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More than just build or buy: software acquisition strategy is far more complex than a simple, two-option decision-making process.

Most of the articles in the "Shop Talk" series are concerned with various aspects of acquiring and implementing third-party vendor software. In other words, these articles assume the build/buy decision already has been made in favor of the buy option. However, the way we tend to characterize the choice oversimplifies the options available and creates a "false binary" where usually an either/or decision is not available or appropriate.

l would like to spend this column talking about some of the options available to a carrier that needs to decide how to acquire a new core system. Let's start by simplifying reality (we'll complicate it later) and offer four alternatives for acquiring software:

* Build: The carrier decides for some compelling reason (e.g., special requirements that are hard to find in a vendorwritten product, or scalability issues at very large carriers) the majority of the acquisition effort will be undertaken by a group of developers who will write and test a "one-off " system to meet the specific requirements of the carrier.

* Buy Best of Breed (configurable): The carrier decides (along with an increasing number of other carriers) to purchase major core system components, e.g., claims, policy, or billing, which are written on top of powerful toolkits and rules engines that allow for major system changes through rapid and relatively low-risk configuration.

* Buy Best of Breed (legacy): The carrier decides to purchase major core system components that are not written on top of "tools and rules" but that have mature functionality and "fit" the carrier's market requirements fairly well. Significant functional changes in this environment usually require extensive traditional "coding and testing," which is costly and time-consuming.

* Buy Integrated Package (legacy): The carrier decides buying an all-in-one core insurance application from a single vendor represents the best value proposition. An integrated package usually contains not only policy, billing, and claims functionality but also rating and print solutions. This is a popular option with small, budget-sensitive carriers but involves the legacy "coding and testing" issue in the event system changes are required.

Before we proceed, let's note a few important points about these options. The integrated package solutions are by definition legacy solutions. The new modern vendors of configurable software are building to a component-focused, architectural master plan. Their whole focus is to write the best point solution that does only what it needs to do but does it really well and also integrates easily to other needed components; for example, most modern policy administration systems do not provide rating or print solutions but integrate to third-party tools available in the market. These systems do, however, deal with the complexities of changes in the state/ line-of-business/regulatory Rubik's Cube infinitely better than their legacy counterparts (which do, by contrast, provide rating and print). Best-of-breed solutions, even legacy versions, generally provide better functionality than the integrated package but require integration among different vendor products and can create look-and-feel and usability issues across systems. Just as the buy integrated package option is most popular with small carriers, so the build option remains most common among either large carriers, which have the budget and, in some instances, the hubris to build software, or those specialty carriers that have a hard time getting functional satisfaction from third-party software.

Fewer carriers now build software for two reasons: First, the cost and risk of "bespoke development" is daunting; second, the vendors are doing such an effective job developing configurable software both large and specialty carriers are beginning to see configurable best-of-breed solutions as a functionally viable and far more cost-effective route than the build alternative. A major build project easily can cost three to five times more than purchasing and integrating best-of-breed components. Mind-boggling as it may sound to most of us, it is not unusual for the largest carriers to spend north of a hundred million dollars to build and deploy a policy administration system. And even then, this does not represent a "pure build" solution. If a carrier builds a policy administration system, what this usually means is it develops the insurance product repository logic and the life-cycle transactions that together support the definition and servicing of the carrier's policy types. These carriers do not build the rating engine; rather, they purchase and configure one--similarly with underwriting, workflow, document management, and imaging components. So, even a build is really a partial build with integrations to third-party vendor engines.

Generally then, at one end of our continuum we have building core systems and at the other end buying an integrated package. Building is expensive, risky, and time-consuming, but the specificity of the solution fits the carrier without compromise (assuming the system gets built). Buying an integrated solution is the least expensive, least risky, and fastest way to go but brings with it the poorest functional fit and often represents the lowest common denominator in terms of functionality. This latter option is the "suit for the average man," which doesn't really fit any one carrier. In between, we have the two flavors of best-of-breed solutions that cost less than the build option and more than the integrated package and provide less functional satisfaction than the build option but more than the integrated package. However, it does not appear to be the case these cost/risk and functionality/satisfaction parameters are necessarily proportional. This raises an interesting question, which is: Does one of these options provide a better risk/reward ratio than the others, and if so, which is it?

A few years ago, I was involved in an unscientific survey of about 25 carrier companies of various sizes. Our population mix included a couple of small regional carriers to a couple of multibillion-dollar carriers and wrote a complex mix of business types. Our task was to establish which of the acquisition strategies each was using in order to make some generalizations about how carriers were acquiring software. The survey indicated the rise of the modern best-of-breed vendors, mostly at the expense of the build and legacy best-of-breed options. One question we tried to get at with the respondents was to compare the perceived cost and risk of the system implementation with the perceived closeness of fit of the system solution--a qualitative risk/reward statement. What came through clearly was carriers that had implemented a configurable best-of-breed strategy felt they had gotten the biggest functional value for the cost and risk. These carriers overall felt they had acquired a system solution that was closely tailored to their functional requirements at a favorable price and risk point.

So, is the configurable best-of-breed option the best strategy? The answer is a resounding maybe. Systems that are relatively easy to configure and modify actually are very large and complex systems "under the hood." For the most part, the larger and more complex a system, the more performance sensitive it will be. And these large and complex systems have yet to prove their ability to scale to the largest carrier environments, especially for policy administration solutions, which are the most complex applications to build and deploy. So, the answer as to whether configurable best of breed is the best solution partly depends on the scale of the carrier's environment.

Moving on from the survey, one consistent finding is carriers, particularly the larger carriers, actually employ a combination of all of these acquisition strategies as circumstances dictate. So, a large carrier may purchase an integrated (and possibly outsourced) option to provide a point solution for a specific market niche, buy and configure a functional solution for claims or billing, but build a policy administration system. Such a diverse systems solution set, of course, may be the result of a designed acquisition strategy, or in the case of carriers that have grown by acquisition, it may simply be the aggregation of acquired carrier system solutions that have never been consolidated due to the cost and risk associated with such an undertaking.

There is no right acquisition strategy that works in all cases. The best acquisition strategy is situational, depending on the carrier profile, the business problem to be solved, and the practical constraints of the options available--a decision that certainly is more complex than the simple build or buy formulation we often talk about.

The content of "Shop Talk" is the responsibility of the author. Views and opinions are those of the author and do not necessarily represent those of Tech Decisions.

George Grieve is CEO of CastleBay Consulting. Previously a CIO and still an acting consultant, he has spent much of the past 25 years with property/casualty insurers, assisting them in the search, selection, negotiation, and implementation of mission-critical, core insurance processing systems. He can be reached at 512-329-2619.
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Title Annotation:Shop Talk
Author:Grieve, George
Publication:Tech Decisions
Date:Apr 1, 2009
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