Some technology trends are just that: trends. Others have the potential to change the landscape of the IT industry landscape. A deep review and understanding of XaaS (“Anything as a Service”) puts the practice on a parallel with similar industry sea changes of the past, like the PC movement of the 80s, the web movement of the 90s, and the sourcing movement in the 00s. Here are our thoughts on what the best practices are for CIOs moving forward with XaaS implementation:
- Review current business processes with a critical eye: Whenever a CIO embarks on replacing any major platform, the first caution is not to recreate what already exists into another system, unless the business is completely satisfied with the current platform which quickly begs the question; why move? Assuming there is a need to move because the existing platform is complex, not scaling appropriately, doesn’t support current compliance requirements, lacking modern security
capabilities, costing too much to maintain, or any other similar reason, the first step should be to review what functions are being supported, what value is behind these functions, and are these functions generic to the industry.
- Define value add processes and align to benefit targets: It is important to define value-add processes and take the step to align benefit targets to each of these processes. This analysis will need to start with a top-level agreement between CIO and COO on value benefits, cost of non-standard process, and success metrics before moving into discussions and process planning.
- Implement Rent vs Buy vs Build model: A very old question that is outlined in just about every IT strategy is the philosophy direction of Buy versus Build. XaaS adds a new dimension of whether the function or service should be rented? In other words, can the company pay per user, pay per customer or pay per policy instead of making the significant investment, to buy or build a platform?
- Prepare for organizational shift, not just technology shift: There is clearly a technology shift in moving to XaaS which includes all the challenges and opportunities with implementing a new platform. One aspect that isn’t as apparent is the need to make an organizational shift from a focus on development and application maintenance to vendor and product management. Specific consideration might include QA focus more on regression testing using business use cases instead of feature testing focus, a shift from focus on intra data center design to inter data center design, and architecture with greater focus on data, data management instead of interconnecting applications within data center.
- Shift primary focus to data and analytics capabilities: Many IT shops spend most their time and resource maintaining, developing, and servicing existing platforms, which leaves little ability to address the huge data frontier. By fully taking advantage of XaaS, IT shops can reallocate resources to focus on unleashing the power of data into the whole enterprise.
Lessons learned and experience from previous sea changes lead us to review XaaS as part of the IT strategy roadmap. XaaS is not simply a new technology but rather a clear move and opportunity that requires a full assimilation into IT shops. At a minimum, adopting XaaS should create the opportunity to bring IT and business teams closer together.
For more on this topic, see my recent CIO Checklist report: http://novarica.com/best-practices-for-xaas-strategy/
2017 has barely begun and the 2016 trend towards core system consolidation in the insurance industry is showing signs of going strong for another year. Duck Creek’s recently announced acquisition of Yodil comes as no surprise, as it both continues the willingness by Duck Creek to invest in broadening the scope of its offering as well as a growing focus on data and business intelligence across the industry as a whole.
This is another example of a multi-year trend towards consolidation in the P&C core system space, a direct response to insurer preferences for suite providers as opposed to best-of-breed. Even when insurers do seek out standalone components, they show a strong inclination towards vendors who will be able to provide additional components at a later date. Over the course of their history, Duck Creek has continued to grow their offering to satisfy more of an insurer’s technology stack, both through development and acquisition.
What’s notable here is that Yodil isn’t what the industry has considered standard insurer core component like claims or billing, but instead is a business intelligence and data management offering. This move by Duck Creek is likely at least partially in response to Guidewire’s multiple acquisitions of data warehouse and business intelligence solutions, with EagleEye (now Guidewire Predictive Analytics) the most recent example. It’s safe to say that BI and data warehousing can now be considered a core part of the insurance suite just like any other business process focused system. Insurers are increasingly budgeting more money towards the data arena, so other suite vendors will need to follow up with their own competitive BI and warehousing offerings either through development or M&A.
Another day, another suite vendor buys another small independent component vendor. This time, Guidewire bought FirstBest Systems. The Age of Suites is certainly upon us, and the suite vendors are taking their cue from Pokemon Go. Gotta catch’em all!
As we wrote in June, there are three major trends driving M&A in insurance enterprise software these days: verticalization, suites, and portfolios.
For insurers who rely on systems from independent software vendors, it’s time to think about the inevitable. What would it mean for your favorite vendor to get rolled in to a suite or a portfolio?
Back in 2008, we wrote an executive brief on this topic called What to Expect when You’re Expecting Your Core Systems Vendor to Be Acquired. We’ve updated it and republished it today.
Greetings from IASA!
Being here at the largest tradeshow for insurance enterprise software vendors is a nice backdrop to discuss this morning’s announcement that Insurity is acquiring Tropics, and the third major trend in insurance software M&A that this latest acquisition highlights.
We’ve written before about verticalization and the importance of suites. Today’s announcement is a good example of the third trend, portfolios.
A Portfolio strategy means maintaining a portfolio of separate core systems or suites that are designed to serve different niche markets. In a portfolio strategy, a company maintains multiple product lines to support different customer profiles and serve different market segments. This contrasts with a typical tech M&A model where acquired products are absorbed into the buyers’ main offering suite, in some cases undergoing an extensive re-architecting.
A Portfolio strategy can work well in a diverse marketplace like the insurance industry, where different buyers can have very different needs. In addition, maintaining a portfolio of parallel products or suites can be easier than consolidating into a single product or suite that meets all buyers’ needs.
Novarica’s team comments on recent insurance and technology news
The VC arms of Liberty Mutual and the XL Group were part of a $3.2M investment round in Notion, a company that makes home-monitoring sensors.
Novarica comment by Tom Benton, VP of Research and Consulting: “Startups like Notion are seeing the insurance market as one with low barriers for innovation but high potential for funding and market growth. As more fintech and insurtech companies develop solutions with application for traditional insurance processes, carriers should monitor insurtech developments, evaluate how to apply these new solutions, engage with startups via accelerators and VC funds and transform internal operations to be prepared to meet the challenges of future insurtech disruption.”
The SEC is also looking at a new set of rules that will raise the investment advice standards for registered reps while also authorizing non-governmental advisor examinations.
Novarica comment by Rob McIsaac, SVP of Research and Consulting: “The regulatory environment that carriers will face in the future continues to evolve, driven partly by continued reaction to some aspects of the environment that contributed to the financial crisis of 2008. As we’ve shared in reports earlier this year, the DOL regulations implemented earlier this year will have a meaningful impact on IT investment plans for annuity carriers and the distributors who sell both variable and indexed products. The potential SEC regulations will continue to evolve into 2017 and beyond, but may be an important item for carriers and distributors alike to incorporate into their intermediate term planning.”
Duck Creek Technologies has acquired AgencyPort.
Novarica comment by Matthew Josefowicz, President/CEO: “With nearly all core systems vendors offering a broad range of increasingly adequate components that can be installed with or without the core administration system, it becomes harder for insurers to make a compelling case to mix-and-match solutions from different vendors in order to fill out their application portfolios… We believe that suite providers are likely to continue to snap up smaller component providers in order to provide clients with a full menu of pre-integrated components that best meet their clients’ evolving needs.” More from Matt in this recent blog post.
CoverHound is launching Cyberpolicy.com, a new online brand for cyber insurance.
Novarica comment by Mitch Wein, VP of Research and Consulting: “CoverHound is attempting to make buying cyberliability insurance easier for small businesses, following in the steps of other direct sellers of small business insurance, by focusing on simplifying the product and buying process. The other interesting innovation here is shifting the underwriting from the buying entity to their security vendor, which reduces the cost to evaluate individual risks.”
In April, we wrote about the reverticalization of the insurance software market. This morning’s announcement of Duck Creek’s acquisition of AgencyPort is another data point in a related trend: the twilight of the independent component solution vendor and the dawning of the age of suites.
In our latest P&C Policy Administration Systems report, the majority of solutions now offer not just policy admin and rating, but also billing, claims, and portal components. More than half also have at least some business intelligence components as part of the suite.
With nearly all core systems vendors offering a broad range of increasingly adequate components that can be installed with or without the core administration system, it becomes harder for insurers to make a compelling case to mix-and-match solutions from different vendors in order to fill out their application portfolios. The core suite provider is increasingly the first call for additional needs. Insurers tend to look to other providers only if their core suite provider doesn’t have a strong enough offering.
We believe that suite providers are likely to continue to snap up smaller component providers in order to provide clients with a full menu of pre-integrated components that best meet their clients’ evolving needs.
This week’s announcement of Accenture’s spin-off of Duck Creek Technologies to a joint venture with a private equity firm underscores a trend we’ve seen in the insurance enterprise software and services market — increased verticalization.
When we first started tracking M&A in this space nearly a decade ago, we focused significant attention on the tech giants like IBM, MSFT, ORCL, and SAP, pictured on the left of our 2015Q2 market view below, as well as the financial investors, pictured on the right.
Source: Insurance Software M&A Update 2015 Q2
While financial investors have gotten much more active in this space in the last five years (lured no doubt by the successful Guidewire and Majesco IPOs), the tech giants are no longer much of a factor. They seem to be focusing much more on their horizontal strengths like cloud and data analytics.
Why is this happening? Well, insurance enterprise technology is not like general enterprise technology. It has a distinctive and closely-connected customer community that values vertical expertise and relationships above all, it requires maintaining a network of partnerships or a comprehensive set of vertical services, and has a business rhythm and sales process that rarely aligns with that of horizontal enterprise technology companies.
Insurance technology companies have been most successful on their own, and frequently struggle to maintain relevance when they are swallowed up by larger companies with broader markets. Right now, most of the M&A activity in this space is taking place among the vertical insurance software providers themselves. We expect this to continue for the foreseeable future.
Recently, Chuck, Thuy and I attended the IASA Boot Camp in Hilton Head Island, SC. The event was started a few years ago by IASA to provide vendors with education and training on the industry, as well as networking and discussing IASA’s events and opportunities. This year’s sessions focused on learning more about how to better engage insurers and understanding their processes for vendor selection and solution purchase decisions. I had the opportunity to speak to the attendees about the challenges facing small carrier technology leaders.
Smaller insurers, typically with less than 25 IT staff and with net premium in the low $100M’s, face the same challenges as their larger peers: modernizing aging core systems, improving customer experience and finding ways to better leverage analytics. These and other concerns are more difficult for smaller carriers since they have fewer resources to dedicate to solutions. As vendors have matured their products and implementations in recent years, they are looking for ways to better meet the needs of smaller insurers.
The Boot Camp also featured presentations on how carriers make purchasing decisions, and on the second day there were lively roundtable discussions on topics that included RFI (Request for Information) and POC (Proof of Concept) processes, and how to better approach the sales process, including demos. I was part of an interesting session that included consultants that have coordinated RFI and POC processes, including me at Novarica, and vendors who have been through various processes from carrier-led to consultant-led. The key takeaway was that frequent and focused communication plays a key role in the success of the process, in particular when the process is used to prepare both vendor and carrier for a partnering relationship.
If you’re interested in learning more about our work with smaller insurers, please feel free to contact me directly
Policy administration system replacement and evaluation activity is at an all-time high across the industry. Across both life/annuity and property/casualty, policy administration systems vendors are offering suites that include not just traditional policy and rating functions, but billing, claims, portals, documents, and business intelligence capabilities.
Yesterday, we published our 2016 Novarica Market Navigator on P/C PAS solutions (complementing the LHA edition published last month). This report covers more than 50 vendor solutions, with individual profiles averaging more 10 pages, providing detailed information on the functionality of all of the sub-components on the system. These reports also include single-page executive summaries for each vendor.
Together, they provide more than 900 pages of research on these important vendors. Jeff Goldberg and Tom Benton will review and discuss this research in a webinar on Wednesday at noon.
Large strategic projects like policy administration system replacement highlight the importance of corporate governance when it comes to technology strategy. According to our recent research, 89% of insurer CIOs say their board members don’t know the right questions to ask about technology, and end up overfocusing on risks rather than opportunities. Frank Petersmark and I will discuss this on a webinar on March 28.
Life and retirement board members will have a lot to think about as the new DOL regulations take effect, requiring sellers of retirement products to act as buyer fiduciaries, and completely disrupting distribution in this marketplace. Several large insurers have cited this change as the reason for divesting their distribution arms, and more change is afoot. Rob McIsaac has been discussing this with our annuity and retirement Council members, and shares his thoughts in a new executive brief.
Over the past few years, I’ve worked with many insurers on core policy administration vendor selection, and I’m excited to have joined a team with so much existing experience in this area.
While most selection processes focus heavily on features, configuration tools, architecture and implementation methodology, it is equally important to understand the vendor’s upgrade process and history. Since business needs and technology continue to change rapidly, a key selection factor for a vendor partner is their ability to evolve to support tomorrow’s needs, and not just today’s.
One predictor of the future is the vendor’s record for helping customers migrate to newer versions of their software. The decision to upgrade can be impacted by factors outside the control of the solution provider such as:
- Business priorities like entering new states, deploying new products or an acquisition
- Budget constraints due to poor underwriting results
- Complexity of multi-year implementation of business transformation projects
Regardless of these external factors, upgrades are most likely to be dependent on the vendor itself. In Novarica’s most recent Property/Casualty PAS Market Navigator report, one key difference that emerged between solution providers was the percentage of current clients on versions of systems that were three years old or older. The reasons for these vendor solution differences should be investigated and assessed as part of the software evaluation process. Prospective clients should consider the following:
- Value of roadmap items. Does the vendor’s solution roadmap suggest enough new capabilities or improvements with each upgrade to warrant implementation? Well-architected and mature systems may have much of the desired functionality and integration capabilities such that upgrading becomes less important. Even if this is the case, this difference is still relevant due to changes in infrastructure components and the risk of technological obsolescence. Ease in upgrading is more critical if a vendor is catching up or building out new competitive capabilities.
- Solution provider release strategy. Some solution providers incorporate all minor releases into the scope of their implementation projects. Others hold back release updates until the system is fully implemented. What is the impact of delaying the incorporation of new functionality during the implementation? Competitors who have already implemented a new system may be leveraging those new roadmap features before you complete your initial implementation.
- Velocity of change. Frequent and material releases will drive a higher need for related regression testing capabilities and possible infrastructure upgrades. How will your organization respond to those demands? How will your QA organization manage release (regression) testing along with functionality testing?
- Upgrade accelerators. Does the solution provider offer adequate guidance regarding how to configure and manage the system to facilitate future upgrades? Do they have the tools and a proven methodology to make this process easier and less painful?
- Upgrade barriers. Potential clients should ask longer term clients either why they haven’t upgraded versions in several years or conversely, what did it take to implement the most recent upgrade. Project team size, duration, challenges and available assistance should be understood. While it is always useful to talk to new clients about methodology, new features and configuration tools, existing clients should also be contacted.
- Impact of configuration upgrades. If solution providers have improvements to their configuration tools in their roadmaps, be sure to ask if products implemented in prior versions will automatically roll forward or if a conversion effort is required. You may be surprised by the answer.
- Value of more frequent upgrades in a managed service agreement. An additional consideration is whether or not you will get earlier benefits realization from a managed service agreement. SaaS installations tend to be on more current versions of the software. If your organization does not have a disciplined program for upgrading software components, you may benefit from a SaaS implementation.
- Selection criteria weights. Given all that you learned by considering the prior seven items, should your selection criteria weighting be altered? Does it give enough weight to differences in upgradeability?
No one wants to be buying a system that will become out of date and require a large scale replacement project in the near future. One way to avoid this is to purchase a system from a solution provider that invests in the future and has a clear and cost effective methodology for managing software upgrades.
Please don’t hesitate to contact me at email@example.com to learn more about our policy administration and other core system vendor selection services. You can also check out: