To Build or Not To Build...
The Costs of Innovation
However, even the most innovative approaches to building can sometimes end up being very costly. For example,before it became OneBeacon (Boston, $3.9 billion 2001 earned premium), CGU Insurance attempted a tool-kit/component approach to the replacement of legacy systems that had suffered from a lack of maintenance investment. Since the IT department had not profited skills-wise from adquate maintenance efforts, such an ambitious project was like ""going from 0 to 60,"" says Mike Natan, CIO, One Beacon. ""They went with some very cutting-edge technologies whose implications they hadn't really thought through,"" he says. As the solution took shape, it became clear that it was going to be fairly unmanageable, Natan relates.
After White Mountains Insurance Group (Hamilton, Bermuda, $16.2 billion in assets) bought CGU, Natan was brought in as consultant in June 2001. Within a month he decided to kill the project—which to that point had consumed about $75 million.
Natan investigated a number of market options to start anew, mostly ""buy-and-integrate"" solutions in the $25 million range. The solution chosen after a two-month evaluation process was to resurrect an insurance framework built by General Accident (which had merged with Commercial Union to form CGU) using a Sapiens (Rehovot, Israel) tool kit. ""To resurrect that, upgrade it, bring it to a current state, add functionality and interface it to the current systems turned out to be the best option for us,"" Natan says—and at a total cost of about $11 million.
Building can even yield marketable results, as it did at Medical Mutual of Ohio (MMOH, Cleveland), which spun off its Westlake, OH-based IT operations to form Antares Management Solutions. ""We felt there was a market for companies that are good at insurance but can't afford mistakes,"" says Paul Apostle, Antares vice president, IS.
Antares offers a ""third way"" in the build-vs.-buy debate—the ""rent"" option. Antares specializes in providing business process and technology outsourcing for healthcare and related industries. ""The biggest issue in finding a solution is often urgency—which rules out a build,"" Apostle says. ""The whole 'con' on buying is it winds up with the longest lead time getting to product and it's the most expensive option of the three we talk about.""
Renting, by contrast, offers the shortest lead time, along with other advantages. ""If you buy a package, you still have to reinvent the wheel yourself,"" Apostle argues. ""If you rent, you're probably working with someone who's done it a few times and knows the pitfalls."" But perhaps a greater benefit is the normalization of costs. ""Someone walking into a 'build' has to be prepared for scope creep and delayed delivery times,"" says Apostle.
Refining Skillsets
Farmer's Insurance (Los Angeles, $11.5 billion in total assets) has a large IT shop proud of its building abilities, but it is leveraging the rent option to sharpen its competitive edge. At Farmer's, that means not only reducing the costs of IT operations, but refining the skills of IT staff. The carrier structures IT into two tiers, according to James Fridenberg, vice president, applications development. The top tier is all our architects, analysts, subject matter experts and designers, the people who have core knowledge of our systems and applications. Those are the people we want to groom and invest in,"" he says. ""The bottom tier is where we look at outsourcing opportunities—the heads-down programer/coder."" Within that concept, Farmers maximizes its outsourcing of application maintenance, to such partners as Wipro (Bangalore) and Cognizant Technology Solutions, a Teaneck, NJ-based firm whose software development centers are located in India.
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Build to Sell?
Faced with a demand to produce an application for AIG's (New York, $268 billion in assets) loss control department, Leon Busiello, director, management information systems, AIG Consultants, was driven to build it by a typical industry problem. ""When we looked for a system that did what we needed it to do, we didn't find anything we liked,"" he recalls. ""The basic work management program we found wasn't made for loss control, and if we bought it we'd probably have to spend as much money customizing it.""
Busiello describes the existing solution as an extremely inflexible ""half-paper, half-mainframe"" application that required massive efforts when changes in report structure were needed. The solution was notoriously user-unfriendly, and produced only hard-copy output that required physical filing accommodations off-site.
""We wanted something that was centrally based, could give real-time information and would serve as an archive, as well as a tracking and order system,"" Busiello explains. ""So we built something accessible to our underwriting groups so they could go online and order loss control directly from their desks."" The system, called COATS (consultant order and tracking system), was built as a client/server application with a VisualBasic front end in early 1998. About a year-and-a-half later the system was Internet-enabled.
The efficiencies that the solution delivered resulted in its becoming ""more of our accounting system—it keeps morphing into other operations,"" Busiello says. It eventually attracted the attention of Global Energy, an engineering group within AIG. ""They came over and wanted to 'rob' some of the code, so we actually sold it to them,"" in the spring of 2002. The application was later rolled out to American International Underwriters Engineering, AIG's international engineering group (which was in the process of being merged into AIG Consultants), Busiello says. ""We've already started with the United Kingdom and Europe.""
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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