John Hancock outsources for savings, better service

John Hancock Financial Services has handed over the management of its IT infrastructure to IBM, a move the insurance and investment company expects will yield better IT services at a lower cost.

IBM is managing and maintaining John Hancock’s mainframes, servers, voice and data networks and desktop PCs in a traditional IT infrastructure outsourcing agreement whose modern twist is its “on demand” pay-for-usage billing structure.

“The primary thing this is doing for us is moving the technology component of our business to a variable model, which gives us significant flexibility,” said Bob Walters, John Hancock’s chief information officer (CIO) and executive vice president, about the deal announced Friday.

The IT improvements will come from delegating the work of managing and upgrading the company’s systems to a specialist like IBM, Walters said. “It’s hard for a medium-size insurance company to acquire and retain all those IT skills and various components you need to be an expert in,” he said.

Moreover, freeing up John Hancock IT staffers from daily maintenance operations will let them focus on more strategic tasks, such as application development. Unlike routine IT tasks, these higher-level IT projects directly affect business initiatives at this Boston-based seller of financial products such as life insurance, annuities and mutual funds which had revenue of $8.9 billion in 2002.

“Like most insurance companies we’re trying to move into different alternate channels of distribution which are going to require portal- and Web-based infrastructure and applications to support this move into direct brokerage business that’s our current big push,” he said.

Meanwhile, the lower costs will come in part from reducing the IT department’s headcount. John Hancock had about 325 people in its IT department and is retaining only about 30. About 200 got transferred over to IBM on July 1, when the six-year, $254 million outsourcing contract kicked in. The remaining employees got laid off, mostly in the area of desktop management.

Lower costs will also come from the “on demand” pay-for-usage model of the contract, in which about 80% of costs are variable and only about 20% fixed, Walters said. “We’ve taken our infrastructure costs now and moved them from a fixed cost to a variable cost because we will be paying for the usage of technology,” he said.

For example, in the past, if John Hancock needed more mainframe computing power, it had to buy one plus absorb all the related costs associated with it, such as software and training. But those days are over, Walters said. “If they have to buy a new mainframe or move us to some larger configuration just so that we can buy one more drink of capacity, we just pay for that one drink,” he said. Moreover, John Hancock doesn’t have to worry about operating, fixing or maintaining the mainframe.

About 20 of the IT staffers remaining with John Hancock will be involved in managing the outsourcing relationship with IBM to make sure the work is performed according to the contractual agreements. Walters is keenly aware that a client must engage in constant and careful oversight of outsourcing engagements or else run the risk of the work not being performed well.

“It’s the job of our governance team to work with IBM to make sure this on-demand model gets implemented appropriately, that the contract terms are being met and that service levels are being monitored actively,” he said. “We’re never going to say to the business people in this company: ‘Well, that’s IBM’s problem.’ It’s my problem as CIO and the governance team’s specific responsibility to work with IBM to be ahead of these issues.”

So far, John Hancock is delighted with IBM’s work. “I can’t stress enough what a fantastic job IBM has done,” he said. John Hancock considered about a dozen IT services providers for the job and ultimately chose IBM because it offered the best technical proposal at the best price, he said. He declined to name the companies who competed for the bid.