IT Spending for Insurance Holding Up…So Far

As economic shock waves continue to reverberate throughout the economy, we all keep wondering what might happen to IT spending in the insurance industry.  The latest indications from analyst firms like Celent, TowerGroup, Gartner and others are all – believe it or not – encouraging. 

These reports are encouraging because while they certainly indicate some softening in growth rates in spending for 2009 compared to 2008, they generally don’t indicate an actual decline in spending.  For many people, that’s very good news.  The broad consensus seems to be that spending will be relatively steady, albeit with altered priorities.

Altered priorities is indeed the second common theme of these reports.  Insurers are not expected to spend money exactly the same way they did last year.  Emphases vary by analyst firm.  Here’s a scan of what they’ve been saying recently:

Priorities Will Shift, But Insurers 2009 IT Spending Remains Healthy According to Insurance & Technology Review of Analysts 

Insurers Face “Unprecedented Financial Pressure” But Will Still Spend on IT According to TowerGroup

Insurance IT Spending Will Slow in the Short Term But a General Contraction Will be Avoided According to Research and Markets

IT Spending for Insurer Data-Oriented Projects Looks to be Holding Up According to Celent

Show Us The Money!

Although there are not enough data points yet to call it a trend, we may be seeing the beginning of an altogether expected scenario given the severe recessionary climate in which we find ourselves:  insurers more willing to outsource because they not only need to cut costs, but also need to generate capital.  That is, insurers looking for upfront cash from outsourcing deals with increased interest.  The case of which I speak was reported in today’s The Economic Times of India and includes the following quote:

“One large insurance company, currently discussing a contract, demands over $100 million upfront payment as part of the savings promised by a vendor,” said a top executive of a leading tech firm who did not wish to be named. “We find more telecom companies discussing this as part of the deal currently,” he added.

(Click here for the full article)

It stands to reason that in this environment where “cash is king” has an intensified meaning, that insurers would look for such deals.  Whether they can get them is another story.  But here would be the good news: if insurers are becoming more open-minded about outsourcing because of benefits such as these. 

If vendors are only facing increased pressure on the deal terms for a deal flow they already have, then that could be downright discouraging.  But if yielding such deal terms means a vendor will receive a significantly increased number of deals, or significantly increased size of deals – then that makes for an interesting environment to enter.  Let’s give it more time and see what happens.

Customer Sat Is Not Easily Measured

Most of the insurance technology industry sells business-to-business (B2B), not business-to-consumer (B2C).  Since the customer is a business and not an individual, customer satisfaction is a plural not a single measurement.  More specifically, there is seldom one person at the customer who represents the totality of what the customer thinks of the product or service being provided.

This comes to mind because I was reading Donald Light’s recent post on the Celent Insurance Blog in which he laments a vendor not knowing the mind of any customer given as a reference.  He cites the example of one reference he called who gave such a negative opinion that Donald was left to wonder:

How could the vendor not know, in general, what the reference is thinking–and knowing that, just give another reference? 

It’s a reasonable question.  But this leads me to think of the underlying and even more important issue than references – customer satisfaction.  It’s hard to measure in B2B situations because there are many opinions that matter.  There’s the opinion of the customer’s project manager charged with getting the product or service installed and operational.  There’s the opinion of the users who actually operate the system or service to be installed.  Then there’s the opinion of those who use the reports and other outputs of the system or service (and they are sometimes different than the users).  And, of course, there is the executive whose budgetary approval paid for everything – that opinion matters, too, eh?

It is no easy task to monitor and measure all these opinions.  Yet, they are all important.  Although it’s a more difficult challenge, I think insurance technology vendors should make sure they study customer satisfaction from all customer perspectives that matter.  Only then, can you be sure you know what you need to know.  Building a product or service and not building along with it an effective system for hearing the voice of the customer at every level is missing the best opportunity for further value creation.  This is because customer satisfaction monitoring not only tells you how you have done (in the past), it also tells you how you can do (in the future).  And that can lead to even more customers.

If you manage customer sat effectively, then managing references is simple:  you just say that people can call any of your customers and ask what they think (not just some select list of references that you’ve pre-approved because you know they’ll say good things).  Sure it’s  a gutsy move, but it’s far more persuasive than any other form of customer reference.

Beauty Contests For Vendors Abound

You may have seen on www.InnovationInInsurance.com notice about the Celent/Insurance Networking News VIP (Vanguards in Insurance Practices) Awards Program.  If not, you can participate in the survey at this link.  Just prior to that, there was the Insurer’s Choice survey (now closed) conducted by Financial Insights/TechDecisions (link here).  I guess this could remind you of Chicago-style voting (i.e. ”Vote early, and vote often”). 

Some people may take issue with multiple beauty contests like this, but I think it’s good for the industry.  Anything that gets vendors recognized and gives visibility to their offerings is a good thing.  Of course, it makes for an interesting situation when both awards are to be presented at the ACORD/LOMA conference in May (Imagine the Miss America and Miss USA pageants being held at the same time in the same building). 

Kudos to the research firms and the trade periodicals investing in these surveys.  Vendors will spruce up for entry and everyone in the industry will have greater visibility to these vendors who are bringing the software, data, services, and outsoucing that are so important to the advancement of the insurance industry.

And may the best man win!  (In the spirit of gender equality, I decided to mix the metaphors.)

Insurance Outsourcers Finding Strong Support

This week brought announcements about two of the insurance industry’s larger outsourcers – Long Term Care Group (LTCG) and ZC Sterling (ZCS) – changing owners (news reports can be found at www.InnovationInInsurance.com).  LTCG was acquired by a financial buyer and ZCS by a strategic.  Details were limited but both deals appear to be good for all concerned, which is all the more encouraging when you consider the financial/economic climate in which we now find ourselves.

LTCG is by far the largest processor of long term care insurance in the U.S. with approximately 20% market share.  The company has 1,200 employees and provides its service to over 30 carriers, including 9 of the top 10 writers of long term care insurance.  Interestingly, LTCG will become part of a larger play by affiliation with a provider of long term care services which should create scale and synergies. 

ZCS is also a leader in its market, being the leading provider of force-placed property insurance in the U.S.  They are expected to generate about $425M in written premium in 2009 and $525M in the following year.  Having been acquired by a public company (QBE, Australia’s largest P&C insurer), ZCS’s sale price was disclosed at close to a billion dollars ($575M upfront with a two-year $325M earnout).

The common thread in these deals is that outsourcing, while so far somewhat limited in its insurance deployment, can be very successful.  Each of these companies operates in a specific niche where it can achieve not only economies of scale, but economies of scope as well.  They move up the experience curve by narrowing their focus to a specific subject which they can master.  Contrast this approach with the one-size-fits-all historic outsourcing models used in other industries.  The former model succeeds while the latter model has struggled.

The ingredients for success in companies like LTCG and ZCS include proprietary technology, a strong and focused management team, and a workforce of domain experts.  When I say “workforce of domain experts” I’m not suggesting that every person needs know everything about the topic.  As a team, however, they need to collectively represent strong and deep knowledge of the business being served.  This begins with the leaders who must be dedicated enough to the success of their customers that they commit to truly understanding the customers’ business. 

LTCG and ZCS are both strong companies and should continue to grow with their new owners.  The insurance industry can grow more successful outsourcers by following the paths cut by these two firms.  That will mean good results for customers and for investors.