Claims managers and their IT partners are faced with a dilemma when it comes to making the decision to build or buy their next claims software solution. The choice, which is not always clear cut, affects nearly every aspect of the claims process, from a minor workflow improvement to the transformation of the entire claims organization. Making the wrong selection can create havoc resulting in unintentional, inefficient processes, hidden costs, and productivity loss.

When making the decision to build a claims solution, managers often use some common justifications such as getting the solution developed to a carrier's exact specifications and IT budget. By building in-house, the hope is that the carrier will get perfect alignment with current or desired future processes. If the solution only seems to require a one-time upfront payment, building might keep costs down while granting internal stakeholders control over the design and implementation of the solution.

When managers use conventional wisdom to justify a “buy” decision, it is usually because they believe that the external solution provider will be ready and able to implement the solution now. Additional common justifications include reduced initial cost of delivery, elimination of waiting in the IT queue, and leverage of innovations from across the industry.

Decision-making Problems

The problem with current buy versus build decision-making is that most preferences are emotional responses from the last experience of the claims manager, with the above justifications being used to rationalize the selection. For example, if the claims manager had a bad “build” experience recently, the inclination will be towards “buy.” If the claims manager had a bad “buy” experience, the preference will be to flee back to the security of the internal IT organization. The reality is that most managers who use the previously noted criteria to determine and justify their IT solution direction are often disappointed, since the problem that they are trying to solve today may have very different requirements than the last project.

For those that choose to build, there will ultimately be disappointments with internal IT. Internal IT organizations do not necessarily understand the claims business better than external vendors that focus on the claims process. The amount of control managers have over their solution is limited by the availability of IT resources. Most importantly, the myth that carriers only need to pay for the system once is debunked following implementation. Internal systems require ongoing care, updating, and maintenance due to new processes, enhancement requests, government regulations, or changes in the IT environment such as new browsers or operating systems.

A Better Framework

Rather than relying on last experiences to determine how to react today, using a simple framework to assess whether to buy or build a claims system often yields better results. Leading organizations evaluate their business needs across three criteria:

Internal compatibility
Industry alignment
Implementation cost

Internal Compatibility How congruent a software solution is with a company's unique workflows could affect the final decision. When assessing business needs for internal compatibility, a claims organization needs to first review their current or planned claims processes against the following questions:

How much competitive advantage do these processes generate?
Do the processes improve cycle time, reduce loss adjustment expense, and increase customer satisfaction?
Are the organization's workflows merely an example of maintaining the status quo?

If the current state is simply the organization's historical way of doing business, it may make sense to consider a change to a proven industry standard or more streamlined process. This can prove to be especially advantageous when using an outside vendor. By looking at many companies' experiences with ERP/back office implementations, such as Oracle or SAP, it shows where not adapting to standard business practices can cause problems. Choosing to adopt an ERP system's standard workflows creates faster and easier implementations. Companies that attempt to retrofit ERP systems to their unique processes find that consulting and customization fees quickly add up, significantly reducing benefits.

If the need for internal compatibility is high, this will drive a company towards an internal, custom-built solution, unless it can find a market-driven system that is flexible and configurable enough to meet its unique process needs. An example of a solution that claims organizations typically build is a subrogation tool. Traditionally, in the auto physical damage claims process, subrogation solutions fall into the category of requiring high internal compatibility. Since carriers believe that their subrogation method delivers competitive advantage, they do not want to share it with others.

However, if internal compatibility is low, the claims organization can benefit from purchasing an enterprise software solution. For example, carriers benefit from buying their estimate/desk review solution. Although many of the processes, rules, etc., are unique to different carriers, the solution providers have built flexible enough review solutions to accommodate most different processes and rule sets.

Industry Alignment Managers also need to determine how important it is for the solution to adhere to industry standards for either technology or methodology. Typically, industry alignment is a strong consideration when:

Interfacing with a large number of external partners.
Using industry standards to lower implementation and transition costs is an important consideration.
Adhering to industry standards will be more defensible.

If the above requirements are all necessary, then that indicates a high need for industry alignment. In this case, it most often makes sense to go with an external solution provider. Solutions that align with industry standards ensure that the claims organization is able to interface easily with third parties that use the same technology standards and best practices. If the organization needs to collaborate with outside partners or maintain the flexibility to change vendors, a “buy” decision may be more prudent.

Claims valuation solutions, for example, tend to be natural “buy” decisions. With partial loss estimating, it is important to use a solution that has a commonly accepted estimating methodology, labor times, etc., when dealing with body shops. In addition, when it comes to total loss valuation, managers prefer to use a total loss solution through an external vendor due to defensibility concerns.

On the other hand, claims management reporting is a typical solution that a claims organization may want to “build.” Because claims management reporting is a 100 percent internal process, alignment to industry standards is not particularly important. Therefore, the decision to buy versus build really comes down to the uniqueness of the reporting requirements, the cost to implement, and the responsiveness that one will get from an internal IT organization as opposed to an external provider.

Implementation Cost Finally, managers should look at implementation costs before deciding to build or buy their claims solution. Implementation costs include everything that is involved in the deployment of new software. Not only do implementations fees target IT (resources, hardware, maintenance, etc.), but they also include process costs that result from inefficiencies that reduce staff productivity. When managers evaluate their decision against the implementation cost framework, they should consider the following:

How much will a build or buy solution really cost?
Is cheapest always best?

To answer the first question, managers need to examine total cost of ownership. Since costs include much more than the initial outlay for the system, managers should analyze how much the solution will cost over the next five years including maintenance, upgrades, integration, and IT resource management. In addition, managers need to look at how the software will affect internal workflows. If the solution reduces productivity by removing single sign-on capabilities, adding steps, or preventing data sharing, it may measurably increase expenses for the company.

While costs are certainly something important to consider, too often they become the sole criteria for making a decision, which is a mistake as well. Although it's tempting to go with what seems like the lowest cost solution, analysis should also take into consideration subjective factors such as responsiveness of internal IT/external vendor, user experience, speed, and overall reliability of the system.

When using the implementation cost framework, a common “build” scenario is an enhancement to the first notice of loss (FNOL) process since maintaining the productivity of on-the-phone reps is of utmost importance. Productivity and cycle time can suffer if a rep needs to log-in and log-out of multiple systems or re-key information during the FNOL process. These extra steps can be very costly to the claims organization. Innovations such as web services from external vendors that can be exposed in the call center representative's native system reduce some of these barriers.

Alternatively, a dispatch and assignment solution is an excellent candidate for a “buy” decision. To ensure that assignments are dispatched to the best available resource, external vendors use advanced logic and resource management to establish appropriate routing. To replicate this in a “build” scenario would require a significant investment in software development skills, which would not benefit the insurance carrier in the long term. The costs to build the system internally generally outweigh any process or integration costs that come from implementing a third-party system.

Bringing It All Together

By using a simple decision framework to evaluate a build versus buy decision, claims managers are empowered to make decisions that will result in the most benefits for the claims organization.

For a “buy” decision, the criteria should be met as follows:

Internal processes are in-line with industry standards and are streamlined;
Requires the ability to interface easily with third parties;
Requires adherence to government regulations or industry standards; and
Reduces total cost of ownership when compared to building.

Determining which system is right for the unique needs of a claims organization requires some in-depth research and analysis, but can result in significant benefits.

Special Reports /

The Buy or Build Dilemma: What&rsquo;s the Right Choice?

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