Explaining the Hiatus

Wondering why I haven’t posted to this blog in a while?  I’ve been working with the Moore Business School of the University of South Carolina (USC) this summer to enable them to assume ownership and operation of Innovation In Insurance – the web site of which this blog is a part, a site focused on improving the insurance experience for consumers and businesses all over the world by dedicating itself  to all things insurance technology (software, services, data, outsourcing). 

The most interesting and exciting aspect of this transition and new phase is that Moore School students will operate the site.  In fact, the transition has already begun with two students and a professor becoming trained and doing most of the site’s work this summer.  Plans for the fall semester call for ten students to comprise the operational team.

The Moore School of USC is the logical institution to take up the charter of Innovation In Insurance.  Its graduates have been actively involved in making Columbia, South Carolina a center of innovation in insurance for over 100 years.  The file cabinet was invented here in 1898, the industry’s first fully-integrated online policy management system was launched here in 1972, and today more health insurance claims are processed here than in other city in the country – perhaps the world.  (For more on this history, see article in middle of this page.)

I have loved launching and managing this site, but its demands have outstripped my semi-retired time resources.  I had a decision to make, and allowing it to become a research program of a world-renowned business business school and research university (for 20 consecutive years its international MBA program has been ranked number 1 or 2 by U.S. News and World Report; more on its rankings) was by far the most attractive alternative to me.  I believe the site can become the nucleus of a host of research and innovation activities involving not just students, but faculty, administration, graduates, and, of course, the broader industry and its community.  The scope of the site’s interest will continue to be worldwide (not merely U.S.) and this fits perfectly with the Moore School’s reputation.

We’ve been working on installing leadership for the effort.  Managing Director of the site will be Jeff Thompson, adjunct professor at the Moore School.  Executive Director is Ernie Csiszar, Special Assistant to the Dean of the Moore School and former president of the National Association of Insurance Commissioners.  As Executive Director, Csiszar will also co-chair the site’s Board of Directors.  The other co-chair, representing the business community, is Eddie Jones, Senior Vice President of Marketing and Communications for StoneRiver, formerly the Insurance Group at Fiserv.  In addition to its Board of Directors, the site will also have a Board of Advisors (executives who give guidance to students about industry needs for the site) and a Board of Contributors (organizations that donate time and expertise to help students operate and enhance the site).  Membership for these  boards is being secured and announcements regarding the individuals involved will be made over time.

Official announcement of all this will be made by the Moore School, probably in September (if you’re with a news organization, please await that announcement before publishing this news – thanks).  I am very excited about  how Moore School students will grow this site to better serve the insurance technology industry.  If you’ve appreciated the site and would like to follow its progress as it reaches for new levels, be sure you are signed up for its news update e-mail sent at the end of each week by clicking here.

Digital Businesses Are More Temporary Than Most

Perhaps you’ve heard that Microsoft is pulling the plug on Encarta.  Seems the Internet (most specifically, Wikipedia) has made Encarta obsolete – the same way that Encarta made print encyclopedia obsolete in the 90’s.  Only difference was that the print versions did well for hundreds of years while Encarta did well less than a tenth of that!  This year, all physical Encarta products will be pulled from store shelves and all Encarta web sites will be closed down.  You can’t have a more definitive death than that.   

When Microsoft was being accused of violating antitrust law, one of Bill Gates’ defenses was that monopolies couldn’t truly exist in the digital realm because there’s always some new technology that can quickly undermine it.  He didn’t get many believers at the time, but even while he was speaking Google was on its way to making Gates and Microsoft look like buggy whip makers.  The swift rise and swift fall of Encarta is a sign of the digital times.

If the insurance industry is going to fully benefit from information technology, it must recognize that it will be harder and harder to exploit rapidly evolving technologies without relying more heavily on a strong set of suppliers: software companies, outsourcing companies, and the like.  A do-it-yourself mentality for insurance company IT departments is not a reasonable option for any carrier who wants to take advantage of the ever-increasing – and ever-changing – advantages of today’s digital technologies.  

It’s hard enough to manage and insurance enterprise, without also trying to keep up with changes that even brains like Bill Gates can’t stay on top of. 

    

Will No One Restrain the AIG Lynching Mob?

Apparently, the most pressing economic issue of the last few days is that AIG is paying out bonuses.  We’re told by the news media that the public is highly outraged.  Politicians are competing with each other to see who can be the most offended by it.  The president has ordered the Secretary of the Treasury to pursue every legal avenue to stop payment and Congress says it can enact a tax to confiscate 100% of those bonuses from the recipients.  Whoa!  We need leaders to restrain mobs, not egg them on.

Do I think AIG is justified in paying out bonuses?  I don’t know whether they are or not because I don’t know the particulars.  If a bonus is a contractual commitment and especially if it is owed to an employee who worked in a division of AIG completely unrelated to the need for government aid, then I don’t see how you can automatically rule it out.  When you start saying it’s okay for government to abrograte contracts between private citizens, you’re giving the politicians an awful lot of power. 

The purpose of a bonus is to make part of a person’s compensation contingent on what they do.  If the person fulfills his or her part, is it fair to unilaterally, without discussion, to deprive them of what they earned?  If I analyzed the specifics of each bonus payment I might be against them all, but how can I be against all of them if I have not analyzed the specifics of any of them?

I have a number of concerns about the AIG bailout – all of them more important than whether or not bonuses get paid.  The biggest one regards credit default swaps (CDS).  Since this was an unregulated market and parties entered into these contracts fully aware of the risk of default without government guarantee, then why are these parties being bailed out?  Nonetheless, I don’t pretend to have enough facts or intelligence to unravel the AIG bailout, much less how to get the economy growing again.  I have to trust that brighter minds with full-time dedication will do that.  But how can they if a mob mentality urges them to major on minors?  And they then succumb to that temptation?

Let’s put it this way, if AIG were allowed to recover all the bonuses paid since the bailout, and if it never paid out another bonus as long as it existed, how much better off would we be as a country?

Right now the country is very frustrated with our ecomomic plight, and rightfully so.  But if our leaders allow that frustration to be focused on peripheral issues and don’t help channel energy in the right direction, we’ll stay mired in the problems and postpone our turnaround.

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.

Satyam Is But One Apple

“One bad apple doesn’t spoil the whole bunch,” goes the old saying.  With the Satyam debacle on our minds, this is certainly an adage worth remembering.  Unfortunately, news accounts and opinion pieces are carrying notes like this:

Far beyond Satyam, it raised fears that similar problems might lurk in other Indian companies, particularly in its vaunted outsourcing industry.  – NY Times, January 8, 2009

Let’s hope that’s not the case.  How wise would it have been if, when Enron’s follies were revealed, Indian and other global investors decided that they should stop investing in and relying upon all oil and gas companies?  Or worse yet, if they had decided all American companies were, as a result, suspect?   

I can’t vouchsafe that no other Indian company will similarly fall – but neither can I do so for any other American company, or British, or French, or German or…

Those who know India only from a distance see all Indian outsourcers the same.  Those who know them more intimately, however, have always known there was a suspect culture at Satyam.  They were certainly never regarded as in the same league with the Big Three: Tata, Infosys, and Wipro.  Moreover, even among the second and third tier Indian outsourcers they were widely regarded as having an overly-aggressive culture – promising too fast, explaining too glibly.  While this was by no means proof that a billion-dollar shenanigan was going to take place, it did mean that sophisticated observers were not completely surprised by this outcome – just as many who knew the sharp-elbowed, predatory culture at Enron were not as shocked as the rest of the world at its ultimate fate. 

I have known and worked with Indians for over a decade and I love them as individuals and as a people.  They hold dear all the things that we Americans hold dear: life, liberty, and the pursuit of happiness (even though they’d use different words to describe those values).  Moreover, Indians are a Horatio Alger story for our times.  They pulled themselves up from poverty and are making themselves a world economic power.  A lot of the affinity between India and America perhaps owes to our common ancestry as outposts of the British empire and heirs of its finer ideals.  But even more of it owes, I think, to our common humanity and shared belief that honest hard work can make a better world.

If anyone wants to say that these Indian companies aren’t subject to sufficient scrutiny, then let him take a look at how well U.S. oversight agencies have done in the last few years (Fannie Mae has had more oversight than any other business on earth and how well has that worked out?).  And then consider that if you want to know why Satyam’s auditors didn’t catch this sooner, you can reach out to an office of theirs near you because you’ve probably heard of them: PriceWaterhouseCoopers.

Let us not paint India with a Satyam brush.  It’s not fair, and we wouldn’t want it done to us.

The Bad News About That Insurance BPO Wasn’t All Bad

It was Mark Twain who said, “Reports of my death have been greatly exaggerated” and Winston Churchill who said, “There is nothing so exhilerating as to be shot at without effect.”  I don’t know if either of these statements apply, but they both come to mind in the case of the MajescoMastek Insurance BPO operation. 

In my recent blog post,   Why Did An Insurance BPO Give Up?, I referenced an article (through www.InnovationInInsurance.com) published in India by The Hindu Business Line titled Mastek Closing Down BPO Practice.  The article gave all the reasons why the company was abandoning BPO.  As it turns out, however, the action described applied to their banking BPO business (which was the certainly the largest part) but not to their insurance BPO business.  Important detail, eh?  Well, probably more important to those of us in the insurance industry than to those in the Indian financial press. 

Through interactions with Erik Stockwell and Billy McCarter of MajescoMastek in the U.S., I learned that the U.S. BPO operations were unaffected by the action described in the article.  Erik is Senior Vice President and General Manager of MajescoMastek’s North American Life & Annuity Division while Billy is President of Property & Casualty.  The Life & Annuity Division has a small and growing BPO operation for new business, case management, and back-end policy servicing – the software platform for which is Vector (previously known as PALLM).  The P&C Division currently offers ASP solutions and says it could offer BPO if it “fits our strategy to be a recognized leader in enterprise solutions.”

Given the limited scale of these operations, I stand by all my musings in the previous blog post.  Nonetheless, I’m thrilled to correct the misimpression of the article that we have one less insurance BPO provider.  (Here’s where the Twain and Churchill quotes come to mind.)  Now, if we can just more insurance companies interested in outsourcing…

ACN v. GW: Why I Hope Guidewire Wins Against Accenture

Let me first say that the one exception to my wish is that if Guidewire has in fact infringed on Accenture’s patent or other property rights. If that’s the case, I hope Guidewire loses. I just don’t think there has been any infringement, nor do I know anyone else in the industry who thinks there has either. Do we bystanders have any way of knowing that for sure? No, and that’s why I state this potential exception.
Having stated my exception, let me also say that I do not favor Guidewire as a company over Accenture. I respect and admire both companies and I hope they both continue to enjoy success in the marketplace. And to sound a personal note, I know and greatly admire Vic Guyan, the Accenture partner who was largely responsible for their claims system and whose name is on the US Patent and Trademark Office paperwork as the lead Accenture person (see the front page of www.InnovationInInsurance.com for the link to the USPTO file). Although Vic is now retired and I seldom interact with him, I treasure my friendship with him. Vic is widely known for his keen intellect and his solid integrity. He has every right to a patent for his outstanding work, and Accenture has every right to protect it.

Why then do I – and many other people – hope that Guidewire wins? Because we 1) find it illogical that Guidewire would attempt to copy the Accenture work, and 2) an Accenture victory would supress innovation in our industry because firms – - especially smaller ones – would be discouraged from developing new systems where any larger firm held a patent. Let’s take these reasons one at a time.

First, it’s illogical that Guidewire would have copied Accenture’s invention. There would be no need to do so. Moreover, it would have stifled the creativity of the developers. There is so much need for automation of insurance business processes that you simply map the process, design the system, and start coding. Consulting someone else’s work just slows you down. My fear would be that someone versed in patent law but not in insurance claims would look at the two systems, see similarities, and conclude one was copying the other. However, the far more likely reason for the similarities would be that claims processes are claims processes and if you’re going to automate them with information technology there are common best practices. Put two teams of developers in separate rooms, tell them each to develop a claims, or some other insurance, system using state-of-the-art technology and the systems are going to look alike to some degree. I have no doubt that there are similarities between Accenture’s system and Guidewire’s; I just doubt that those similarities are the result of imitation.

Second, an Accenture victory would discourage innovation. We’d have a situation where large well-heeled companies would obtain patents and that would make those domains off-limits to conpanies with more limited resources. The way you usually protect yourself in court against an accusation of intellectual property theft is with “prior art.” But if you develop your system at the same time as, or after, the larger firm, you can’t have any art that is prior. Innovation is not the sole province of start-ups, but start-ups HAVE to innovate to become viable. If we discourage them from innovating, we discourage them altogether. It’s not healthy for the industry that rich companies get to cordon off whole areas – such as claims – because they have enough cash to procure patent exclusivity because the Patent Office doesn’t know enough about insurance to distinguish between a fundamental of insurance process and a unique way to automate it.

In summary, I believe innovation in our industry will be encouraged by a Guidewire victory and discouraged by an Accenture victory. We don’t need any company to have a monopoly on new claims systems…or any other insurance systems.

Who Wants to Help the CIO?

In their most recent blog, Deb Smallwood and Cindy Maike quote from their IBM-sponsored white paper, Insurance: Realizing the Full Potential of Change.  (E-mail dsmallwood@smallwoodmaike.com for a copy.)  In their writing, Smallwood and Maike state that’s it’s important for insurers to change…and that the business side of the carrier must lead that change while the technology side supports that leadership.  They then promote the use of Business Process Management (BPM) and Service Oriented Architecture (SOA) as enablers rather than technology, and as disciplines of effective change management.

This white paper makes me think about what an overwhelming challenge it is to be an insurance company CIO today.  Unless the carrier CEO is already proactively formulating clear strategy for the CIO to follow, the CIO must induce the CEO to do so (ever tried to convince your boss to do something he or she is not already doing?).  Then, the CIO must make sure his or her organization is educated on the proper use of BPM and SOA to execute that strategy (how many people in the organization thoroughly understand these concepts – in the same way?)…AND…integrate the myriad applications and systems that comprise today’s insurance company (is hodgepodge too strong a word?).  Consider that at least half the energy required by any new system is often the energy to integrate it into the spaghetti of home-grown and vendor-provided systems that is currently operating.  It’s exhausting just thinking about being an insurance company CIO.

This overwhelmed CIO provides a great opportunity for insurance technology vendors to be a part of the answer instead of part of the problem.  Think about your product or service not merely in terms of its features, functions, and benefits – but equally as much in terms of what it does for “the integration problem” (if we can call it that).  Maybe BPM/SOA provides a standard paradigm for addressing the integration issue that arises, to whatever degree, with the consideration of each new piece of software or component of outsourcing. 

I think when a carrier CIO sometimes resists what seems to be a no-brainer innovation of installing a vendor product, it may be because behind the scenes there’s an integration complication, or the CEO has not provided an overarching strategic context, or some other broader, background issue.  Maybe Smallwood and Maike are providing a better roadmap for vendors to support the CIO’s.