Leaping the 'Digital Divide'.
Many insurers are concerned about falling farther behind in the race to the Internet, and they feel pressured to develop an integrated online strategy. According to an e-business survey of U.S. life insurers, most companies only recently have begun to implement their Internet initiatives.
Given the relative infancy of online insurance sales, it is not too late to leap the "digital divide." The divide separates companies that have successfully integrated e-business into their operating processes--such as broker Charles Schwab--from those that have not. Most insurers are in the "have-not" group.
A successful leap will give an insurer a powerful competitive advantage in distribution and greater efficiency in delivering services. It also will help the company remain in business tomorrow, because carriers not doing business online will be at a serious disadvantage. Before making the leap, however, it is important to look carefully to determine what direction the company should take and when it should begin.
Some insurance managers have a narrow view of the Internet. For them, an e-business strategy is synonymous with plans for a Web site. But a Web site is only a small part of a company's overall e-business strategy and objectives.
Used appropriately as an enabling tool, the Internet can have a major impact on almost any business process, including sales and service. For example, in the property/casualty and health insurance businesses, companies can use the Internet to digitally streamline claim processes to improve efficiency and effectiveness. In the life and annuity businesses, the Internet can assist companies in digitally streamlining a policy or the annuity contract acquisition process. But the challenge to overcoming resistance to change and achieving the fundamental transformation required in business processes and legacy systems should not be underestimated.
The Meta-Model Framework
Too narrow a view of the Internet will limit a company's strategic options. Think e-business, not Web site. There are several Web-based distribution alternatives from which to choose. The strategic meta-model framework can assist in the selection of an appropriate business model (See "How the Strategic Meta-Model Framework Works," above).
A meta model is a higher organizing level for a number of related business models. Although Yahoo! Finance and Schwab differ in many ways--Yahoo! Finance has hotlinks, while Schwab has an integrated e-business offering--they belong to the same meta model. Both have an open architecture, which means they sell a broad range of products from multiple providers, and they have a direct relationship with customers, the end users.
In the strategic meta-model framework, the horizontal axis represents a product or manufacturing perspective. An insurer can sell either proprietary products or those of other providers. The vertical axis reflects a distribution or customer perspective. Some carriers consider their producers or intermediaries as customers, while others see the end users (insureds) as the customers. Viewing intermediaries or policyholders as customers is much more common in financial services than the business-to-consumer and business-to-business distinctions prevalent in other industries.
Furthermore, one size does not fit all when it comes to Internet functionality. Different meta models--and different strategies targeting different market segments within a meta model--require different degrees of Internet functionality (See "Understand Internet Functionality When Choosing a Meta Model," left). Companies must consider the degree of Internet functionality as well as understand the implications of selecting the appropriate meta model. By doing so, insurers can use these frameworks to define an e-business vision, choose a business model and identify the organization capabilities needed to succeed.
A description of the meta models follows:
* Clicks and Mortar. Clicks-and-mortar companies sell proprietary products directly to customers and integrate physical and Web-distribution channels. Geico, Progressive and most traditional banks are representatives of the clicks-and-mortar meta model. These companies offer the same products online and through a physical channel, such as a branch or call center. Because of the complexity of selling multiple products across multiple distribution channels, a clicks-and-mortar company must adopt customer-centric processes to become distinctive. From planning and marketing to legacy system integration and measuring profitability, every function must be customer centric.
* Pure Play. A pure play is a virtual insurance company selling proprietary products directly to customers. A pure play may be a dot-com or a dot-corp--a company selling products and services unique to the channel. Ecoverage is an example of a dot-com. John Hancock, Merrill Lynch and Coverna Direct of Aegon are examples of dot-corps. Pure plays require total Internet functionality, a brand that creates Web traffic, a great user interface (the look and feel of the Web site) and customer confidence in fulfillment.
* Product Aggregator. Product aggregators distribute products from multiple insurers directly to insureds. InsWeb and Quotesmith are aggregators focusing on term life, auto and homeowners insurance. Product aggregators have spurred the shift to the Internet by providing choice to consumers. Product aggregators must be an early entrant, sign up enough carriers to provide shoppers with the perception of choice and persuade carriers to change their distribution strategy. Many carriers use product aggregators to generate leads for their agents, while paying agents the same commissions. Thus, product aggregators become another expense layer for these insurers, making their products less profitable.
* Distribution Center. A distribution center also offers products from multiple providers directly to consumers. Unlike a product aggregator focusing on product lines, the distribution center concentrates on the relationship with customers across broad product lines. Personal financial-management software sellers Quicken, Yahoo! Finance, WingspanBank and Schwab are typical distribution centers. Given the daunting task of creating a distribution center for customers, many centers develop relationships with partners (that may be other providers) to fill in product gaps. For example, WingspanBank uses E-Loan for credit products and InsWeb for insurance products.
* Specialty Provider. A specialty provider has relationships directly with multiple providers and customers. It delivers services that typically represent a part of the sales and service value chain. Cybersettle, the best example of this meta model, offers outsourced solutions for the claim-adjudication process. A specialty provider serves niche markets, and such a company must be focused, an early adopter and possess outstanding functionality and execution capabilities.
* Product Manufacturer. Product manufacturers sell their own proprietary products and consider intermediaries their customers. Most traditional insurers fall into this category. There are really two types of intermediaries: producers (agents) and Web centers of influence, such as portals and exchanges. Insurers that focus on producers must concentrate on infrastructure, using the Internet to sup. ply tools that support producers. This could lead to each producer having its own personalized portal integrated into the insurer's Web site. Those that focus on Web centers of influence must be able to provide low cost, a product brand and economy of scale. To distribute products through portals, where customers have a choice of multiple carriers, an insurer must have a strong product brand and offer low rates. The product becomes a commodity. The key is to pick Web centers of influence with the greatest market pull and integrate them into the sales process as closely as possible.
* Network. Managing general agent online companies are bricks-and-mortar organizations selling products from multiple providers. They have intermediaries as customers through physical distribution channels but also have an online presence. RELee is such a company. Most managing general agents focus on physical distribution channels. Their primary challenge is digitally streamlining manual processes, legacy systems and agent behavior.
* E-mediary. An e-mediary sells products from multiple providers to intermediaries like managing general agents but exists only online. Examples include ChannelPoint and BenefitPoint. They are analogous to Sabre, the travel reservation system used by all travel agents to book flights on any airline. E-mediaries want to be the platform that insurance brokers and agents use. Unfortunately for e-mediaries, carriers don't want to sign up unless brokers use the platform, and brokers don't want to use the platform until they have access to a number of carriers. E-mediaries must resolve this dilemma, treat both carriers and intermediaries as customers and integrate with the various legacy systems of insurance companies. In other words, huge investments are required to build the infrastructure needed to succeed as an e-mediary.
Here's some final advice before leaping the digital divide. First, don't rush into e-business. Don't get bogged down in analysis paralysis. Careful planning will improve the chances of doing it right the first time. As a rule of thumb, analysis should take four to six weeks instead of three to four months. An effective planning effort should review the competitive marketplace, identify the customer needs to be addressed and determine the business offering that will provide an appropriate solution.
Second, monitor progress against expected outcomes. Although this sounds simple, it can be quite challenging. Determine what outcomes are desired, and these should drive business decisions. For example, what level of customer traffic is needed on the Web site? What is the required close rate? What level of persistency is expected from that business? Then monitor e-business results against expected outcomes and those of competitors and revise the business model as needed.
An e-strategy doesn't have to be set in stone. Unlike classic strategy e-business strategy is very dynamic. And it doesn't have to be perfect. The Internet is about testing and learning. Therefore, it is important to build things that have the ability to adapt and change. New things are happening every day. To respond to this new environment, a company must be customer centric. While the tactics may change, keep this as the guiding principle.
So even though the gulf is widening between insurers that have implemented successful e-strategies and those that have not, there is still time to act.
Just be sure to look before you leap.
Michael C Kim is a principal of Tillinghast-Towers Perrin in New York and is heading the firm's e-business efforts worldwide. Dennis A. Steckler and Jean C. Miller are consultants in the Chicago office of TillinghastTowers Perrin, where Steckler is the insurance and technology practice leader for the firm and Miller specializes in insurance information technology.
Many insurers undertake Internet initiatives without understanding what is required to tackle e-business issues--such as distribution channel conflict. These initiatives are often disconnected or implemented poorly. Most of these efforts are bound to fail.
To determine if the company is ready, take this simple test. Unless all the answers are "yes," it is likely that leaping into e-commerce would be a waste of time and energy with little likelihood of success.
* Is there an executive sponsor? Developing and implementing an e-business strategy without the support of a senior executive is very difficult, "E" has such an impact on all aspects of a business that only a senior executive has sufficient control to capitalize on the opportunities. In fact, a growing number of chief executive officers in insurance and in other industries are sponsoring these initiatives.
* Is there a clear line of sight from vision to tactics? One needs clear alignment from the e-business vision through the business model, the required organization capabilities (including technology solutions and business processes), the tactical implementation activities and the expected financial outcomes.
* Are e-business goals and objectives shared across the company? Decentralized e-business initiatives may create corporate impasses due to the difficulty of getting all departments on board.
* Has the expected return on investment been analyzed? Over the past two years, e-business spending by the insurers participating in an e-business survey increased 500% on average. Not surprisingly, the investment required was their major challenge. Many are focusing on new business processing and policyholder services, identified as functional areas likely to generate the most significant cost savings from Web-enabling technologies.
* Is the company up to speed? Early movers enjoy a tremendous competitive advantage on the Internet. Companies must learn to compress the time from vision to launch from years or months to weeks. In a recent study of Silicon Valley start-ups, researchers determined that working at e-speed meant two things: making immediate decisions and developing the ability to multitask. Employees of start-ups did not work faster at a given task than those at traditional bricks-and-mortar companies. Rather, they worked on five to six tasks at a time, while their counterparts at traditional companies were working on one or two.
* Do employees have the requisite skills? Many employees lack the skills and capabilities needed to implement e-business initiatives. Respondents to the survey indicated that training and people development failed to bridge this competency gap. Thus, companies may have to look externally for e-business knowledge, skills and experience.
* Does the company have access to skilled Web site designers? Customer experience defines the perception of a company's brand, and the user interface determines the customer's experience. The user interface must make it easy for customers to do business with the company. Therefore, it is essential to find the personnel and resources to create an interface that leaves an excellent impression. Be like Amazon.com, a company that delivers a great customer experience with a great user interface.
* Can the company deliver on its promises to customers? The promise created by the user interface must be fulfilled. An attractive interface and meeting customer expectations create the lasting impression of the company's brand. In the survey, customer care topped the list as the most important focus of a company's e-strategy.
* Is there a strategic partnership strategy? Success in e-business often requires alliances and partnerships. Given the need for speed and the existence of prebuilt technologies, it is costly and unwise to develop proprietary solutions for all a company's needs. To fill in product and service gaps, consider alliances, partnerships, joint ventures or simply license solutions. Don't build everything from scratch, and don't go it alone.
* Can the company provide reliable, round-the-clock service? On the Internet, customers expect 24-hour, seven-day-a-week reliability. Recall the nightmare caused by the denial of service attacks that crashed computers at Ebay, Yahoo and ETrade. A company could lose hundreds, even thousands, of dollars per minute. One's technology and organization also must be able to meet the demands of success. Success on the Internet can be almost as frightening as failure. For example, the Victoria's Secret Web site crashed during its first live Web-cast fashion show because of the high levels of Web traffic. Without scalability--the ability to deal with heavy traffic--success can create failure.