Pressing Tech Issue: Enterprise Software Vs. Cloud Computing?
One of Robert Frost's most popular poems contains more than a few parallels with what insurance technology executives are grappling with as they look at systems in the cloud compared with systems housed within their own organizations. Consider this classic verse:
"Two roads diverged in a wood, and I...
I took the one less traveled by,
And that has made all the difference."
Setting your course for innovation
Certainly there are many who are opting for the less-traveled SaaS road, and others who prefer the other road commonly called enterprise.
Within the insurance industry, cloud technologies have been successfully deployed in ancillary areas of the organization such as Human Resources, Accounting, e-mail, and other non-core areas of the business. Typically, those core applications such as policy administration, agent commissions, rating, billing, claims, and agent and customer portals have been firmly entrenched in enterprise or on-premises applications.
However, with the success of cloud-based software in those non-mission critical areas, SaaS systems are becoming the favored choice for deployment in certain core insurance areas. But for those core tasks that are truly mission critical, have deep integration requirements and importantly, are processor intensive, IT executives are taking a go-slow approach before they commit to putting those systems or business processes into the cloud.
Why the concern? The short answer is that enterprise software is "owned" by the insurance carrier, and the risks of a data breach of sensitive information is relatively low when the application is housed behind the insurance company’s firewall. Insurance companies are huge repositories of customers’ personal information. And that information is entrusted to the insurance company with the expectation that it will remain private and confidential.
In short, enterprise software deployments merit a certain kind of security that is hard to duplicate in a cloud-based system.
Another aspect to consider is processing horsepower. Saving and retrieving data such as we see in popular CRM systems like Salesforce.com is not particularly processor intensive. Tasks with intensive calculation requirements, such as commissions and bonus calculation, are another matter. These systems can often have more than a hundred integration points both up- and downstream, and managing them in the cloud is a major concern to many insurers.
According to recent research from Novarica, the key driver for carriers adopting SaaS systems was "the speed of deployment and the ability to sunset current applications." (Photo: iStock)
What is driving SaaS adoption?
Among the common drivers for carriers to adopt SaaS system, according to Novarica, were standardization paired with release management, which reduces support costs and ultimately lowers the cost of ownership. However, that standardization, call it efficiency, is largely a trade-off between having key business processes undifferentiated from competitors that are on that same SaaS application and having a custom designed application that preserves competitive differentiation.
Large companies see being able to differentiate from competitors as a key advantage of the on-premises model. Additionally, large companies have very large IT staffs that are capable of implementing and managing new applications.
Cost is clearly another factor in making SaaS a viable choice for many core insurance applications. For mid-tier and smaller insurance organizations, the advantages of SaaS are clear:
— No infrastructure costs;
— Software is on a subscription model that includes maintenance and upgrades; and
— Provisioning is very easy.
With SaaS, a smaller insurance company can readily compete with the 'big guys.' While some simple back-of-the-napkin analysis can show advantages for SaaS, the analysis is really an apples-to-oranges comparison. A more detailed look at cost and a few other items show that cost may not be the main concern.
What about the 'hidden costs'?
You may not appreciate the importance of some of the items buried in the fine print of SaaS solution provider contracts. Items such as transaction volume, number of processes allowed per month, data storage fees, data transformation costs and other items can result in significant additional fees levied by the vendor that must be met for subscription compliance.
If you don’t understand and carefully quantify each item in the SaaS agreement, fees can easily double or triple — but you might not realize the impact until the solution is implemented and in full production and you receive your first over-usage invoice. (Photo: iStock)
In order to get a full assessment of hosted versus on-premises factors such as implementation, customization, upgrade cycles, support and maintenance, security, scalability, and integration(s) must be understood. For example, implementing a SaaS application is relatively easy, since it is using a ready-made platform that has already been provisioned, while on-premises applications take resources, equipment, and time to set up a new environment. In essence, the financial choice is whether the new system will tap the operating expense budget or the capital expense budget.
The key in assessing the advantages and disadvantages of SaaS or on-premises is one that is common to all technology acquisitions— the vendor. At the outset, the absolute key requirement is that the vendor has extensive experience within insurance technology. There are many vendors that purport to have deep domain experience in insurance. From what I’ve observed, however, in many applications sold to insurance companies vendors are very likely taking a horizontal application and providing some level of uniqueness that makes it salable to insurance companies. This is very common in CRM and commissions applications, where vendors have created hundreds of applications from managing sales to managing human resources to managing inventory. Vendors will claim insurance expertise, but a look under the hood will usually reveal an application that was built for, say, telecommunications or pharmaceuticals and “verticalized” to make it acceptable to insurance carriers and distributors. It’s the old "one-size fits all" mentality.
Where the rubber hits the road in vendor selection is in looking at a vendors’ expertise in integration and security. As experienced insurance IT managers are aware, insurance infrastructure can be a hodge-podge of technologies and applications that run the gamut from fairly modern to legacy. A vendor that doesn’t have a track record of successful implementations with a variety of technologies is one that probably shouldn’t be on your short list. As a starting point, look for applications with embedded integration platforms that you (not the SaaS IT/Support team) will have full access to. The same thing can be said regarding the privacy and security of data and personal and private information.
Insurance carriers are very aware of the security implications of SaaS, where security is dependent on the vendor. A corollary to the vendor’s experience in integrations is the vendor’s experience in implementing fixes of the software or migrating existing clients to new versions of the software. Again, vendors that have dozens of satisfied clients are more likely to have the experience and talent to become a credible business partner. One more tip on vendor selection.
Ask for a report detailing system outages for the last two years that shows the nature of the outage, core issue and time to resolution. If the vendor refuses to deliver this document, think again about adding them to your short list.
Some large vendors in our space have recently dropped their on-premise solutions and 'gone all in' for the cloud. It might be a safer to go with a vendor that can provide cloud or on-premise solutions, leaving the final hosting decision in your hands. You can always migrate to the cloud later if you’re not comfortable with the change. The choice between the cloud and on-premises is very much like choosing between the two paths that 'diverged in the wood.'
There are certainly advantages to each alternative, but ultimately the key driver is whether the vendor can accommodate both software delivery models, on-premises and SaaS. Vendors that have the capability to work with clients with unique requirements that mandate enterprise software or SaaS are vendors that have the overall experience to help you choose which path to take.
John Sarich is an industry analyst and VP of Strategy at VUE Software. He is a senior solutions architect, strategic consultant and business advisor with over 25 years of insurance industry experience. He can be reached at John.Sarich@VUESoftware.com.
Originally published on PropertyCasualty360. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.