Over the past four years we’ve talked on numerous occasions about the riskiness of core system replacement and the possibility and impact of failure. This is especially the case for policy administration systems (PAS), which are the most complex and difficult insurance application systems to replace. Given that this issue of Tech Decisions is focused on PAS, we’re going to consider ways you can minimize the risks inherent in replacing a legacy PAS. There are three “mitigation strategies” that a carrier can use to minimize both the risk and the potential impact of project failure. These are: choose the right vendor/software, create contractual flexibility by defining exit points, and build in project milestone reviews that test the contractual exits at appropriate times.
Mitigation Strategy No. 1: Choose the Right Vendor/Software
So what does a contractual exit actually look like? Contractual exits usually concern costs and timelines but may also include other criteria such as quality. For example, I recently heard that a carrier exercised a contractual exit because the vendor came back at the end of the requirements gathering phase with an implementation re-estimate that was higher than an agreed limit spelled out in the implementation services contract. This carrier had (with expert help, I might add) structured its software and services agreements to minimize upfront financial commitments and to provide opt-outs if the shape and size of the project grew beyond acceptable boundaries.
These boundaries, expressed as percentages of the original estimates, were agreed as exit criteria in both the services and license agreements. It is, of course, a hard judgment call as to whether or not to bail out of an ongoing project, but without these mechanisms in place it is much more difficult for a carrier to pull the plug. The contractual exits described in this instance are similar to the buy/sell triggers that investors place on stocks, which often execute automatically if a given stock falls by more than a specified percentage. This doesn’t mean that getting out of the stock or the implementation project was the right call, but it is a rational way of evaluating how to spend money and invest.