Call It

Establishing the core competencies of an insurance carrier may sound like a great deal of work involving research and self-examination. However, Donald Light, senior analyst in the insurance group for Celent, contends it all comes down to two major questions insurers need to answer concerning the amount of internal development capability they require: "Do you want to write a lot of applications with your own staff? Or do you have a preference to buy applications from software vendors and view your own staff as doing integration, maintenance work, or minor kinds of development?"

The answers will help carriers determine their core competencies, particularly within the IT department, where staffing issues and changing business processes present a challenge to CIOs.

But where does an assessment of internal capabilities begin? Bill Jenkins, CIO of Penn National Insurance, explains any assessment should start with what the company is good at. Being good at something isn't necessarily the same as having a core competency in that area, though. "If you are good at payroll and payroll is not a differentiator for you, so what?" he says. "That's something you easily can outsource."

Steve Haas, associate principal with the consultants at Everest Group, agrees with Jenkins and adds core competencies need to be viewed from a strategic level. "Too often, people think of core competencies as something they do very well," he says. "There are companies that have outstanding HR departments. They get a lot of work done with very few people. While I'm sure they are very proud of [their HR efforts], I'm not sure that would be a core competency."

Any assessment of a carrier's core competencies can be done internally. "In some sense, it's always done internally by default," Light says. "If you are using little or no outside resources, that means you've made a decision."

The classic definition of core competency is an activity or capability within an organization that distinguishes it from its competitors and gives a competitive advantage, according to Haas. "It's something that is hard for others to imitate and gives the company the capability in which it can develop and launch new products and services," he says. When looking at an insurance company, Haas is of the opinion core competencies center around customer service, channel management, and the ability to develop new products quickly and efficiently.

Core competencies can be developed in different ways, he suggests. For example, "a company decides consciously through strategic planning activities–which may or may not require hiring a consulting firm–that the two or three things it wants to make sure it does extraordinarily well are going to distinguish it in the marketplace," he says. "Or over time, [companies] have developed a core competency without knowing it, and it wasn't until someone labeled it a core competency that they discovered this was something that gave them a competitive advantage."

Most companies have just two or three core competencies, reports Haas. A company may be competent at a lot of things, but he feels for a skill to rise to the level of a core competency, it needs to provide the company leverage in the market–a source of competitive advantage and something that offers benefits to consumers of the product.

Haas worries the term core competency is starting to lose some of its edge, though. "The view of core competency in the lexicon is migrating more to 'something we do pretty darn well,'" he observes.

Hard as it is to believe, CastleBay Consulting CEO George Grieve has learned many insurance CIOs aren't clear on what their job in life might be. "We'll ask CIOs, 'What are you here for?'" he says. "'Are you integrators? Are you builders? Are you purchasers of software?'"

In some cases, Grieve notes, companies have failed to answer these questions, which creates complications as carriers move from one major situation to the next and decisions are needed on how to approach each situation strategically. "My personal opinion is the vast majority of insurance carriers should have nothing to do with building software unless it absolutely is a last resort," he says.

His reasons for buying rather than building include the belief most IT shops aren't big enough or sophisticated enough to do the job well. Second, he claims the vendor marketplace has improved dramatically over the last five years to such an extent it's unlikely a carrier could build software equal to or better than what vendors have built already.

There are problem areas, though. Grieve believes for some segments of the industry, such as excess and surplus lines and specialty lines, it is difficult for carriers to find off-the-shelf solutions, so those insurers are more inclined to build. But for the most part, "unless you are one of the big companies with a tremendous amount of resources and a lot of reach, you probably should look to buy before you ever think about building," he maintains. "What [a carrier's] main objective should be is to integrate purchased products with the legacy assets."

The skill sets and the head count needed to develop functions internally or either buy or outsource them are very different, points out Light. "Larger companies will do all of those things and also have significant numbers of developers on board," he says. "Smaller companies tend to fall under the category of buyers."

Large-tier insurance carriers believe their business model and the complexity of their legacy environment make building solutions a more attractive alternative, states Light. "When you get into the world of top-tier companies, they feel no package that has been written to appeal to a broad range of insurance companies possibly could do all the things they need it to do to maintain a competitive differential," he says.

When the need is for carriers to change the way they do business, buying vendor products and sharing the vendor's development team as an outsourcing partner can be a better option. In 1999, Buckeye Insurance Group purchased from Insuresoft the Diamond policy administration system. That brought about a major change in the way Buckeye did business, according to R. Christopher Haines, assistant vice president, technical operations. "That was a big decision for us," he says. "This year we're a 128-year-old company, but up until 1999–our first 120 years–we did everything the exact same way."

The changes Buckeye wanted to make forced the carrier to look closely at its operation and judge how well things were working. The IT team handled much of the assessment, visiting each department and eventually meeting every employee face to face to learn how the employees were spending their days.

One thing the company discovered it was doing well was a process called expanded underwriting authority, explains Haines. "We allowed our agents to make underwriting decisions to a pretty high level," he says. "We allowed the agents to accept the coverage, but they still had to enter all the information manually. It was an easy decision for us to go to real-time Web processing because it wasn't a change in our philosophy or methodology."

A major concern for Jenkins at Penn National is the availability of staff. In that regard, one of the strategic initiatives the entire organization currently is undertaking is a discussion of staffing, not only in IT but in underwriting and claims, as well. "We are looking at the technical skills of the entire organization," he says.

Penn National wants to identify the skills required by the company for the next three to five years. "There are steps we need to take in order to address this issue, and part of that is what are our core competencies and what are our skill levels," he says. In recent years, Penn National has embraced a number of new technologies for the organization, such as business rules engines, which allow the carrier to compete. Therefore, examining staffing needs and the skill level of the business users is something Jenkins feels needs to be done posthaste.

Penn National has established IT operating principles, and one principle states the carrier will reuse before it buys and buy before it builds. "As we go through the process of evaluating what is needed by the business, we go through the thought process [concerning the IT principles]," says Jenkins. In many cases, he finds there are not many solutions the carrier can buy off the shelf, particularly when it comes to areas such as automating the upfront underwriting process, predictive analytics, scorecards, and workflow. "As a result, we have to rely on external contractors that have the skill set to come in and not only address the systems we need but also [be on board] for skill transfer," he says. "We've embraced what I call a 'construct philosophy.' We are buying components and cobbling them together, but we need the skills to do that and build out our components."

Part of what Penn National has done is to examine how the carrier breaks up the IT delivery system. "We look at what skills we have and what we need and then determine how we get the skills to sustain ourselves going forward," he explains.

The personnel issue, particularly attracting and retaining programmers, is an area of concern for Buckeye, as well. The carrier is located near Dayton in western Ohio, and Haines says, "The challenge we have is how do you keep [programmers] from quitting? You treat them well, but things happen you can't control. You lose a lot of knowledge when [programmers] leave. You get them up to speed, and something happens in their life, and they are gone."

One advantage Buckeye has obtained from its contracts with vendors Insuresoft and Interactive Business Systems (Buckeye's Web development vendor) is personnel issues can be handled with a minimum of problems. "There have been times when a programmer or analyst assigned to [the Buckeye account] has taken another job, but the vendor trains people to move into the role," says Haines.

Recently, Buckeye's lead analyst from Insuresoft was given three weeks off to spend time with her husband, who just had completed his third tour of duty in Iraq. At the same time, the vendor's lead programmer went on a maternity leave. "But we haven't missed a beat," says Haines. "[Insuresoft] has slid people over onto our account. If the same thing happened [in Buckeye's IT department], I can't imagine losing that number of resources. We'd be in a world of hurt."

Having access to the vendor personnel also allows Buckeye to leverage training issues. When Haines informed Interactive Business Systems that Insuresoft was moving from .NET Framework 1.1 to .NET Framework 2.0, he was told there would not be any major problem. "But if we were doing our own Web coding, I'd have to get our Web resources to a training class somehow and pull them off whatever work they were doing," he says.

Vendors can cycle people through training, which is difficult for smaller carriers such as Buckeye. "Both of our vendors are Microsoft Gold Partners," continues Haines. "They can have Microsoft come in and do in-house training. We're basically empowered with that knowledge because of our partners. Those are the things we are able to leverage by outsourcing."

Penn National has begun to do more outsourcing in recent years for a combination of reasons, indicates Jenkins. One reason is to obtain the skills the carrier does not have on staff to meet the business requirements of the systems that have been installed. The ability to manage the outsourcing is important, too. "I'm not going to outsource something I can't manage properly because that's a prescription for disaster," he says.

For example, Penn National purchased the Pegasystems rules engine. Jenkins knew he didn't have the skill sets internally at the time the carrier bought that particular tool, so Penn National is using Pegasystems personnel to help build the workflow, underwriting workstation, and scorecard using business rules. The carrier also benefits by getting the staff up-to-date on the use of that tool going forward. "We are bringing outsourcers in to help us with that skill transfer," notes Jenkins.

With its broad spectrum of services, insurance is a difficult business for IT to be able to raise itself to a level that would be viewed as a core competency for a carrier, Haas believes. However, IT is critical to the successful operation of an insurance company, he adds. "A lot of the functions that are good candidates for core competency in insurance cannot be performed without a highly capable IT structure delivering the support and services," he emphasizes.

The gamut of IT services runs from the management of the individual hardware, platforms, servers, and mainframes to the higher-level points of business analysis and systems architecture. To a large degree, all of these services function as a part of the business operation. Haas doesn't recommend Everest's clients outsource these functions because those services have such a tight integration and linkage to business operations.

At the other end of the IT scale, Haas contends software is rife for consideration of outsourcing. "There are plenty of opportunities for companies to determine they need some kind of leverage to improve quality, be more agile and flexible, or to lower their operational budget," he says. "There are a lot of IT outsourcers out there that can provide that service."

On the technical side of Buckeye's IT department, resources are limited, according to Haines. The company has established another division within IT that serves as an operations department, though. "As we were automating processes for underwriting, people became expendable," he says. "Rather than let them go, we transferred them to the operations part of the IT department to do systems testing and outside Web site support for our agencies. We were able to leverage their underwriting knowledge."

This was important because Buckeye doesn't like to use its outside vendors for front-line testing. Haines believes the outside vendors actually slow down the process. "As good as [vendors] are, they don't know Buckeye products like Buckeye employees do," he says. "To have [vendors] do front-line testing is no benefit to us."

In Grieve's experience, outsourcing is more dangerous and a lot more sensitive than many business people give it credit for. He points to examples of carriers declaring they outsource all their legacy maintenance so their internal staff can do development work. "That makes sense on the surface, but there are significant problems with that scenario," he asserts. Whoever is going to take responsibility for running the legacy systems is going to have to learn the details of that system, and that's not always easy because some legacy systems have poorly written code and are badly lacking in documentation, he explains. "Having other people become responsible for [maintenance] probably takes longer than most people assume because of the learning curve," he says. "There definitely are carriers that have been disappointed in the amount of time and energy it takes to transfer legacy systems to an offshore support vendor. [The carriers] haven't gotten rid of these issues because the vendor that has acquired responsibility for running those systems cannot understand everything about the systems, and [the carriers] potentially are losing a lot of institutional knowledge."

Another area carriers often don't think about is the number of years they are going to need to keep those legacy systems functioning. "[Carriers] are not replacing all the functions the legacy systems perform, so they have to keep those systems functioning for an extended period of time," Grieve continues. "Outsourcing clearly works when something is more like a utility–running the help desk or communication servers. Those kinds of things seem to be the place where it is the least problematic."

Haas doesn't advise clients to be afraid of the outsourcing option, but he urges caution. "[Carriers] need to move forward slowly and methodically and take advantage of best practice when it comes to outsourcing," he says. "They can't rush into it. They need to understand outsourcing brings new risk they might not necessarily be familiar with."

Risk can be managed and mitigated, however. "One of the phrases we use is 'fear, uncertainty, and doubt' about the risks of outsourcing," says Haas. "There are areas where things can go wrong. But if you listen to the experience of others and the best practices in the industry, the risks are known and are manageable along that path."

Determining the best strategy to take all boils down to carriers having to determine what the differentiators are between themselves and the competition, Jenkins believes. "There are those things that are useful commodities and those things that could be differentiators," he says.

When a carrier decides to outsource a function or a commodity, Jenkins warns not to neglect all the implications for that particular system or function. "If you outsource something and don't understand the implications to other systems, you may have a problem," he concludes.