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The relationship between insurance group Pearl, which includes London Life and NPI, and business process outsourcing (BPO) provider Diligenta is a long one.

Diligenta was created by TCS to offer BPO to the UK life assurance industry. But before engaging in a radical programme of BPO with Diligenta, focused on setting up shared services across the whole group, Pearl already had a strong relationship with TCS that, over the years, had evolved from bespoke activity to programming-type work.

Serious forays into outsourcing at Pearl began in 2001. The strategic focus was a familiar one: to consolidate the IT function, including infrastructure, service management and development, from all three businesses into one. The outsourcing route was chosen in order to gain access to the skills required for such a complex operation.

Shared services represented a natural next step after this success. Diligenta announced its first deal with Pearl in April 2006. It is expected to generate revenues for Diligenta of about £486m over the initial 12 years of its term and is the biggest BPO deal in the life assurance market in the UK.

Diligenta is supplying a “utility model”, providing its customers with cost-focused services that are delivered as a utility because they are generic to the industry.

Tony Kassimiotis, chief operations officer at Pearl, explains that the complex operating environment in the industry, including the management of closed life funds, has led Pearl to consider how it is likely to evolve in the next three to five years.

For example, with the decline in the closed book business, questions about the operating model the company was using, and how it could continue to leverage economies of scale, became pressing.

“We needed outside help to do this and shared services are a central part of it since they help us to use IT optimally and to be efficient with IT resources,” Mr Kassimiotis explains.

Pearl is looking to Diligenta to deliver on a number of counts. Cost is, of course, top of the agenda. But even that is more complex than it sounds. For example, a traditional outsourcing arrangement is based upon fixed costs. But shared services in the life assurance industry must be variable because, as the number of closed life funds decreases, the number of policies to manage decreases, too.

The utility model plays a central part as well. In short, it enables Pearl to transfer part of the risk it faces as a life company in the future. The risks are clear. Changes in pension legislation are part and parcel of operating in the pensions industry but the costs of implementing such changes are huge.

“With the utility delivery of shared services, Diligenta can make the changes on a single operating system and, in effect, distribute the cost of those changes across its client base,” says David Power, Diligenta’s CEO. “Diligenta can shoulder the risk associated with legislative changes by virtue of the volume of work it creates with shared services as a utility.”

The risk transfer can be broken down into three main areas. First, there is operational risk transfer. “A large part of the business is the administration and management of policies,” Mr Kassimiotis says. “Diligenta ensures that we don’t face unexpected costs that would then have to be taken on my policy holders.”

Second, there is transformational risk. “Pearl ran its business on 11 different financial and administrative systems, as well as other peripheries,” Mr Power explains. The aim is to move this heterogeneous environment on to a single core system, that is, in effect, the same as the utility core system. “The parameters for this change, such as the timeframe, is set at the start and Diligenta bears the cost should the programme fall away from these,” Mr Power explains.

Third, there is the question of future changes. This will include changes in the regulatory environment but also possibilities such as euro compliance. This too is borne by Diligenta.

The utility model also offers Pearl protection against the possibility of having to make redundancies, should future market conditions require it. In effect, if shared services as a utility allows the company to scale operations up with minimal internal stress, it also allows it to scale down.

There could be a question raised here about whether the utility model erodes competitive advantage for Pearl. For example, if its policies are being run on the same system as competitor policies, it could introduce commoditising forces into the marketplace, leading to price harmonisation. Mr Kassimiotis thinks this is not a problem, first, because price harmonisation is still some way off, and second, because the main driver in the market at the moment is the simplification of the offerings, something that the utility model encourages.

The relationship between the two companies is obviously deep and complex. It is essential to manage it effectively. A contractually based governance framework includes a series of committees, attended by senior management down, to look after all aspects of ongoing operations and business transformation. “We have a window into the relationship from all sorts of angles,” Mr Kassimiotis says.

Underpinning it all is trust. Both parties are clear about what is being provided. Both are prepared to be honest in their dealings, disclosing all problems from the earliest stage so that there are no surprises.

Finally, they adopt an open book pricing policy. “If you are outsourcing 90 per cent of your business operations to someone else you have to understand each other’s business model and pricing structure,” Mr Power concludes. “Pearl understands exactly how we operate. Without this, the future of the relationship would be at risk.”

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