The value of standardization in P&C insurance

 “Any customer can have a car painted any color that he wants so long as it is black.”

Henry Ford famously set the standard for ‘out of the box’ applications — if you wanted a Ford automobile, you got a black one.

Fast-forward to today. Now you can customize every detail on modern automobiles across most brands. However, this customization comes with a heavy price, and more standardized versions are available to provide affordable options and remain cost-competitive.

Software is no different

How do you manage the balance between customizing your software without over-spending on over-configuration?

Software developers constantly manage their products between two ends of the spectrum: commoditized versus fully customizable/configurable. On one end, commoditized software works right out of the box every time (ideally). Desktop software is the best example: Microsoft Office, Adobe Creative Cloud and others, provide out of the box functionality designed to work immediately.

On the other end

A fully-customizable package enables businesses to get exactly what they want, exactly how they want it — though at exponentially-increasing costs. Most enterprise software requires significant customization and configuration to work, costing upwards of hundreds of millions of dollars in addition to the cost of the software license or subscription. Managing the balance between those two ends of the spectrum allows customers to get what they need and moderates cost and time to deploy.

With the recent cross-industry pivot to the cloud, software purchasers are embarking on a renewed journey of customization versus commoditization. Multi-tenant SaaS solutions like Salesforce built their model on allowing some configuration while maintaining an overall consistent product across all deployments. Even multi-instance, single-tenant cloud companies are making the push toward standardization to accelerate their pace of innovation, enabling them to keep customers on the latest version consistently.

Deciding on customization

There are three main tenets to understanding and accepting the value of standardization:

• Differentiate rapidly between ‘want’ and ‘need.’
• Understand the value and return on investment on any out of the box customization.
• Evaluate the effectiveness of existing processes and procedures and explore what can be improved outside of the software.

The first step toward finding the right balance is an unrelenting focus on what is a ‘need to have’, or what customization is truly needed for the business to operate, versus what is a ‘want to have’.

Insurance business systems

For P&C insurance core systems, the ‘needs’ include connection to existing software/databases, integration with user interfaces and inter-connectivity with other parts of the technology stack. Without this, configurable software simply won’t work. The ‘wants’ often include deep commission customization, account exception handling, straight through processing rules, legacy integration, telephony integration, call history, dynamic refreshing screens, rearranging fields, and more. This initial classification helps companies prioritize configuration investment based on what delivers the most business value.

The second step is developing a value-based story for each customization/configuration. There are several approaches including benefit mapping exercises, value alignment processes, cost benefit analysis, strategic benefit exercises and workshops, and more. Through these approaches, the insurer can estimate the quantitative and qualitative benefits of each decision, including mapping interconnected dependencies. Insurance companies can then further prioritize customization and configuration, focusing only on the highest return activities.

Lastly, companies should use software deployment as an opportunity to step back from specifics and question their overall efficiency. Many companies have multiple ways of doing the same activity without specific business rationale; often it’s a result of acquisitions, lack of a continuous improvement mindset, or perhaps historical processes and practices they have never really questioned. While some companies believe their processes create competitive advantage, multiple or complex processes typically prove to destroy value (e.g. Progressive Insurance Company’s clone rating models and processes in the early 2000s).

Working with established software providers on these deployments can be particularly beneficial, as they will have greater levels of exposure to a wide variety of processes and activities, best practices which are incorporated into their out of the box software. Meanwhile, the view of individual insurance companies may be limited to their own approach.

Standardization is essential to the future of software in the cloud. It helps customers:

1. Optimize total cost of ownership through a deliberate approach focused on maximizing the value of their deployment;
2. Ensure they are able to stay current with the latest version of software with no breakage;
3. Continuously improve their business operations through process efficiency; and
4. Decrease time-to- deployment from years to months, and even months to weeks.

It is also critical for cloud companies to continue developing and releasing high-quality products with an eye on innovation without over-pivoting on customizations. One natural extension of this is the evolution of industry standards. As cloud companies move to more standardization, expect the development of industry standards to further simplify integration and configuration of products.

Aaron Davidson is the business owner for Guidewire Cloud at Guidewire Software, provider of the industry platform P&C insurers rely upon to run, grow, and differentiate their business. He can be reached at adavidson@guidewire.com.

These opinions are the author’s own.

See also: Five digital trends impacting insurance agents in 2019