Harvard Case - Anthem - An Insourcing Strategy Through the Establishment of a Subsidiary (Legato)
"Anthem - An Insourcing Strategy Through the Establishment of a Subsidiary (Legato)" Harvard business case study is written by Anilesh Seth, S. Ramnarayan. It deals with the challenges in the field of Strategy. The case study is 15 page(s) long and it was first published on : Mar 31, 2022
At Fern Fort University, we recommend Anthem pursue a strategic insourcing approach through the establishment of Legato, a subsidiary dedicated to providing IT services. This strategy leverages Anthem's core competencies in healthcare and data management, while simultaneously creating a competitive advantage through cost reduction, improved service quality, and enhanced innovation capabilities.
2. Background
Anthem, a leading health insurance provider, faces increasing pressure to reduce costs and improve operational efficiency. The company's reliance on external IT vendors has led to inefficiencies, lack of control over service delivery, and limited flexibility to adapt to evolving industry demands. To address these challenges, Anthem is considering insourcing its IT operations through the creation of a subsidiary, Legato.
The main protagonists of the case study are:
- Anthem: The health insurance provider seeking to improve its IT operations.
- Legato: The proposed subsidiary responsible for providing IT services to Anthem.
- Anthem's IT department: The internal team responsible for managing IT operations.
- External IT vendors: The companies currently providing IT services to Anthem.
3. Analysis of the Case Study
Strategic Analysis:
- Porter's Five Forces: The healthcare industry is characterized by high bargaining power of buyers (patients and employers), moderate rivalry among existing competitors, and high threat of new entrants due to regulatory barriers. The threat of substitutes is moderate, with alternative healthcare delivery models emerging.
- SWOT Analysis: Anthem possesses strengths in its brand recognition, strong customer base, and extensive data resources. However, it faces weaknesses in its IT infrastructure and lack of control over service delivery. Opportunities lie in leveraging technology and analytics to improve service quality and develop new products. Threats include increasing competition from other health insurers and the rise of disruptive technologies.
- Value Chain Analysis: Anthem's value chain includes activities such as customer acquisition, claims processing, and provider network management. IT plays a crucial role in supporting each of these activities. By insourcing IT, Anthem can streamline its value chain, improve efficiency, and enhance customer experience.
Financial Analysis:
- Cost Reduction: Insourcing IT can lead to significant cost savings by eliminating vendor fees, reducing overhead, and improving operational efficiency.
- Increased Flexibility: A subsidiary like Legato provides Anthem with greater control over its IT budget and resources, allowing for more flexible allocation and investment in strategic initiatives.
- Improved ROI: By optimizing IT operations and enhancing service quality, Legato can contribute to increased revenue and profitability for Anthem.
Operational Analysis:
- Improved Service Quality: By directly managing its IT infrastructure, Anthem can ensure higher quality service delivery, faster response times, and improved customer satisfaction.
- Enhanced Innovation: Legato can foster a culture of innovation within Anthem's IT operations, leading to the development of new technologies and solutions that enhance the company's competitive advantage.
- Increased Security: Insourcing IT allows Anthem to implement stricter security protocols and better protect sensitive patient data.
4. Recommendations
Anthem should proceed with the establishment of Legato, a subsidiary dedicated to providing IT services. The implementation should follow these key steps:
- Define Scope and Structure: Clearly define the scope of IT services to be provided by Legato, including infrastructure management, application development, and data analytics. Establish a clear organizational structure for Legato, ensuring alignment with Anthem's overall strategy.
- Develop a Business Plan: Create a comprehensive business plan for Legato, outlining its financial projections, key performance indicators, and growth strategy. This plan should be aligned with Anthem's overall strategic objectives and incorporate a clear roadmap for achieving operational efficiency and innovation.
- Recruit and Develop Talent: Attract and retain highly skilled IT professionals with expertise in healthcare, data management, and emerging technologies. Invest in employee training and development programs to ensure a skilled workforce capable of delivering high-quality services and driving innovation.
- Leverage Technology and Analytics: Implement advanced technologies and analytics solutions to optimize IT operations, enhance service quality, and gain valuable insights from patient data. This includes investing in cloud computing, artificial intelligence, and machine learning capabilities.
- Foster a Culture of Innovation: Create a culture within Legato that encourages experimentation, collaboration, and continuous improvement. Provide employees with opportunities to develop new solutions and contribute to the company's growth and success.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: By insourcing IT, Anthem leverages its core competencies in healthcare and data management while staying true to its mission of providing quality healthcare solutions.
- External Customers and Internal Clients: Legato will directly serve Anthem's internal clients (employees and departments) while indirectly benefiting external customers (patients and employers) through improved service quality and innovation.
- Competitors: Insourcing IT allows Anthem to differentiate itself from competitors by offering a more integrated and cost-effective approach to healthcare delivery.
- Attractiveness: The financial projections for Legato indicate a positive NPV and ROI, suggesting a strong business case for insourcing. The projected cost savings and improved efficiency will contribute to Anthem's overall profitability.
6. Conclusion
Establishing Legato as a subsidiary dedicated to providing IT services represents a strategic opportunity for Anthem to enhance its competitive advantage, improve operational efficiency, and drive innovation. By leveraging its core competencies, embracing technology, and fostering a culture of innovation, Anthem can create a sustainable competitive advantage in the evolving healthcare landscape.
7. Discussion
Alternative options considered include:
- Continuing with external vendors: This approach would maintain the status quo but limit Anthem's control over IT operations and potentially lead to higher costs and reduced flexibility.
- Outsourcing to a third-party provider: This option would offer some cost savings but could compromise Anthem's data security and limit its ability to control service delivery.
Key risks associated with this recommendation include:
- Talent acquisition and retention: Attracting and retaining skilled IT professionals in a competitive market can be challenging.
- Integration challenges: Integrating Legato's operations with Anthem's existing systems and processes could be complex and time-consuming.
- Technology adoption: Investing in and implementing advanced technologies can be costly and require significant expertise.
8. Next Steps
To implement this recommendation, Anthem should follow a phased approach with the following key milestones:
- Phase 1 (Months 1-6): Establish Legato, define scope and structure, develop a business plan, and recruit key personnel.
- Phase 2 (Months 7-12): Implement technology and analytics solutions, integrate Legato's operations with Anthem's existing systems, and begin transitioning IT services.
- Phase 3 (Months 13-18): Optimize operations, foster a culture of innovation, and monitor performance against key performance indicators.
By following these steps, Anthem can successfully establish Legato as a strategic asset, driving innovation, improving operational efficiency, and enhancing its competitive position in the healthcare industry.
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Case Description
Anthem Inc. (www.anthem.com) was a leading health care insurance provider and the largest insurer in the Blue Cross Blue Shield (BCBS) network. In October 2017, it approved the establishment of captive subsidiaries or global capability centers (GCCs), called "Legato," in India and the Philippines. The first captive was established in India. From January 2018 to June 2021, the two Legato entities had ramped up their head count to over 15,000 full-time employees (FTEs). This number well exceeded the initial approved business plan of a little over 3,000 FTEs. As a result, the parent organization accrued substantial cost savings. This also helped the company create a foundation to use low-cost internal talent to enable additional objectives, such as supporting digital transformational objectives and improving end-to-end process efficiency. Anthem developed an initial organization chart and reporting structure to establish the new companies. As the entities grew, Anthem made changes to better align them with US processes and strengthen governance and risk management. In 2021, Anthem established a new objective for Legato. As a cost center, Legato had firmly established itself in Anthem's value delivery chain, successfully setting up several information technology (IT) and business process practices. Anthem decided to use this capability by pursuing IT and business service revenue from other BCBS players in the US. It could now offer a suite of IT and business process services from Legato-essentially a profit and loss (P&L) role. The addition of this new P&L role brought up the following questions: Should the existing leaders' role be expanded to take on the additional responsibility of delivering to external customers? Should an entirely new division be established to take on this new P&L role? Or was there any other option to consider?
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