Dealing with Disruption Through Strategic IT Partnerships

As disruptive technology sweeps through the insurance industry and start-ups transform the competitive landscape, Baxter Thompson Associates’ Managing Director Jon Baxter explains how corporate companies can adapt to change with the help of strategic IT partnerships.

 

While large organisations typically have an operational focus and change incrementally, the issue today is that disruptive change is happening at a much faster pace than before, particularly within technology. Not only are artificial intelligence, deep learning, and block chain technologies all finding more use-cases in the insurance industry, but according to venturescanner.com, there are now 535 venture-backed companies globally promoting new innovative services in the insurance industry—the largest category being health insurance.

These are predominantly small companies, mostly comprised of ten people or less who have pitched an idea, received funding, and are now developing (or have developed) a solution to take to market. These companies are proposing new business models, which are value propositions all underpinned by new technology. Some examples include PocketDoc, InstaMed, Crowdaura, Dynamis, The Floow, Bought By Many, and Guevara.

What this shows us is that the customer need is still the same (i.e. the provision of insurance) but the fulfilment of this need can be radically different. The promises these technological advances hold—such as faster settlement times, reduced fraud risk, and much lower transaction costs—make a compelling case for competitive advantage. However, if smaller start-ups end up taking a dominant market position, not only would the incumbent suffer cannibalisation of its revenue stream, but also a potential long term death sentence, given that the company could not compete on a like-for-like basis.

 

Adapt or Die?

So how can corporate companies react to disruptive technology and its inherent risks? Here are some strategic options:

Compete using existing business models by competing on price and driving down cost to retain market share. The down side? This option has already been played out with comparison websites (another form of technology disruption),  whether insurance companies participate with the comparison website or go direct.

Innovate internally, which can be achieved—at a price. Workplace attitudes, beliefs, time allocated, and incentives would all need to be addressed, along with applying new ways of working. Take note: you would have to compare the cost of change to the existing workforce to other investment options.

Invest externally. Given that insurers have large investment funds, the major questions would be: How much of that fund should be diverted to high-risk start-ups, and what’s the risk of not investing? According to ft.com, Aviva, Axa, and Allianz (among others) have committed $1bn to investing in technology start-ups.

Collaborate. Aviva, Admiral, and Swiss Re are just a few that are in collaboration with Startupbootcamp InsurTech at their Digital Garage, and they’re holding weekend hackathons to solve business problems.

But how can corporate companies adapt in the longer term? If start-ups were invested in and owned by the incumbent insurer, one would have to consider whether the start-ups provide a service to the insurer or compete with an equivalent service. Depending on this position, the corporate company could:

• Continue to own the equity in the company, but keep the start-up at management arm’s length in order to maintain a strategic position in the market place
• Benefit from the return on investment through lower transaction costs and better customer service, or sell the company entirely to restart the investment cycle all over again
• Incorporate the start-up into its operations, “productionising” and scaling the start-up business model
• Incorporate operations into the start-up so that in the new business model, start-up culture becomes the de-facto way of doing business in the longer term.

Whatever the outcome, I believe the insurance industry will be going through significant change based on the promises presented by disruptive technology. The challenge for insurance companies will be maintaining their share of an eroding revenue stream over time.

 

Strategic IT partnerships

Regardless of whether we really want to follow it or not, the disruptive technology path requires active facilitation at the highest levels in the corporate organisation. Given that technology is driving change, there is clearly a compelling need for strategic IT partnerships within corporate companies to answer the above strategic options.

Strategic IT partnerships can help companies adapt to technology disruption in the following ways:

• Taking a “horizon scanning” and research-based approach by initiating a study to assess the above strategic options in order to help identify the scenarios and shortlist potential use-cases and technologies.

• Using value workshops to review the current customer experience and assess how potential use-cases could be applied to realise the promise of disruptive technology—in other words, how are the customer’s “pains” and “gains” addressed?

• Holding business model workshops to understand how cash is generated, how profits are made, and who plays what role in the value chain. Can we make money with disruptive technology? How?

• Selecting the top three use-cases and having the company fund an incubation programme to develop and pilot new products and services.

In order to be included in this facilitation as a strategic IT partner, you need credibility and respect in the broader IT capability. Is the IT function seen as delivering its projects and service commitments? Does it have the resources available and sufficient aptitude to facilitate strategically?  Does IT have the opportunity to succeed in the organisation, or is it beset with scope change, legacy systems, a cost centre approach or unaccountable business partners?

However, before being able to facilitate a conversation around these questions, what is needed is business insight—in other words, an understanding of the company’s strategy, strengths and weaknesses, the external competitive landscape, an understanding of existing and disruptive technology and its potential impacts, and an understanding of the industry.

In the end, it’s like clockwork: dealing with disruptive technology means having strategic IT partnerships, and achieving the status of strategic partner means being a trusted advisor to the organisation—which is a status that is earned, not given, if only you have that strong business insight that companies need.

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Jon Baxter is the managing director of Baxter Thompson Associates, which helps IT functions become strategic IT partners through enabling business relationship management competency. In order to assure its success we provide a diagnostic to help formulate the options and long-term roadmap and then provide interventions such as interim management, change management, recruitment and training to achieve that status.