Vendor Park Goes Jurassic

Last year was an extraordinary time of stunning financial meltdown and the advent of political change. While the beginning of 2008 appeared rather positive and upbeat, by the end of the year we learned we were, in fact, already in a recession as the year had started; we just didn't know it back then. In our own market, 2008 was a year in which executives who traditionally chafe at the heavy hand of regulatory oversight suddenly began to congratulate themselves for adhering to those same burdensome regulations, which had helped our industry avoid the worst of the financial crash.

Indeed, the P&C vertical, normally a staid financial underperformer, looks pretty attractive these days both to investors and employees. Three important facts underpin this relative health: First, most of the premiums spent in P&C are nondiscretionary–even in a recession we still must have car insurance and (assuming we still own a home) homeowner and maybe mortgage insurance; second, due to the aforementioned regulation and oversight, about two thirds of our investments are in high-grade municipal and government bonds, not mortgage-backed securities, and while bonds are not exactly making money, they are not tipping our carriers into financial freefall; and third, due to recent catastrophe experience and reserve strengthening, the industry as a whole has become significantly less leveraged (we are sitting on a ton of cash) and is capable of sustaining itself through a tough period. There also is talk, especially in the commercial market, of the much anticipated arrival of a hard market following an extended soft underwriting cycle. So, the best news to come out of 2008 for property/casualty is we still have a viable industry that will remain recognizably constant in 2009.

This allows "Shop Talk" to continue to focus on what it generally focuses on: all things vendor. So, despite the financial upheavals, as I look back on 2008, the abiding metaphor in my mind was borne as a real-life sequel to Jurassic Park. In 2008, giant software carnivores strode into our quiet vendor space with the intent to dine on the small Compsognathus creatures with which we traditionally do business. Whether these big guys will cause our landscape to change in such a way that things will never be the same again remains to be seen, but it certainly is the case that in 2008, the property/casualty vendor park went Jurassic.

But back to my movie sequel: Recall that famous scene in which Jeff Goldblum, as the annoying, know-it-all chaos theorist, notices the shock waves in the puddle that reverberate with each muffled, booming footfall of the approaching T. rex? What follows, of course, is a brief but hair-raising chase scene in which the Jeep narrowly beats the pursuing predator. Imagine the serendipity! I was watching Goldblum and company in a hotel room near a client carrier that was in the final stages of assessing claims software vendors. On the final-four short-list: Accenture, Guidewire, Oracle, and SAP. (In the interest of open disclosure, I offer the following disclaimer: My company, CastleBay Consulting, has a business relationship with Guidewire software. The company does not have a business relationship with any of the other vendors mentioned in this article.) Three tyrannosaurs and a "Compy." I swear I kept glancing nervously at my water bottle as I imagined muffled, booming footfalls in the client's office the following day.

What attracted these giants to our market? Well, first we need to qualify the term attracted as it implies an initial entry, which is not strictly true. SAP and Oracle have been selling financial and enterprise software into the P&C market for years, and Accenture has been a purveyor of claims solutions to high-end carriers for a similar time frame. What is different now, however, is: One, these vendors apparently are making a significant commitment to develop and sell core insurance software; and two, they are competing for business in mid- and lower-tier carriers that are the traditional environment of the small, industry-focused "Compy" vendors.

If you think my characterization of these giants as large aggressive creatures isn't correct, then consider the following. At the end of 2007, Accenture sued Guidewire asserting patent violations were behind the development of Guidewire's ClaimsCenter product. The suit, which spawned a counter-suit, has not as yet received final resolution. Oracle acquired Skywire Software, a significant player in the document management and rating space. SAP reentered the market with an aggressive sales campaign supported by similar pricing. These were aggressive moves, as of course are to be expected in both Jurassic Park and the business world.

Serious questions arise from these events concerning our marketplace. They include:

1. Why did they come?

The big guys showed up for the reasons any predator in history has made an appearance. The P&C software market has been a rich and rewarding home for software vendors for the past few years. Carriers finally have committed to core system legacy replacement, and the new (or reinvented) breed of vendor has enjoyed growth and profits as a result. We can only imagine the conversations that took place in the executive suites of the software giants: "Tell me again how come we are not a dominant player in this vibrant market?" You just have to believe roaring and foot stomping took place, possibly followed by dismemberment. And so they came, all of them with one stated intent–to be the market leader.

2. Will they stay?

Only time will tell. Success at selling (of which there are some signs) and implementing (maybe a little early to tell) core systems will help. However, while we noted above that our market probably isn't going to tank in 2009, it is unlikely to be as rewarding in the next three years as it was in the past three. It is a lot easier to establish share in a growing market than in a static or shrinking market. Also, it's harder to anticipate the actions of a vendor that wins billions of dollars in revenue from other markets than to predict the behavior of a vendor that lives and dies in our market. The fact is exactly the same kind of executive-row conversation that might get a vendor into this market could just as easily get it out. If the numbers don't work out for the big guys, don't be surprised if our park goes back to being a lot less Jurassic.

3. Will the tyrannosaurs kill the Compys?

This is the classic competitive question. Who wins when you pitch a giant multi-national vendor against a small, local one? The first thing to remember is the time frame in which these competitions will occur is during a carrier-focused sales cycle. The Compy will win if it can convince the carrier agility, domain knowledge, and market focus outweigh financial strength, global reach, and broader software, services, and delivery offerings. Also, as we pointed out above, don't underestimate the staying power that comes from a survival struggle: The Compy that loses probably dies (gets acquired), the big guy that loses goes back to other markets and licks its (minor) wounds.

Will the tyrannosaurs kill each other? Clearly, not all of them can be the market leader, and they may damage each other trying. However, the likely outcome will be the less successful competitors would withdraw to markets where they have strength.

4. Will they be good for carriers?

If the arrival of the big guys spurs the Compys on to bigger and better things, then the market in general wins. However, the "size matters" argument should be approached with caution. Just because a vendor measures its revenue in billions of dollars does not make it a low-risk option. In fact, as alluded to above, if most of that revenue comes from other markets, that in itself is a risk factor. Also, big doesn't mean smart, or committed, or knowledgeable. Big vendors screw up just like small vendors, except when they do they usually screw up bigger. And how does a billion-dollar carrier exert influence or pressure on a multibillion-dollar vendor? Answer: not as easily as with a $50 million or $100 million vendor. Finally, will the big guys have the patience and focus to stay and learn the intricacies of our industry sufficiently well to succeed? The argument has been made many times and remains valid: P&C insurance applications are complex, data rich, and subject to constant regulatory change. Success at HR, or supply chain, or banking is not a predictor of success in our convoluted and idiosyncratic world.

My conclusion, as ever, is "buyer beware." Tyrannosaurs are big and powerful with huge legs, jaws, and tail. But they have tiny arms. Make sure their reach is sufficient for your purposes.

George Grieve is CEO of CastleBay Consulting. Previously a CIO and still an acting consultant, he has spent much of the past 25 years with property/casualty insurers, assisting them in the search, selection, negotiation, and implementation of mission-critical, core insurance processing systems. He can be reached at 512-329-2619.

The content of "Shop Talk" is the responsibility of the author. Views and opinions are those of the author and do not necessarily represent those of Tech Decisions.

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