Core systems insurance software for the property & casualty (P&C) industry isn’t the first thing that comes to mind when you think of sexy disruptive technologies. For the 99% of us that fall into that group, let me introduce you to Guidewire Software, the market leader revolutionizing a $1 trillion industry (in terms of written premium) that in many cases still runs on technology built in the 1980s. The company currently sports a healthy $4.3bn market cap, a stock that is up 25% in the last year and happens to be a great example of highly effective alignment between business and operating models.
Guidewire creates and captures value for over 200 customers (Nationwide, The Hartford and Zurich Group are some of its mega-carrier clients) by providing a full software suite that includes policy administration, claims, billing, underwriting and other add-ons such as business intelligence and mobile products. The company prices its software as a recurring term-license and sells services to implement customers and provide ongoing support. The company’s mission is to deliver the software that P&C insurers need to adapt and succeed in a time of rapid industry change – and to ensure that every customer succeeds in the journey. A customer testimonial video is below.
There are a few key parts of Guidewire’s operating model that make it highly effective in executing on its business model. The company is product-centric and has gone to great lengths to build a technology platform that aligns with its business goals. Guidewire started out a claims-only module for carriers looking to modernize their claims systems. Over time the company realized that the market was demanding a “full-suite” solution that also included policy administration (the brains that underwrite and store all customer policies), billing and a number of other products. Not only has the company added these capabilities but it built its code in the Java EE standard (preferred in the industry) and has focused on flexibility and scalability. By having a flexible open architecture, Guidewire can plug in new insurance products (like usage-based insurance for Uber drivers) over time as they are invented and updated features such as mobile claims that can talk to their core system. The scalability point is a critical link the company leverages for its business strategy of targeting larger carriers. Big carriers present sizable revenue opportunities and increased visibility in the insurance industry, but require significantly higher horsepower with thousands of concurrent users (Nationwide has over 30,000 employees, for example).
On the intangible side of the operating model, Guidewire has successfully refined its processes and managed human capital in the highly critical area of software implementation. Ripping and replacing thousands of lines of custom code and rules for policies which are underwritten differently in every state in the US is a painful people-intensive project. It routinely takes over 2 years to get an insurance carrier up and running on a new product. Guidewire has increased the efficiency of its implementation process over time while maintaining a 100% success rate by instituting processes such as “discovery and needs analysis” prior to starting implementation and agile methodology with month long sprints. On the human capital side, Guidewire made the strategic decision a few years ago to outsource as much of the implementation work to partners as possible. Today the company has a network of 5,500 outside consultants that are highly trained in the Guidewire methodology that can be assigned to projects on an as needed basis. To ensure quality, Guidewire assigns an internal engineer to each project to manage the customer relationship.
The company’s implementation operations are closely aligned with its business model in a couple of ways. First, insurance carriers are highly risk-averse and demand an impeccable track record to buy software from a third party vendor. Second, Guidewire’s management is highly motivated to grow recurring software revenue as much as possible to increase margins and create value for investors. Once successfully implemented, a customer becomes an annuity stream of high margin recurring revenue as insurers typically refresh software once every 20-30 years. Through the offshore approach to services, the company has been able to move low margin services revenue off its income statement, while still maintaining high services quality. In FY 2015 Guidewire backed up this operating strategy with business results: recurring term and maintenance software revenue comprised 60% of revenue (growing 18%) compared to 55% of revenue in FY 2014 while services revenue declined 3% in FY 2015. Investors have consistently rewarded management’s strategy as the stock price has tripled since their 2012 IPO. Those returns sound sexy to me.