Risk managers are best advised to hire a vendor: cost and flexibility lead the vendor argument

Risk & Insurance, July, 2003 by Frederick P. Holzerman

According to 539 information technology leaders surveyed in the April 2003 issue of CIO magazine, chief information officers will continue to face tight budgets in 2003. Their greatest challenges are prioritizing demands from the various business units and aligning IT with business goals.

That's why many companies and risk managers should consider vendors. They provide more value in less time than their in-house developers.

An insurance company can benefit in many ways by aligning itself with the right vendor. An IT vendor with a strong insurance industry focus, for example, can quickly understand an insurance company's strategic direction and has the human and technical resources to act quickly.

Vendors bring a level of industry knowledge and expertise to the table that's impossible for in-house developers to match. Some IT solution providers have been solving problems at hundreds of insurance companies for years. These solutions address problems facing the entire industry, but they are often tailored to individual organizations based on their approach or competitive advantage.

As a result, vendors deliver more research and development than individual insurance companies could afford to do on their own. As the size of the vendor's client base grows, comparable research and development costs are lowered for each client. Imagine the level of savings with 100-plus clients sharing the cost of research and development of a system.

Vendors, by virtue of their business, must provide solutions that adhere to industry standards. This extends the lives of their products and lowers their overall costs.

Partnerships and alliances with other IT solution providers, such as IBM and Microsoft, help keep a vendor's products fresh and up-to-date. A vendor's technical support is available on-demand, so an insurance company only pays for what it needs, when it needs it.

The ability to know exactly what your company is spending its IT dollars on is a challenge at many insurance companies. It's not easy. You have to factor in salaries, taxes and benefits, and all associated overhead costs--making it just about impossible to attain an accurate number.

The inability to gauge the actual expense dollars associated with an internal IT department perpetuates the fallacy that in-house development is cheaper. In fact, over the past decade there has been a paradigm shift for companies--that would have previously initiated in-house development--to look to outside vendors for assistance. Companies that want strategic focus, improved service and tighter cost control see vendors as a viable alternative.

It costs less in the long run to invest in a software package than to build your own because you're less likely to have "scope creep," a major cause for project and implementation delays. Packaged products also are updated regularly to meet the changing needs of the market.

Purchasing a software application, outsourcing H' functions, or obtaining consulting services makes more sense than ever. That's why more companies are thinking twice about kick-starting another protracted, all-consuming in-house development project.

In today's market, success is measured by balancing costs and relationships. The ability to measure the effectiveness of an insurance carrier's H' department can be as simple as selecting the right solution provider.

Reputable H' companies offer a competitive advantage because they have many resources, the most important of which are their broad, real-world technology and insurance business experience. The big payoff for insurance companies is cheaper, better strategic planning.

Frederick P. Holzerman is program manager at Computer Sciences Corp.