Buy or build? Its been an important question debated in IT shops for as long as there have been IT shops. But software vendors patiently have chipped away at the builders of the IT world to the point that build is rarely the best option anymore. It used to be a question of, Should I buy or should I build? says John Flynn, senior vice president of META Group. Were past that question today. Now its, What do I buy and for what reason?
A third question could be: Whom do I buy from? For most insurance carriers the answer appears to be someone with a tried-and-true product. As the insurance software market gets crowded, it is hard to find a product that is both exceptional and persuasive, yet that is what insurers are asking of newcomers to the market.
The insurance industry is all about managing risk, says Kevin Dennis, director of enterprise solutions for the consultant Interactive Business Systems, and jumping on a new vendor or solution is riskier than sticking with a proven commodity. There is a tendency in any risk-averse industry such as insurance not to pick the new guy, he says. Firms that have produced software for a long timeCSC, Appliedare very good. They are reputable, you know what youre getting, and they can give you a long list of references. To break into the market you would have to have [a product] thats unique and compelling. Thats getting really hard to do these days.
Still, there are times insurers must face up to a difficult situation and dig in with their own set of tools. There may be a solution to buy for every insurance problem, but getting it to fit within a carriers sometimes antiquated legacy system makes buying a solution a waste of money. Ed Leveille, CIO and vice president systems at Providence Washington Insurance Companies, says his company prefers to buy, like most other companies today. Sometimes, though, carriers cant find the right tools and are forced into a difficult position of building a system. We couldnt find a true policy administration system that fit our needs, he says. We saw that anything we did buy we were going to have to do a lot of customization to the front end anyway, so we just said lets go ahead and build it.
New Guys
More and more products are being launched into the insurance technology market, and while the new and unknown scares some carriers, Leveille says it doesnt bother him. In fact, he recently licensed two products for a Providence Washington start-up company from a new vendor that hasnt even completed the product yet. I happen to know the principals of the company from way back, and I know their strengths and weaknesses, he says. Im very much convinced its going to be an excellent product.
Typically, when selecting a vendor, Leveille looks around the market himself and consults research firms to give him a list of the key players in the market. Even after researching a company and its customer base, Leveille indicates it still comes down to a gut feeling. Whats your gut really say about these people? he asks. How do these people deal with you? Is it more as a customer or more as a business partner? You can pick that up quickly in your conversations.
Leveille has made deals with the top vendors in the market, he says, and gambled with companies that dont have very many installed pieces. The proof of the pudding comes after the contract is signed, and you have the installation, and you give them the first project to assist you with. Whats the service like? How do they respond to you? If youve got a major production problem, do they give you good service? I cant say all my vendors are like that, but the ones that get most of my business are like that. They give me service, and they treat me like a partner.
Nicholas Wilkoff, a senior analyst with Forrester Research, believes it is getting more difficult for new vendors to enter the market. Companies are looking to work with vendors they have familiarity with and to standardize on specific platforms, he says. Companies are taking a look at the technology theyve invested in across the enterprise and at the lower-level infrastructure technology to standardize platforms from IBM, Microsoft, or Oracle. This focus on standardization is hurting the best-of-breed vendors, he asserts, and forcing consolidations among vendors across the technology market.
Flynn points out it is a buyers market, as well. When you go out and look at the critical mass of solutions that are available, its more than a handful, he says. Now, in some segments, you see 30, 40, 50, 70 providers. Such a crowded field is beneficial to carriers. The new entrants are stirring the potwaking up some of the older sleeping giants and helping them recognize the need to innovate and grow and replace their product as opposed to just maintaining it.
Taking somewhat of an opposite view, James Fridenberg, vice president, policy management applications, with the Farmers Insurance Group, believes new vendors do not face an uphill battle. New vendors in the insurance software application space often have new approaches that offer a cost-effective alternative to the traditional players, he says. As an insurance company, we need to continue to look at all the options that are available to us.
Farmers evaluates products and solutions based on a number of criteria, Fridenberg says, such as integration with the carriers existing software and hardware platforms, return on investment, installed base, compatibility with the Farmers business model, vendor reputation, staff training needs, TCO, and end-user evaluation. The new insurance solution providers will prove themselves by scoring well in these categories, he says.
Ralph Carlile, Grange Insurance Groups director of IT, asserts it is difficult for new vendors that offer only run-of-the-mill types of applications. But if vendors can find a niche, particularly with a business-critical application, even newcomers have a chance to succeed. In the insurance industry, theres a huge need for a richer product set related to integrated policy, claims, and billing processes, he says. Right now, there are less than a handful of companies that do that in the client/server world, and many of them do not offer a configurable system. Thats why you see such a high level of proprietary software in the business-critical functionality related to the vertical market.
The fact that these applications are business critical is one reason insurers have been reluctant to embrace new vendors. They are just not willing to invest in something unless it has a track record, says Carlile. You are looking at something that is a core business applicationsomething that your revenue stream depends on.
Insurers are unlikely to invest in one of these core applications without some firm assurances it will work. Breaking in with a smaller carrier isnt the direction to go, either. Smaller companies look to the larger ones, Carlile says. If the larger companies have not implemented it, the smaller companies arent likely to use it.
To the Core
Leveille still believes it is easier to find most systems on the market and dismisses talk that a particular system can give an insurer a competitive advantage. When I want a billing system or a claims system, I plan to purchase it, he says. Claims is claims is claims to me and to our business people. We think there are good systems out there to purchase and just plug in.
Forresters Wilkoff says just like much of todays technology, IT departments need to be flexible, as well. I dont think its necessarily a choice of whether you build or you buy, he asserts. In many cases, the line has become blurred, and there is the option of assembly and building applications off of existing infrastructure and technology.
Flynn notes clients of META Group still raise the build vs. buy question. They tend to put it in the context of a specific functional needsuch as rating engines, policy administration systems, or claims applications, he says. If you just think about those three areas, they represent a fairly large percentage of the operational function an insurance provider has to engage in.
Still, Flynn believes the ability to buy a best-of-breed solution that supports the three functions above will be more beneficial in the long run for carriers. Buying a tool allows them to deliver greater value to their user base so [the carrier] can focus on the hard stuff, such as workflow enablement, as opposed to writing the functional code to build [a system].
An Easy Choice
Any consumer of IT services would much rather buy services, Flynn believes, whether that means a physical product or people, if the purchaser believes the solution will deliver greater value to the company and diminish risk. The biggest reasons for this are the depth and breadth of the software available and the state of outsourcing in the insurance market today. What youve seen over the last five years is a greater emphasis on providers recognizing there is opportunity in the insurance marketplace, he says. So you see products emerging with fairly significant industry understanding and depth.
The big challenge for vendors over the years has been how do they enter a marketplace with a product thats attractive enough to the buyer community while, at the same time, producing a profit for them. For the longest time, providers of software solutions have approached the [insurance] industry cautiously in large part because of how well they understood the [insurance] industry and how much penetration they could get with the product, says Flynn. As they recognized that greater industry knowledge and depth gets them the robustness and functionality [carriers seek], they can get better penetration.
Still, Wilkoff adds, some projects get carried too far, and the cost for the insurer gets out of hand. What carriers are doing is isolating the projects or breaking them down into more specific projects, he says. If you look at something like compliance, for example, when you get into the technology, it can be broken down into a number of different products that can be used by an insurance company to drive toward compliance, so [the carrier] focuses on electronic records management as a technology they want to make a selection around.
Standards Are Important
While standards such as ACORD XML still are emerging, Flynn maintains enough customers are demanding compliance that vendors have little choice but to jump on board. Standards are nowhere near complete, and by no means are they accepted 100 percent by everybody, but it has reached enough critical mass where its influencing the marketplace, he says. People are saying, Is your product XML compliant? If its not, I wont choose it. Thats a great thing.
Leveille also is a strong believer vendors need to react to the standards movement. Ive gambled my company on it, he says. I think [standards] are slow coming, but every month or so I read another headline where another major vendor in the insurance space has decided to go that route. There will be different variations and versions as we go forward, but the specifications and standards that are playing out in this whole XML thing are here to stay.
Dennis of Interactive Business Systems believes the standards fight is a good one, adding the ACORD XML standards are a huge step in the right direction for [insurers] actually to transmit information. But even though a standard is available, it doesnt mean the problem is solved just yet. What everyone is struggling with right now is how do we agree on a standard to trade information, he adds. Everyone wants [software] to come out with something that conforms to those ACORD standards. The problem is those standards are extremely flexible. Just because a product conforms with a standard doesnt mean it is going to be possible to trade information.
Fridenberg agrees standards such as ACORD XML are very important. It makes it easier to integrate third-party products into our applications, and interfacing with external vendors and services becomes less challenging, he says.
Vendors have to be standards compliant, Carlile believes, particularly with the ACORD XML standards. Insurers have to have the ability to integrate systems quickly if they are going to buy software off the shelf, he says. The XML standards probably are our best hope right now of being able to accomplish that [integration]. As systems become more XML compliant, it would be nice if they were ACORD XML compliant as well if they are going to deal with the insurance industry.
Still Scared
If there is one word that makes insurers leery about buying a new software package, it is customization. Thats what I use as my decision point, says Leveille. How much customization am I going to have to do to the package to accommodate my business users? If its a lot, then I dont want to buy a package because typically if I buy a package I have to pay a maintenance fee and support services annually at like 15 percent to 18 percent of the license feethats what the markets pretty much at now. If Ive done a lot of customizations, I cant do the upgrades anyway. It kind of defeats the purpose, I think, if youve bought a package and greatly modified it.
Still, customization is done all the time. Leveille believes it is done for one of two reasons. Either the package was not a very good fit to begin withit might have come close to what you were shooting for but not near it, he says, or the users want the system to fit into their current structure and are unwilling to change that structure to fit the new system.
That is why many insurers are turning to portfolio management to take advantage of software they already own but may not be fully exploiting. A lot of that is driven by acquisitions, says Dennis. Insurers arent really sure about what theyve got and what exactly the software not only is doing, but what it can do. Some of these firms want to reach an economy of scale by putting policies on one system, and to reach that economy of scale, they have to figure out what is the best of breed they have and what is the easiest to support and how it integrates with the tools they are providing to their constituency.
The Right Decision
The decision to buy a system today comes down to recognition by the CIO of what the company is trying to do with technology, says Flynn. Youve got CIOs or business unit executives recognizing the industry they are in is insurance, not technology, he asserts. What they can be great at is insurance. They can be pretty good at developing software, but at what cost? Is [building software] where they really want to sink their capital and manage their risk?
The mystery has been taken out of insurance software, as well. The [software] industry recognizes insurance is a difficult financial product. However, it is not so unique that commercially viable solutions cant be constructed around it, says Flynn. For the longest time, it was believed insurance products or systems were so difficult and obscure you couldnt create technology on the outside as a commercial product to service it. That myth has been broken down. There still are aspects of the industry that actually have that challenge and probably always will, but its not the critical mass of what is happening in the industry anymore.
Nevertheless, says Fridenberg, many of the off-the-shelf policy processing systems or claims administration systems on the market are more suitable for small to medium-size insurance companies. Smaller companies typically can adjust and adapt their business products and processes around a software product with little impact, he says. For a large multiline carrier such as Farmers Insurance, which operates in 42 states and offers many insurance products in all lines of business, off-the-shelf products typically do not provide the level of robust functionality and performance capability we require. For the most part, we have found building custom systems provides us the best value proposition in cost, functionality, and flexibility. However, we still look and evaluate other products all the time as you always have to be surveying the landscape.
The Final Answer
As insurance carriers learn to better manage their portfolio of technology investments, Flynn believes the industry will see greater levels of judgment on business cases that propose technology. The questions will continue to be asked, he says. Are we building this, or are we buying it? If we are building it, why? Dont avoid the questions, defend [the answers] rigorously. Those who build probably will have a very justified reason for doing it. Its just not so easy to build it yourself anymore. Theres too much choice out there.
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