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Big Fish Eats Little Fish

Technology providers are beating financial service companies to convergence, as vendors prepare for a single market.

Even before the end of Glass Steagall, pundits have been predicting the insurance industry will be overrun by fast-moving financial service counterparts—namely banks and brokerage houses. To date, little trampling of insurers has occurred, but the technology providers serving the financial services industry have seen their fair share of mergers and acquisitions.

"There was supposed to be a great marriage between banks and insurance companies that has not occurred yet," says Richard Roby, director of insurance research at Needham, MA-based Tower Group, a financial services consulting firm. For financial services, IT "is an information game" that will be sorted out in Washington to determine who and what kind of information can be shared among organizations. "It has not yet been determined how the information game is going to pan out."

Still, technology providers have been preparing for thejoining of financial service verticals for some time. "The acquisition by CSC of Continuum in 1996 changed everything," says Bill Goff, an industry veteran who spent time with AMS Services (Windsor, CT) and who now advises insurance company CEOs. Suddenly, "other technology companies were interested in the insurance vertical," he adds.

One company, Fiserv (Milwaukee), has been particularly active in acquiring insurance technology vendors. "Before 1998, we were not insurance," says Les Muma, president and chief executive officer at Fiserv. "With the anticipated fall of Glass Steagall, we knew having the ability to do data processing for a wide range of insurance products would give our existing banking customers products they would want. We moved into securities one year before that, but insurance blending with banking is not going as fast as securities and banking."

Fiserv has acquired 96 companies that provide technology to financial services over the past 14 years, averaging a respectable seven acquisitions a year. Notable recent insurance vendor acquisitions include:

--National Flood Services (Kalispell, MT, October 2000), a provider of flood policy administration services;

--Progressive Data Solutions (Orlando, April 1999), a specialized workers compensation administrative software systems provider;

--FIPSCO, Inc., (Des Plaines, IL, March 1999), a provider of systems for marketing support and presentations for life insurers;

--Life Instructors, Inc. (New Providence, NJ, October 1998), an online, educational course provider for life insurance companies and securities industry firms;

--The FREEDOM Group (Cedar Rapids, IA, December 1998), a provider of specialized software products and services to the insurance industry;

--Specialty Insurance Service (now called Fiserv SIS, Orange, CA, May 1998), a provider of computer software and related services for P&C insurers; and

--Network Data Processing (now called Fiserv Life Insurance Solutions, Cedar Rapids, IA, April 1998), a provider of administrative software, systems services and data processing to life, annuity and health insurance companies.

However, Fiserv doesn't acquire companies indiscriminately. "Fiserv loves companies that are technology driven, but have a recurring revenue component," says Muma. "TPAs and outsourcers have recurring revenues," from transaction fees or contract renewals. "Software sales does not have recurring revenues."

In fact, Bill Goff says, "Selling software is not a way to make money. Transaction processing is the best way to make money," according to Goff. "Transaction processing is a huge cash cow.

"There are a few good, small companies out there fighting the long, uphill battle to build software and sell it," continues Goff. "I can see big players moving to acquire small players like that."

For instance, the 800-pound CRM gorilla, Siebel Systems (San Mateo, CA), recently acquired Janna Systems (Toronto), a front-end Web-enabled CRM provider. Tower Group's Roby sees Siebel and Janna working well together, as Siebel's technology can provide the customer data to Janna's front end. "Many providers have back-end systems that don't face the customer, but the customer wants to see how their claim, or application is doing," says Roby. "That is where the value of front-end technology comes in."

The trend of large non-insurance-specific technology companies moving to acquire small insurance players will continue as vendors position to take a bite of the estimated $12 billion the insurance industry spends on IT, says Anthony Cioffoletti, president, Business Technology Alignment Group, LLC (Valhalla, NY), a financial services consulting firm. "You are seeing the large outside players buy vendors with established names in insurance," he says. "Also, the barrier of entry to insurance is large." Part of the barrier is real, he says, citing "regulations on a state basis and statutory reporting rather than standard GAAP." But there is also more of a psychological barrier. "Vendors have always been told if they are not really in insurance, they don't know the business-go away." Therefore, if a non-insurance-specific technology player acquires an insurance-specific provider, it gains insurance credibility, he adds.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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