Testing the Limits of Speed-to-Market with What-If Scenarios
When insurance leaders consider a new cloud agile platform to bring a product to market, they face a critical question: Is the investment worth it?
Coretech Insight modeled three scenarios to quantify the business value of speed-to-market. The benefits were compelling.
However, what if things didn’t go as planned?
We used What-If scenarios to measure the impact of unanticipated costs, new resource requirements, and delays – common challenges with coretech – on the benefits of speed-to-market.
Overview
Insurers want to bring new products to market, but are often blocked by the limitations of their incumbent systems. Cloud agile platforms offer a more flexible alternative that promises faster speed-to-market. However, deploying a core platform is an expensive undertaking. This naturally leads to the question: Is the investment worth it?
To answer this question, Coretech Insight modeled scenarios to quantify the value of speed-to-market in “Driving Speed-to-Market Through Cloud Agile Technology.” Based on our findings, it is difficult to overemphasize the importance of speed to market. For insurers facing unacceptable product delays with incumbent systems, cloud agile platforms offer a compelling alternative that should be explored.
However, what if things didn’t go as planned?
What if the pricing for a cloud agile platform were significantly higher – three times higher – than we estimated?
What if significantly more resources were required?
What if the rates for vendor/SI services were much higher?
What if the implementation took twice as long to complete?
We converted our published research into a speed-to-market toolkit that models scenarios dynamically. Armed with the toolkit, we ran through a series of What-If scenarios to explore how changes in fees, resources, rates, and timelines impact the value of faster speed-to-market.
Analysis
Imagine a $500M DWP insurer has identified an opportunity for new small commercial/BOP products. Within its current policyholder base alone, the insurer estimates it could generate $25.4M in additional premiums. (For a detailed breakdown of the scenario and underlying assumptions, see Scenario 2 in “Driving Speed-to-Market Through Cloud Agile Technology.”)
The challenge: the insurer has a homegrown, on-premises policy admin system. The IT department estimates it will take 18 months to build support for these new products, at an internal cost of $711K.
The insurer has been developing and using the system for many years, and its IT team knows how to maintain it. “If we just give them a little more time,” some stakeholders insist, “IT will deliver these products. We’re paying their salaries anyway, so the cost of the new products is already baked into our plans. There’s no need to engage an outside vendor and pay extra for this.”
However, 18 months is a long time. The insurer has identified a cloud agile platform that would enable them to deploy the new products in five months. Estimated implementation costs are $460K. There is also a SaaS subscription fee of 1% of quarterly DWP from the new products, with a minimum of $25K per quarter.
So, would the investment in “an outsider” be worth it?
Figure 1 below compares the projected net benefit of the cloud agile platform vs. the incumbent system. Deploying the new products in five months instead of waiting 18 months would result in $11M more in net premiums over five years. The cloud agile platform enables the insurer to start generating premiums much sooner than the incumbent. Even with the cost of implementation and ongoing SaaS subscription, that headstart in generating and growing premiums translates into a significant benefit over five years.
Figure 1. Quarterly Results
Source: Coretech Insight, May 2023
What if SaaS subscription fees were higher?
Returning to the question at the start of this research, what if things didn’t go as planned? For example, what if our SaaS subscription fees for the cloud agile platform were 3% instead of 1% of DWP, and the quarterly minimum fee tripled from $25,000 to $75,000?
Plugging these inputs into our toolkit, we see there is an impact. Figure 2, below, shows the benefit of cloud agile vs. the incumbent is reduced by $1M, but it is still a healthy $10M over five years.
Figure 2. Quarterly Results with 3x SaaS Pricing
Source: Coretech Insight, May 2023
What if additional resources were needed?
Surprises are common during core platform implementations. Additional resources – from either the vendor/SI or the insurer –- may be required to keep to an established schedule.
This scenario was built on the assumption that three vendor/SI resources would be working with two subject matter experts from the insurer to configure and deploy the cloud agile platform for the new products. What if we discovered we needed significantly more resources – say, four times the original number – 12 vendor/SI resources and eight insurer SMEs?
Adding these resources to our toolkit (along with the earlier price increase) reduces net premiums, but still results in a strong benefit. Figure 3, below, shows a net benefit of cloud agile over the incumbent of $8.6M in additional premiums over 5 years.
Figure 3. Quarterly Results with 3x SaaS Pricing + 4x Resources
Source: Coretech Insight, May 2023
What if rates were significantly higher?
Our original scenario assumed a blended rate for vendor/SI professional services of $250 per hour. What if the rate were $500 per hour?
Figure 4 below shows that bumping the professional services rate up from $250 to $500 (along with tripling the SaaS fee and adding four times the resources) reduces the benefit from cloud agile vs. the incumbent to $7.2M over five years.
Figure 4. Quarterly Results with 3x SaaS Pricing+ 4x Resources + 2x Services Rate
Source: Coretech Insight, May 2023
The cloud agile alternative still provides a compelling alternative to the incumbent. Despite the increased upfront investment (from $460K to $3.2M) the head start on generating premiums yields a significant benefit over the incumbent.
What if speed-to-market…were not so speedy?
As a final test for this scenario, what if the cloud agile system could not be implemented in five months? What if there were challenges and, instead, it took 10 months? (Considering the history of core platform implementations, such a delay would not be unheard of.)
Figure 5 below shows the impact of extending the cloud agile implementation from 5 to 10 months (along with our earlier pricing, resources, and rate changes). There is still a net benefit with cloud agile, but it’s not realized until the last quarter, and it’s a minuscule $248K.
Going live after 10 months instead of five reduces the head start in generating new premiums. The longer implementation timeframe pushes up-front costs to $6.2M. This combination of slower start and higher costs eliminates the advantage of cloud agile over the incumbent. In fact, the reason there is any benefit is due to an assumption that cloud agile operating efficiencies would generate 15% more new policies than the incumbent. Without this operational advantage, cloud agile would have a net loss compared to the incumbent.
Figure 5. Quarterly Results with 3x SaaS Pricing, 4x Resources, 2x Rate, 2x Timeline
Source: Coretech Insight, May 2023
Implications
So what do we learn from this exercise? (Other than playing with What-If scenarios is a journey that never ends!)
The rapid implementation timeframes possible with flexible cloud agile platforms offer a significant advantage over slower, less flexible incumbent systems. Short implementations contain costs and enable insurers to start generating premiums sooner. If a market opportunity for a new product will generate healthy premiums, the net benefits of a rapid cloud agile implementation can absorb even significant increases in SaaS fees, resources, and professional services and still be compelling.
Delays are incredibly costly. When an implementation for new products is delayed (driving costs up while pushing back the start of new premiums) the benefit over the incumbent erodes quickly and may be eliminated entirely. In fact, let’s fire up the toolkit, play What-if one more time, and see the impact of even a one-month delay.
Resetting the scenario to its original published form, our cloud agile implementation took five months to reach go-live. Figure 6 below shows, with on-time delivery, the benefit of cloud agile over the incumbent was $11M in premiums over five years.
With a one-month delay (six months for implementation instead of five) the benefit of cloud agile over the incumbent drops to $10.1M. Within this scenario, every one-month delay decreases the benefit by nearly $900K, almost 8%. A six-month delay would cut the benefit of cloud agile nearly in half.
Figure 6. Impact of Delay on the Benefit of Cloud Agile vs. Incumbent Over Five Years
Source: Coretech Insight, May 2023
It’s critical for insurers to keep this larger picture in mind as they face decisions and surprises that come with a coretech implementation in support of a new product opportunity. For example, an insurer might discover previously unknown requirements that call for additional resources to stay on schedule. Some insurers, seeking to minimize upfront costs, balk at additional costs like these and choose instead to accept the delays. In doing so, they may be sacrificing hundreds of thousands or even millions of dollars in additional premiums that would have been realized if they had funded the incremental increase to stay on schedule.
Insurers should also be careful to hold their vendor accountable for meeting implementation deadlines. Progress should be monitored continuously, and the insurer and its vendor should act quickly to resolve challenges at any sign of delay. Incentives and penalties added to service contracts to encourage on-time delivery should reflect the compelling benefits of achieving rapid speed-to-market, as well as the very negative impacts of delay.
Contact me at jeff.haner@coretechinsight.com. Whether your need is for research, advisory services, content, or just a conversation, I look forward to hearing more about your plans and helping to bring them to life.
Jeff Haner is the founder of Coretech Insight, an independent firm that specializes in research, content, and advisory services for P&C coretech and related solutions.
Before Coretech Insight, Jeff served in senior IT, advisory, and marketing roles with Deloitte, Oliver Wyman, NJM Insurance Group, Gartner, and BriteCore. While with Gartner, he authored the Magic Quadrant for P&C Core Platforms. Jeff’s experience as a coretech customer, analyst, and vendor has provided him with a pragmatic perspective, unique insights, and the ability to help his clients make fast progress toward accomplishing their goals.