Farmers Group learns the key to

Revised: 09/22/2006

Mar. 1, 2003 Issue of CIO Magazine

Walk Like an Outsourcer

After ending an outsourcing deal early, Farmers Group learns the key to
successful reinsourcing: running its IT shop like an outsourcer would.

A FEW YEARS after leaving Xerox, Cecilia Claudio got burned by a big-name
outsourcer. When she took over as CIO of Anthem Blue Cross and Blue Shield in
1996, she inherited a five-year, $30 million data center deal with Unisys.
Claudio was dissatisfied with service levels and increasing costs, so she got
out of the contract and rebid the work, ultimately going with Affiliated
Computer Services.

Since then, Claudio has proved that she knows not only how to get out of a
bad situation but also how to bring outsourced IT back in. As senior vice
president and CIO of Farmers Group, which she joined in 1998, Claudio did
just that after the company acquired Foremost Insurance for $812 million in
2000. The Caledonia, Mich.-based provider of insurance for mobile homes and
RVs was outsourcing all of its mainframe IT support, application development
and maintenance. The company was eight years into a 10-year, $150 million
arrangement with Integrated Systems Solutions (a division of IBM that
eventually became the core of IBM Global Services). Foremost Insurance had
originally outsourced the work for financial reasons but, according to
Claudio, savings never materialized. In fact, costs were escalating. "They
didn't have a strong contract that allowed the customer to reap the benefits
of total cost of ownership going down over time," explains Claudio.

So after Farmers brought Foremost into the fold, Claudio and her team chose
to bring all the work in-house rather than offer it to another outsourcer. By
doing that, she believed she would have better control over the work being
done and the costs involved.

Although Farmers would have to pay $4 million in cancellation fees and early
termination penalties, Claudio's financial analysis showed that the company
could recoup those initial costs within a year and then begin to save money.

First she had to break the news to the service provider, which was difficult.
"I pride myself on having excellent relationships with partners and vendors,
and I don't do things lightly," explains Claudio. "It's hard to go to a big
partner and say, 'This is no longer working for us. We're not seeing the
benefits.'"

Then there was the process of bringing outsourced staff aboard at Farmers.
Those employees effectively had been boomeranged. Originally Foremost
employees, they lost their job when the IT work was outsourced. Then they had
to be convinced to join up with the outsourcer. Now they were being asked to
come back as Farmers employees. Claudio knew that having their knowledge of
the company and its systems would be critical, particularly during the
transition. So she had to "make it appealing not only on a professional level
but on an emotional level." Although she could not offer them the variety of
tasks and access to new technologies that the outsourcer provided, she could
promise stable positions at a company that cared for its employees.
Ultimately she was able to bring back 90 percent of the original IT staff.

The entire reinsourcing process took six months and was completed in
September 2000. Claudio says the move paid off. "Within the first year, we
began saving about $6 million a year."

The key has been running in-house IT like an outsourcer. "[We're] a very lean
organization capable of achieving the best value for our money," Claudio
explains. In fact, some say Claudio's IT shop is even more efficient than
that of most outsourcers, with information technology costs coming in at 1.9
percent of revenue. William N. Pieroni, general manager of IBM's global
insurance industry group, can attest to that fact: "Farmers' IT spending
levels are less than half that of the major competitors, and that is nothing
less than incredible given the scale and scope of the enterprise."

"It all starts with pride of ownership," Claudio says. "I believe I can do as
good a job if not better in the major aspects of running an IT shop than an
outsourcer."

An online information service of the United Farmers Agents Association, Inc.