About 10 years ago, I penned an article on how to derive a
decision between build vs. buy (or blend) in insurance core
systems. At the time, the focus was primarily on P&C claims
solutions since only a few technology providers had anything
robust enough from the buy solution side that could compare
with building a solution.
In most cases, a blend solution became more of a reality
with insurers buying solutions that covered some of the necessary requirements, but then had to keep a legacy component
or build something to produce the full solution they required.
Fast forward 10 years and the market for comprehensive
core systems has grown significantly given the increase in package billing, and policy administration solutions available. Insurers realize, like the claims package solution market 10 years
ago, many of the key processes and functions in billing and
policy administration are not secret sauce and aren’t enough of
a strategic differentiator to deserve a special best-of-breed or
customized build solution or justify the added expense.
There are legitimate areas where strategic differentiators
absolutely exist, such as underwriting and pricing, but it
is conceivable that accommodating those special strategic
functions within a package solution is realistic. Moreover, the
allure of integrating to a common suite solution can lower IT
complexity and cost.
Business Case Considerations
The key decision element that has gone unchanged is the
importance of building an accurate business case. So often,
insurers made the decision to buy, build or implement a blend
solution first and then have difficulty fitting and determining
the real business case behind the decision.
For example, Insurer A wants to buy a package solution,
but believes its process is different from other insurers. If
the company purchases a package solution, it will need to do
heavy configuration on the product. In this case, the insurer
may not only underestimate the configuration effort on the
initial implementation, but also the impact of maintenance on
the overall total cost of ownership.
Once the insurer extends the business case five to 10 years,
it will show the maintenance effort can become more complex
and costly. Additionally, given Insurer A has moved away
from the out-of-the-box version so significantly, the company
will have to grapple with that every time they upgrade.
Insurer B wants to purchase a higher-priced package solution which it thinks is close to meeting business and technical
requirements. Budget constraints force them to purchase
The Transformation of the Core
Has the build vs. buy question really changed that much?
By Jeff Bergman
another solution that has a lower price point, but because it
lacks their desired level of functionality, the company plans to
configure it. Typically, the amount of work required in these
configuration situations is significantly underestimated and in
the end, Insurer B will end up spending more than the original option, which was a better fit for their business.
Final example, Insurer C has done well to avoid the mistakes
of Insurers A or B and implements a solid buy or build solution.
Unfortunately, they underestimated either the need or the budget
required to effectively perform some of the most critical elements
to a successful implementation: organizational change management and training. This oversight results in the operational effi-ciencies they were counting on in their business case to be lower
than expected or delayed due to adoption, training or operational
process issues. This situation will typically require more training
and cost than originally expected in the original business case.
Building the Suite Business Case
An additional factor in building a business case that has not
changed over the years is the difficulty to make the same positive ROI business case you could for claims transformation or
for the billing and policy transformations. Typically for billing,
a break-even ROI is standard and acceptable given the business
case drivers are not as robust in the headcount reductions and
process efficiency benefit areas and more robust in IT legacy
system replacement and improved customer experience.
With a policy system replacement, the same drivers apply,
but adding in better rating capabilities and downstream
analytics helps the business case turn more positive and make
the decision to transform easier. Typically in today’s marketplace, the policy administration core transformation decision
is more focused on a risk mitigation decision due to business
resumption fears and the cost avoidance of same, and less focused on a positive business case, which is difficult to develop.
In the end, the good news is there are many insurance core system
transformation solutions to choose from to make a more thorough
and worthwhile build vs. buy decision. It is important to ensure
that not only your business objectives match your chosen technology solution but also the true cost of your technology requirements is represented in your business case to avoid any unpleasant
surprises you will need to explain later to your board. ITA
Jeff Bergman is managing partner of the MVP Advisory Group.
He can be reached at firstname.lastname@example.org.