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Insurers Must Rethink Vendor Relationships in the Cloud

Cloud-based technology solutions are proving to be a valuable new resource for insurance IT organizations seeking to do more with less. But getting the most from the cloud requires carriers to rethink vendor relationships.

"In an outsourcing agreement, you typically write up a unique contract and then manage to that contract and the SLAs specified," says Guru Vasudeva, SVP and enterprise CTO for Columbus, Ohio-based Nationwide ($20.8 billion in annual revenue). "However, in the cloud world, for offerings to deliver the value that people talk about, the offerings have to be far more standardized."

In addition, insurance carriers must weigh the benefits based on unique organizational characteristics and market positions. While many insurers may be able to take advantage of infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) offerings, for example, larger companies have to determine whether they might be better off with a private cloud solution, Vasudeva notes.

"We have enough scale that we can negotiate the same things that any cloud provider can," he says. "We also get the benefit of risk management and compliance through having our own infrastructure, and you can manage your own security better, so the jury is out on what size companies can benefit from [third-party] cloud offerings."

Software as a service (SaaS), however, presents a clear opportunity for large and small companies, provided the offering is not for a differentiating capability, Vasudeva opines. Examples include truly automated functions such as email. "There is no reason for us to host those kinds of capabilities internally," he says. "Furthemore, with SaaS, unlike IaaS, you're getting an end-to-end capability that is constantly evolving through customer feedback."

Applying this logic, Nationwide has successfully leveraged SaaS web metric and payment processing capabilities, according to Vasudeva. But even with SaaS offerings, insurers need to look very carefully at how contracts are written for cloud-based offerings. "Typically the liability that cloud-based vendors accept is limited to the amount of fees we pay them," he cautions.

SaaS delivery of software often involves fewer parties from the decision process to implementation, making the effort quicker and easier, adds Ric Young, senior marketing strategist with MajescoMastek (New York), which offers a SaaS/private cloud delivery option for all of its solutions. The need for IT involvement is minimized, clearing the way for the vendor and the insurer group to focus on business goals, he observes. "It's good for the vendor and even better for the insurer, since it also helps them to avoid project scope creep and therefore unplanned costs," Young says.

At the same time, the popularity of alternative delivery models is changing many vendors from software companies to service providers, Young comments. But just because a vendor is good at delivering capabilities through a traditional software license, he warns, doesn't mean it will be good at cloud delivery.

3 Questions to Ask Before Signing With a Cloud or SaaS Provider
  1. Has the vendor considered and prepared for the fundamental shift in technology delivery?
  2. Does it have the service and support structure in place to deliver?
  3. Does it have a culture that lends itself to being a service company, or is it geared more to product development?

Young advises insurers to ask the following questions: Has the vendor considered and prepared for this fundamental shift? Does it have the service and support structure in place to deliver? Does it have a corporate culture that lends itself to being a service company, or is it geared more to product development? "The vendors need to ask themselves these questions, but the insurer needs to ask these questions of the vendor as well," Young insists.

The predicament in which insurance technology executives find themselves is that they have to push the technology envelope while reining in costs, opines Rick Roy, CIO of Madison, Wis.-based CUNA Mutual ($15.4 billion in assets). But they also have to protect the business. "You have to demonstrate that you're taking advantage of the opportunities out there and considering what's possible," Roy remarks.

It's great to have new choices, he acknowledges, but, Roy says, the question is how to arrive at a satisfactory business and legal arrangement when technology is not running under your own roof, which has important implications for the insurance industry. "In a software license situation, I'm interested in the vendor's R&D, but I couldn't care less how they run their own internal data center," he comments. "But as soon as that solution is running in their data center, I care a bunch."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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