Is It Finally Time to Buy Instead of Build?

What drives competitive advantage? Insurers will have different answers to this question, and the argument to build your own software is often based on one of:

  • Packaged systems do not match our in-house platforms;
  • We will develop something best suited to our needs;
  • Our team knows our business, and is cheaper than a packaged option;
  • Our market USP is inherent to the way we have developed our software.

But real competitive advantage is generally delivered through successful execution of a company’s strategic imperatives. Simply, each insurer must do something different or better than its competition. In the past, an insurer using packaged software was often at a distinct disadvantage in this regard. The rigid structure of software packages in the past forced insurers into processes that were, at best, marginally different from competitors using the same software. Many packages did not enable process at all, but were simply transaction data buckets. Changing these systems was often difficult and expensive – and upgrades were generally impossible. For an insurer looking to differentiate itself, it might have seemed logical to build customised software or to seek out lesser known software vendors. The insurer could then conceivably compete (and win) by executing core processes better than the competition. Many insurers have enjoyed success with just such a business model.

The evolution of packaged software over the past decade has seen a dramatic shift in this landscape. Whereas in the past packaged core systems could be limiting, they now offer nearly limitless possibilities for innovation. Core processes are easily and efficiently handled in flexible modern core systems, so insurers with heavily customised software will struggle to keep pace, while competitors are free to focus on how they will innovate.

Some insurers may be concerned that if they choose vendor developed core software, albeit from a vendor with a larger number of customers and the strengths this brings, this is also perceived to mean that the insurer will struggle to differentiate itself relative to the market.  Assuming that software is flexible and proven, then differentiation will likely not only be easier and less expensive than it was on previous legacy systems, but also be easier and less expensive than it would be on software with lesser adoption or a customer built solution. The technology will be easier to update and configure, thereby increasing the possibilities to adapt the software as business conditions evolve. Even if dozens of other insurers are using the exact same core system, each will use the software in a unique way that best supports that company’s business model and strategy.

A well-established core system that is being used by many others is likely to offer the best opportunity for an insurer to be innovative – and this becomes a new competitive advantage. If sufficiently flexible, the software can support necessary business processes in an efficient manner, freeing up time for the insurer to focus on what will differentiate it as a company and make it stand out in the market.

A version of this blog post was previously published in German by Versicherungsbetriebe