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Industry buzz around new technology can often lead to insurers taking shortcuts. When a quality high performing operation is the goal, traditional TCO for core systems—measuring costs of licensing, on-going maintenance and upgrading, investments in infrastructure, and costs for manpower and services—is only the tip of the iceberg when it comes to factors to consider.
Many insurers are undertaking system modernization projects and are aware that costs of maintaining inflexible legacy systems go beyond hard dollars, even when they are “paid off.” Unfortunately, this insight often isn’t applied when selecting a replacement system. Insurers must either calculate and compare True TCO of “modern versus modern,” or they risk repeating the mistakes of history.
Evaluating True TCO is challenging given that insurers have different processes, priorities, and strategies—and when they have to choose from among multiple vendors making all sorts of promises. The challenge for insurers is to clarify priorities, and drill through vendor marketing hype.
Components for Calculating True TCO
Insurers must identify, prioritize, and calculate the cost of all True TCO components. This is no easy task, and for many insurers it represents a departure from routine, applying rigorous discipline and answering tough questions before even beginning the system selection process. The following are components that insurers must weigh in order to understand true TCO.
Speed to Market: Speed is an oft-stated goal of insurers choosing to modernize, but has numerous cost implications: the hard-dollar value of getting a product to market 30 days earlier, the lost-opportunity cost of lagging behind the competition, and the cost of the additional spend to catch up. Can the system be easily configured to support current or improved processes—or is an insurer required to transform current processes to meet system design?
Speed of Deployment: The longer to deploy, the more the initiative costs, and the greater chance of “scope creep” and overruns. Quick deployment also creates cost avoidance as new products are added and old ones migrated. How well a system fits into the current environment affects costs. Cloud might also be leveraged to increase speed of deployment. A vendor’s proven approach and record of quick installation and integration increases the chance of a successful quick deployment.
Does it make more sense to get into production quickly with 80 to 90 percent of requirements or wait until all requirements are met? The sooner in production, the sooner you reap the benefits. Trying to get to 100 percent takes more upfront time, cost, and often results in scope creep. Refining the system to deal with those policy or customer exceptions may be best done after initial deployment.
Configurability: Configurability means different things to different people. Know what you want and understand what configurability really means. New configuration capabilities may require new and more technical staff in business units, creating a “shadow IT” group or new IT staff with different skills. What’s your appetite for taking this on and what is the cost? Important and often forgotten is the cost and time of conversion of history to the new system.
Meeting to Customer Expectations: Consumers expect the same flexibility, customized service, and speed from insurers they receive from other financial services and online retailers. If an insurer doesn’t provide the products and experience a customer expects, that customer will go elsewhere. Once customers leave, chances are they aren’t coming back (at least not easily)—translating to more lost opportunity costs.
Cost of Compliance: Remaining compliant with continually changing bureau rates, rules, forms and regulations carries significant cost. Available solutions range from vendors providing full analysis, interpretation and integration of rates, rules and forms to vendors who provide no support. Insurers need to determine the effort, time, and resources involved in compliance by internal staff or vendors, and how each systems under consideration lessens, or increases, costs involved. Getting it wrong not only results in costs of noncompliance in fines but also increased scrutiny from regulators.
Cost of Quality: Legacy systems have a history of quality-related problems due to inconsistency, redundant data entry, and manual workarounds, translating into often overlooked costs of doing business to handle functions that current systems can’t. When work needs to be redone there are direct and indirect costs, including those related to negative impacts on customer relationships.
Cost of Dependence: Self-sufficiency is often the goal, but everything has a cost. While there is a financial impact of short- and long-term reliance on a software vendor or systems integrator, insurers need to determine their right balance of self-sufficiency and vendor support. This consideration holds true whether referring to day-to-day maintenance, configurability or compliance.
Arriving at Answers
When comparing modern core systems, it is essential to look beyond the base costs of software licenses, new hardware, and implementation resources and services. Determine what is important to your organization, identify key decision points, and ask tough questions—of both your vendors and internal stakeholders.
Although there is no single answer to what True TCO means, utilizing a smart, systematic approach will help to make the best-informed decisions. Subsequent articles will explore how some insurers have approached the TCO challenge when comparing modern core systems.