Wipro Makes It Interesting

While some are still wringing their hands about Satyam, Wipro has announced that it has developed and will market a software-based solution called Insurance Claims Analytics (ICA).  This business intelligence solution is designed for P&C carriers, and is expected to be followed by other solutions for the insurance market.  This move, of course, takes Wipro beyond its bread-and-butter business of providing people to execute processes and into the field of providing proprietary technology.

Wipro is not the first Indian outsourcing company to take such a tack, nor even the first to do it in insurance.  That distinction probably goes to Majesco Mastek whose chairman, Sudhakar Ram, formulated and began executing this strategy several years ago.  He believed that proprietary software was an important weapon to add to his competitive arsenal.  Wipro is a far larger company, however, and its move in this direction sets up some interesting possibilities.

It’s natural that Indian firms would take advantage of the business process knowledge they’ve gained from the work they’ve been doing for insurers.  To leverage the domain expertise they’ve gained as a result of aggressively growing their operations is a wise move on their part.  On the other hand, it will be interesting to see how other competitors respond – will everyone step up their game?  The insurance industry should benefit from the heightened competition that will occur.

It will also be interesting to see if the Indian firms are willing to develop software that reduces process steps, automates processes, and, as a consequence, reduces the headcounts required to execute an insurer’s business processes.  After all, the Indian outsourcers have grown their revenues by “adding seats.”  If this new revenue stream of proprietary software reduces seats, will the owners be as aggressive in pushing it?  It’s not easy for any company to alter its business model or do anything that might cannibalize its core business. 

Of course, it’s much too early in the game to wonder whether an analytics solution like ICA is going surface all these issues.  But if the major Indian outsourcers are going this direction of converting their ever-increasing domain expertise to technology solutions, we’ll see some of the answers in the next few years.

Recent Signs of IT Spending for Insurance Remain Encouraging

Sungard, one of the leading technology providers for financial services, recently reported 11% organic growth for Q4.  Meanwhile, the four major bank technology providers (Fiserv, Fidelity National, Metavante, and Jack Henry) all reported good quarters.  They struggled to varying degrees with licensed software sales, but other components of revenue are holding up well.  Moreover, the shortfall in license revenues may be deferrals rather than revenue that will never show up.  These vendors largely serve the community bank market in the United States and so the woes of the largest banks do not impact them severely.

Gartner is reporting that global IT spending for financial services will be off 70 basis points in 2009 from last year’s spend.  However, this may simply reflect that things in the U.S., bad as they are, are better than they are elsewhere in the world.  Returning again to bank vendors, Temenos, one of the leading bank technology vendors outside the U.S., reported year-over-year decline in Q4 revenues and declined to give any guidance for 2009 earnings, citing market uncertainty.  When contrasted with the U.S. bank technology vendors mentioned above, it points again to greater weakness outside the U.S. markets. 

The assumption in my thinking, of course, is that as goes financial services, so goes its components (banking, insurance, capital markets).  Health, which to some extent is a component of insurance, is projected by Gartner to show a 2.2% increase in IT spending for 2009. 

All this published evidence is consistent with all the anecdotal evidence I’ve encountered.  That anecdotal evidence is that while everyone speaks cautiously, they all report a continued interest IT investments for financial services including insurance.  I’ve heard of no major shutdowns of IT spending.  More thoughtful spending, yes; but no mindless moratoriums.  Therefore, in spite of the doom and gloom pouring forth there’s ample reason for cautious optimism.  The insurance industry needs technology – perhaps even more than ever in difficult economic times.

The Insurance Technology Industry Is Growing

Berkery Noyes, a New York-based M&A Advisory firm, reported this week on Software M&A activity for 2008 across all vertical industries and, lo and behold, the two biggest transactions were insurance-related.  First, there was the proposed acquisition of Mitchell International by CCC Information Services (still awaiting approval of the FTC) for $1.4B.  Second was the private equity acquisition of TriZetto by Apax Partners for $1.26B.  This was during a time when activity in the broader financial services vertical was down.  (Click here to the see the report; Click here to see coverage in Insurance Networking News.)

These transactions demonstrate the increasing scale of vendor size in insurance technology and the industry consolidation that is underway.  Granted, insurance technology is still a far less mature field than banking technology where very large vendors dominate the landscape.  Moreover, the insurance technology consolidation that we see is greater on the claims side of the business than on policy administration.  This is because state regulations allow the former more easily than the latter (far more state-by-state regulation differences exist on the underwriting side than on the claims side).  All three of the vendors mentioned above serve the claims side of the business (CCC and Mitchell for P&C, and Trizetto for Health).

There are a large number of vendors in insurance technology.  The Vendor Directory on www.InnovationInInsurance.com lists over 500.  That gives a lot of raw material for consolidation.  Moreover, there are yet more firms to be formed simply because there are so many functions in insurance that beg automation.  I’m not suggesting that you will ever remove the need for people making decisions in insurance, but I am suggesting that there is still a lot of paper-pushing going on.  Hence, insurance is one of the most fertile vertical fields for information technology growth.

Populist Politics Obscure Facts and Reason

For the last few years, visible populists like Lou Dobbs have sought to stigmatize any company who outsources.  The populist argument goes that such companies are “exporting U.S. jobs to other nations” such as India.  If that was the only story you heard, you’d think such companies were bent on ruining America just to make more money for themselves.  You’d also think that multitudes of American workers, including IT professionals in the insurance industry, were losing their jobs week after week to offshore firms. 

Fortunately, there are plenty of facts which refute such specious arguments.  A notable story filled with such facts turns up recently in Insurance & Technology magazine where they describe how one of the largest insurance claims processors in the U.S. has had the dickens of a time finding enough IT workers – so much so that they’ve now partnered with IBM and a major university to try to get more young people interested in pursuing the field  (click here for the article). How can this be if outsourcing decisions have idled multitudes of U.S. IT workers?

Blue Cross Blue Shield of South Carolina (BCBSSC) has a million customers but also is a major behind-the-scenes processor for other Blue plans and for several programs of the U.S. government.  In fact, there are more insurance claims processed by this Columbia, SC-based firm than by any other firm in the country.  Thus BCBSSC is one of the major employers of IT talent in the insurance industry and would be able to speak more credibly than Lou Dobbs about whether there is a surplus or shortage of IT workers.