Insurance executives are realizing that digital transformation is critical to achieving long-term financial objectives and remaining competitive in the ever-changing insurance marketplace. Yet the decision to implement new technology should never be taken lightly. For many, it will be an expensive and risky endeavor that takes multiple years to complete, leaving project teams burned out.
If the idea of implementing a new solution doesn’t create serious anxiety and apprehension, chances are you’re one of the lucky few who haven’t experienced the pain of a multi-year implementation going sideways. All it takes is a few customer references or a quick google search to find horror stories of projects that took twice as long and 10x the budget to complete–astounding numbers considering many of these projects end up in the millions, if not tens of millions of dollars by the time they are finished. Yet we aren’t surprised by these numbers. We’ve come to expect that project costs, timelines, and deliverables will end up higher than initially discussed. Somewhere along the way, this become the norm, which begs the question…
Why have we accepted this as the status quo?
Let’s first unpack what the status quo is. To do this, we need to understand two key things:
- The Financial Investment is Monumental – If you’re a provider somewhere between $10M and $1B in DWP (Direct Written Premium), and you’ve evaluated a core system provider, you know that the cost associated with purchasing a new solution is anywhere between $250k and $5M in annual subscription costs. Stacked on top of this, are professional service costs that range from $500k to $5M, which eventually compound themselves into a $1M to $10M investment once the project is completed. Both costs require significant consideration from a business, as they become formidable OPEX and CAPEX line items in the budget.
- The Relationship Between Time and Complexity is a Close One – Implementing a new core system is a complex project that involves data integrations, configuration of workflows, and the standardization of business processes. The more complex you make this exercise, either through extensive customization of a new solution or through poor project planning, the more time the project will take – the concept of diminishing returns comes into play here. Where do you draw the line? In a highly regulated industry, like insurance, the competitive advantage is baked into the nuance of business process, there-by requiring ample customization (ergo, a longer implementation) to maintain this strategic advantage. This means extra hours and a significant change management exercise for implementation teams.
As a project’s cost increases, so will the complexity of execution. Simply put, software providers will tailor, customize, and develop solutions for any customer willing to pay the price for doing so. As an executive, your appetite for risk decreases as costs increase, which means an organization’s desire for new and innovative process decreases as project costs climb – there is certainty in the status quo. For core platform providers, this has uniquely positioned their business as custom solution providers that can deliver purpose-built solutions to those willing to pay, and more importantly, those willing to wait.
Over the last 15 years, core system providers have scaled their business to accommodate this phenomenon. For providers operating in the Tier 1 and 2 space, where annual contract costs for a core system are roughly 1% of their DWP, the business model works. As solution providers move down market, this model begins to fall apart. Premium volume and project complexity are not correlated – the work required to implement a provider with $10M DWP isn’t much different that the work required to implement a provider with $100M in DWP.
Consequently, as up-market providers continue to accept the status quo and reap the rewards of digital transformation, smaller niche providers are priced out of market.