating costs in the last five years and embraced outsourcing or took smaller steps by outtasking select services did so only after overcoming layers of technical issues and going rounds with doubters. Most companies outsource at least a few IT services, yet the approach generally taken by IT executives at large companies is increasingly feasible for smaller companies. A case in point is Kentucky National Insurance (KNI), of which I am the president. We made the decision to outtask mainframe IT services beginning in 2004 and found it paid off early and often ever since.

Reasons corporations outsource/outtask abound. KNI’s circumstances were more critical than most. For years the insurance provider grew its customer base to thousands in several states. When nature turned extraordinarily nasty and a prolonged string of weather disasters left KNI with an unusually large number of claims, KNI’s profitability tumbled. That was the beginning of a new story for KNI.

The priorities of company executives changed dramatically. No longer was the focus on growth-oriented activities and on supporting existing customer services. Instead, company leaders mandated a very narrow focus on claims processing productivity and controlling/limiting operating costs. Insurance policy provisions require KNI, following its 2004 closure, to continue servicing claims until settlement, so there is unusual emphasis to reduce major costs in the interim.

Clearly, IT staffing is one significant cost center, dictating a reduction in staff and back-office overhead costs. Service provisioning for KNI’s custom-built business applications and third-party, commercial database programs came from an IBM OS/390 system, managed by more than a dozen in-house IT staffers. As such, mainframe outtasking was a likely step—and for potentially enabling floor space to be cut by an order of magnitude. Open to any strategies that could help, the company turned to people who had previously helped established KNI’s data center and mainframe environment.

“From our first discussion about managed services,” noted Bob Plants, account executive at Mainline Information Services (MIS), who supervised the transition, “it was clear that while KNI’s new ‘mission’ was very different, they were aggressively targeting operating efficiency of database applications, security, and cost-effectiveness in one bull’s eye.”

Outsourcing/outtasking is hardly new, and planning is well-documented, as are success stories. Still, KNI officials needed to see for themselves how it would serve in the smaller KNI environment. A series of test steps early in 2005 provided the answer.

In preparation, MIS established T1 point-to-point communications and technicians took backups of KNI’s software and data back to the Oakbrook, IL center where they had recreated the IBM environment, complete with the continuation of licensing agreements between the third-party database application provider. Once restored in Oakbrook, the system was brought up for KNI.

The first step was to ensure the operating system and communications were working and what software might complain. In the second, the companies conducted acceptance tests (verifying, for example, that KNI users could log on and were able to print forms, checks, and reports correctly from every office facility). Following these familiarizing tests, technicians from both companies met to review performance.

Immediately apparent in the testing was that hosting KNI’s batch jobs on more powerful IBM hardware streamlined the subsequent task of writing detailed implementation and service level agreements. Historically, the process of addressing necessarily minute details for large corporations has mired most attempts by small- and medium-sized businesses (SMBs) to outsource. As such, overcoming this obstacle warrants renewed attention of SMB’s IT managers.

Getting Ready to Go Live

Watching the remote service provisioning running for two months in parallel without a hitch convinced KNI executives the next step was to discuss going ”live”—shutting down KNI’s on-site resources and being up on MIS provisioning 24x7. Note that in the testing phases, just as it would be after going live, an operator was always on hand to monitor processes and to mount tapes required by jobs running in their system. Most jobs submitted are batch processes to produce reports or supply data to other applications.

To the user community at KNI who process claims, oversee billings, and administration of the database application the service is transparent. In fact, management processes of the database and all of KNI’s applications remain unchanged, accomplished now by KNI’s sole remaining administrator.

KNI executives watching the bottom line do see a difference: mainframe costs were immediately reduced by about 50 percent when the mainframe racks were emptied out and 1500 square feet of expensive back-office space was closed. Typically, managed services vendors set up contracts individually, and for KNI a fixed-price contract was negotiated. This resolved KNI’s most pressing business need almost overnight. Moreover, IT managers at SMBs can look at this fast-track transition—from discussions leading to a two-month familiarization and implementation planning to going live in only five months—and find reasons to be optimistic about outtasking’s feasibility.

Not surprisingly, security was an early concern. “Point-to-point T1 connections resolve most security concerns of IT managers,” says Dave Doyle, MIS Managed Services technical manager who provided the technical assistance. “Still, various aspects specific to KNI for meeting industry regulations and reporting requirements warranted special attention; these services are not ‘out of the box.’”

Concerns for day-to-day management of KNI’s system were also examined. “It’s interesting that with the T1 pipeline and high availability inherent in today’s hardware and database systems,” noted Doyle, “one can be mislead to think backups, recovery practices, [and] scheduled maintenance, for example, are somehow lesser matters among managed services. Actually, the service provider makes these matters more important than ever, while customers offload the responsibility and benefit by focusing their attention more narrowly on running business processes.”

Once the transition was completed, KNI executives saw tangible resolution to their concerns over data security. The collection and storage of backup tapes at separate MIS facilities inherently adds to KNI’s disaster protection and dramatically enhances business recovery objectives.

Among the lessons learned: take stock of the provisioner's ability to support services as advertised. Look critically at site security and capabilities for keeping data both safe and accessible. By addressing these key areas, KNI's successful out-tasking and rapid lowering of the total cost of ownership provides a timely example for IT executives and CxOs to see exactly how a similar program can be a positive, long-term force on their own balance sheet