Claims managers and their IT partners are faced with a dilemmawhen it comes to making the decision to build or buy their nextclaims software solution. The choice, which is not always clearcut, affects nearly every aspect of the claims process, from aminor workflow improvement to the transformation of the entireclaims organization. Making the wrong selection can create havocresulting in unintentional, inefficient processes, hidden costs,and productivity loss.

When making the decision to build a claims solution, managersoften use some common justifications such as getting the solutiondeveloped to a carrier's exact specifications and IT budget. Bybuilding in-house, the hope is that the carrier will get perfectalignment with current or desired future processes. If the solutiononly seems to require a one-time upfront payment, building mightkeep costs down while granting internal stakeholders control overthe design and implementation of the solution.

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

Decision-making Problems

The problem with current buy versus build decision-making is that mostpreferences are emotional responses from the last experience of theclaims manager, with the above justifications being used torationalize the selection. For example, if the claims manager had abad “build” experience recently, the inclination will be towards“buy.” If the claims manager had a bad “buy” experience, thepreference will be to flee back to the security of the internal ITorganization. The reality is that most managers who use thepreviously noted criteria to determine and justify their ITsolution direction are often disappointed, since the problem thatthey are trying to solve today may have very different requirementsthan the last project.

For those that choose to build, there will ultimately bedisappointments with internal IT. Internal IT organizations do notnecessarily understand the claims business better than externalvendors that focus on the claims process. The amount of controlmanagers have over their solution is limited by the availability ofIT resources. Most importantly, the myth that carriers only need topay for the system once is debunked following implementation.Internal systems require ongoing care, updating, and maintenancedue to new processes, enhancement requests, government regulations,or changes in the IT environment such as new browsers or operatingsystems.

A Better Framework

Rather than relying on last experiences to determine how toreact today, using a simple framework to assess whether to buy orbuild a claims system often yields better results. Leadingorganizations evaluate their business needs across threecriteria:

• Internal compatibility
• Industry alignment
• Implementation cost

Internal Compatibility How congruent a softwaresolution is with a company's unique workflows could affect thefinal decision. When assessing business needs for internalcompatibility, a claims organization needs to first review theircurrent or planned claims processes against the followingquestions:

• How much competitive advantage do these processesgenerate?
• Do the processes improve cycle time, reduce loss adjustmentexpense, and increase customer satisfaction?
• Are the organization's workflows merely an example ofmaintaining the status quo?

If the current state is simply the organization's historical wayof doing business, it may make sense to consider a change to aproven industry standard or more streamlined process. This canprove to be especially advantageous when using an outside vendor.By looking at many companies' experiences with ERP/back officeimplementations, such as Oracle or SAP, it shows where not adaptingto standard business practices can cause problems. Choosing toadopt an ERP system's standard workflows creates faster and easierimplementations. Companies that attempt to retrofit ERP systems totheir unique processes find that consulting and customization feesquickly add up, significantly reducing benefits.

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

However, if internal compatibility is low, the claimsorganization can benefit from purchasing an enterprise softwaresolution. For example, carriers benefit from buying theirestimate/desk review solution. Although many of the processes,rules, etc., are unique to different carriers, the solutionproviders have built flexible enough review solutions toaccommodate most different processes and rule sets.

Industry Alignment Managers also needto determine how important it is for the solution to adhere toindustry 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 transitioncosts is an important consideration.
• Adhering to industry standards will be more defensible.

If the above requirements are all necessary, then that indicatesa high need for industry alignment. In this case, it most oftenmakes sense to go with an external solution provider. Solutionsthat align with industry standards ensure that the claimsorganization is able to interface easily with third parties thatuse the same technology standards and best practices. If theorganization needs to collaborate with outside partners or maintainthe flexibility to change vendors, a “buy” decision may be moreprudent.

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

On the other hand, claims management reporting is a typicalsolution that a claims organization may want to “build.” Becauseclaims 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 tothe uniqueness of the reporting requirements, the cost toimplement, and the responsiveness that one will get from aninternal IT organization as opposed to an externalprovider.

Implementation Cost Finally, managers should look atimplementation costs before deciding to build or buy their claimssolution. Implementation costs include everything that is involvedin the deployment of new software. Not only do implementations feestarget IT (resources, hardware, maintenance, etc.), but they alsoinclude process costs that result from inefficiencies that reducestaff productivity. When managers evaluate their decision againstthe implementation cost framework, they should consider thefollowing:

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

To answer the first question, managers need toexamine total cost of ownership. Since costs include much more thanthe initial outlay for the system, managers should analyze how muchthe solution will cost over the next five years includingmaintenance, upgrades, integration, and IT resource management. Inaddition, managers need to look at how the software will affectinternal workflows. If the solution reduces productivity byremoving single sign-on capabilities, adding steps, or preventingdata sharing, it may measurably increase expenses for thecompany.

While costs are certainly something important to consider, toooften they become the sole criteria for making a decision, which isa mistake as well. Although it's tempting to go with what seemslike the lowest cost solution, analysis should also take intoconsideration subjective factors such as responsiveness of internalIT/external vendor, user experience, speed, and overall reliabilityof 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 isof utmost importance. Productivity and cycle time can suffer if arep needs to log-in and log-out of multiple systems or re-keyinformation during the FNOL process. These extra steps can be verycostly to the claims organization. Innovations such as web servicesfrom external vendors that can be exposed in the call centerrepresentative's native system reduce some of these barriers.

Alternatively, a dispatch and assignment solution is anexcellent candidate for a “buy” decision. To ensure thatassignments are dispatched to the best available resource, externalvendors use advanced logic and resource management to establishappropriate routing. To replicate this in a “build” scenario wouldrequire a significant investment in software development skills,which would not benefit the insurance carrier in the long term. Thecosts to build the system internally generally outweigh any processor integration costs that come from implementing a third-partysystem.

Bringing It All Together

By using a simple decision framework to evaluate a build versusbuy decision, claims managers are empowered to make decisions thatwill result in the most benefits for the claimsorganization.

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

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

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