There was a time when nothing was more natural than to build large and unique systems, and even now thelimitations of the marketplace may sometimes lead insurance IT executives to think, "if you want something done right, you might as well do it yourself." But the DIY attitude is no longer so defensible. Market pressures are forcing carriers to deliver more creative offerings much faster than in the past. The question is no longer simply whether to build or to buy, but how to balance elements of both when seeking the most economical solution. And, further complicating the picture, as executives consider the technological shape of things to come, they also have to consider striking a new equilibrium in terms of the skill sets of their staffs.
In the past, insurance companies could say, "We're going to custom-build a system that fits the way we do business," according to Judy Johnson, vice president, insurance information strategies, META Group (Stamford, CT). The industry resisted what it saw as "cookie-cutter process environments" and "believed that each company had specific business models, products, needs and processing environments," she says. Moreover, IT shops could afford to build huge systems then, Johnson adds. But now that companies no longer have the luxury of 24-month-and-longer product cycles, pre-built packages make more sense.
Unfortunately, "companies were often disillusioned with the vendor options provided, either because they didn't think the system offered them the functionality they wanted, or they weren't happy with the services part of the organization," Johnson contends. But in large measure vendors of packaged solutions have fallen short through no greater crime than simply taking their cue from the insurance industry, and have been more leaders than followerswhich has led to a kind of vicious cycle. "The vendors have been saying, 'You don't understand what it takes to be in the software business!'which is absolutely trueand the companies are saying, 'You guys don't understand that the world is changing and you're not providing us with what we need!which is also true," Johnson laments.
To bridge this gap, Johnson says, insurance software vendors have begun to produce more modular offerings, allowing component-based "best-of-breed" approaches.
The majority of CSC's sales are now of components rather than traditional "monolithic" full back-office processing offerings, acknowledges Paul DeFuria, CTO of the vendor's financial services group. Developing solutions that will satisfy the precise needs of an insurance company is indeed difficult, he argues, because vendors can't anticipate the specific difficulties of dovetailing with the existing functionality of a carrier's systems. Potential customers "would like to be able to get to this atomic level of 'I could buy this selection of services as a component,' but as a practical matter to a software company, it's very hard to componentize at that level because you have no way of certifying that your software will deploy and behave properly in production," he says.
As traditional players like CSC were migrating to componentized approaches, newer companies were moving in. Says META Group's Johnson: "You saw Castek Toronto walk in and start scooping up market share because they had a component-based system." Other vendors and consultants have picked up on the trend by offering development frameworks, such as WorldGroup Consulting's Insureworx, PwC Consulting's Integrated Financial Services Solution, along with offerings from British invaders, Sherwood Internationalwhich produces the Amarta business process implementation environmentand The Innovation Group (TiG), which offers iBOS (innovative business operating system).
The current success of such solutions is based on the lessons of large project failures and the time and money it takes to build from scratch, says Blair Porter, vice president, financial services, for CGI Group (Toronto), which provides outsourcing as well as its own framework-type offering, GIOS (Global Insurance Open Solution). "Some carriers spent a lot of money over the last few years to get through Y2K and the Internet phase, so there are a lot of sunk costs they want to be able to harvest," Porter says. Insurers are trying to maximize investment through re-use of existing assets, and are looking increasingly to ASP or other hosted offerings. The question now, according to Porter, is less "Do I buy or build?" than "How much do I buy versus how much do I rent?"
All bets are off, however, when the decision can affect a carrier's ability to differentiate itself from its competitors. That is the view held by Bob Lukas, senior vice president and CIO of The Hartford's (Hartford, $167 billion in assets) P&C company. "The most important criterion to us is whether the function we're attempting to automate has clear competitive advantage to The Hartford," he says. In January 2001, Lukas's team began a project to rebuild its personal lines legacy system by late 2003, "in a way that new product and changes to existing product can be accommodated much faster than in the legacy environment," Lukas adds. "We may buy some little tools or components, but the overall architecture and capability is something we'll construct ourselves because of our belief that it will lead us to competitive advantage."
Other considerations sometimes can make bought solutions a good choice, Lukas concedes, but generally for "small stand-alone, commodity-type functions." He has a dimmer view of enterprise software purchases. "A lot of people, I would say, are sorry to have made those purchases," he hazards. "We shy away from big enterprise things unless it's pretty clear that we can get some capability that will be valuable to us."
Unfortunately, many insurers are not good at caluculating the cost/benefit of packaged solutions, according to Scott McConnell, vice president, Cap Gemini Ernst & Young (New York). "Larger IT shops have traditionally been much more experienced with building than with buying, and therefore than with the estimates and full-lifecycle costing associated with buying," he says.
Total Cost of Ownership
Conversely, insurers often underestimate the costs of building because internal development expenses are not treated the same as external ones. "You're using existing salary and hardware expenses, but you're also diverting core resources," says Jeff Adams, senior vice president for TiG's North American management consulting division. When insurers decide on internal development, Adams asks, "Are they really comparing the total cost of, for example, all the legacy or middleware maintenance they're going to continue to have to do?"
Carriers are understandably cautious about retooling their legacy systems but they should look to new and robust ways of looking at business architecture, Adams advises. "If you're going to run a processsay, a claims or underwriting processyou need to understand the series of local or micro events and outcomes that contribute to an overall workflow," he says. "These are capabilities that most carriers don't have in abundance."
Some carriers may, however. Craig Lowenthal, CIO, Hartford Financial Products (HFP), a New York-based subsidiary of The Hartford, agrees that buying is an attractive option in many cases, but says "if you buy it, try not to modify it." If HFP's legacy issuance system were broken, Lowenthal says by way of example, the company might have replaced it with a bought solution. However, since that system served the company's needs well, HFP kept it and modified the front end to align with business processes and workflow. "It could be a big mistake for me to buy a new system. Sure, I get a brand-new front end, XML and potentially other benefits, but then it takes me multiple years to rebuild the critical back-end nuts and bolts of the system," Lowenthal says. Gradual change has resulted in proven processes over the years, allowing HFP's IT department to "leverage the known, while continually upgrading the user experience," he adds.
This summer HFP took a combined buy/build approach toward an electronic filing and document imaging requirement. A natural "buy" option would have been to bring in a whole application that managed document retrieval and storage and required certain hardware and infrastructure investments, Lowenthal suggests. With such an approach "you're getting into a huge cost proposition, and on top of that, you're radically changing users' workflow."
HFP's solution was to buy a combination of eCopy (Nashua, NH) scanner add-ons to existing digital copiers and $150 scanner attachments for existing employee laser printers. "They can go to the copier and scan, or they can do it right at their desk," Lowenthal says. Since HFP's customer correspondence is created in Word, "using Windows APIs, we built a process whereby instead of hitting the save button, employees hit a custom button that will print/fax/e-mail (customer's choice) the document, as well as save it to our network document store. Then, as part of our existing underwriter workstation, the employee types the account name and the system brings up all the documents associated with it."
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