Information as a Value Differentiator

Christopher Henson, Stamford

This essay is about an e-business strategy built on client-focused extranets for a company specializing in traditional reinsurance or insurance financial products. It assumes that their business mission will remain centered around the sale of these products to individuals and businesses and that they will resist competitive pressure to evolve as derivative traders (whose only customers are investors) or as commodity suppliers of capacity to aggregator web sites. It looks at whether the 'information' on which the traditional re/insurer franchise is based, and from which its products are manufactured, will retain its value in a business environment in which speed of delivery and product presentation are two critical success factors.

The Internet environment and the e-business models it has produced is a challenge to business strategies firmly grounded on terra firma. The main purpose of every company's strategy (success)will remain the same as it evolves to meet the challenge of the web, but the speed with which eStrategy develops and changes requires a flexibility which traditional structures do not usually have. eStrategy also evolves in a trading space, the Internet, in which the company's customers are physically present, and in real time. These two features turn the traditional business environment into a competitive disadvantage, as Merrill Lynch discovered when access to customers was taken away from them.

In the traditionally-structured firm a campaign aimed at finding out what your clients need can go only one way - outward. The customer response rate is typically low unless incentives are used to improve it. But under normal conditions not much comes back and that which does is delayed and may be useless anyway. What your customers say they need from you may not be what they want from you. e-Business communication goes both ways - out to the customers and back again - simultaneously and in real time. And even if they don't say what's really on their minds the technology behind e-business can tell you what they're 'thinking'. What your customer 'clicks' on and what is ignored tells you immediately what to get more of. If they don't click on at all, you just received a 100% response rate to a question you didn't even need to ask. The potential scale and speed of this response could represent a significant competitive advantage for companies which are organized to use it.

Speed and agility in meeting their customers' needs have not been notable attributes of insurers in the past. The exception has always been organizations like Lloyd's, which functioned more like a club than a corporation, and whose recent death and rebirth as a corporation points out how remarkable it was to have survived as long as it did. That aside, the fact is that all the re/insurers left which count are big firms with big overheads. This is a natural inhibitor when it comes to 'going virtual' on the Internet. Another inhibitor for many companies is the spectre of channel conflict, or war with their own individual agency force. Yet another is the not unreasonable wish that the world would quit changing at the speed it is. And if all of these objections were overcome there remains the presence of gatekeepers in any corporation who will not willingly grant access to bearers of disruptive ideas.

Knowledge workers are the essential capital of information companies. In the case of re/insurance companies they produce and market an intellectual product, the policy of indemnity. This product is created from high quality information consisting of specialized data and techniques concerned with the analysis and management of ubiquitous and adverse risk. The information collected educates and protects companies and customers from the consequences of this risk.

In the past the high quality of the insurers' information has been of essential value to their customers and only the company had it. The business models built on this accumulation of information acccount for a significant part of the GNP of the US, the UK and most other developed countries. In the e-business milieu however competitive forces favor a different model. Access to markets through the Internet is unrestricted and largely uncontrolled. Products and skills can be unbundled and individual components priced and marketed separately either as contracts or as financial products. e-Business strategy and the markets it targets can be sized daily to available capital. Large heavily-capitalized firms which deal with the traditional broad array of client companies' needs may see large markets deconstructing into niche markets each of which will be served by a specialty provider which may not even be primarily engaged in the line of business it is competing in.

Companies competing within such an e-business format might now need to unbundle and price separately the 'information' component of their services from the 'capital' component. The question of how much that information component is worth becomes critical. As companies develop a consultative role to clients and seek to become partners in their strategic planning what can be offered them? How would the market price the information this industry has carefully collected for the last 200 hundred years? The following illustration hinges on the commercial value of 'high quality' as opposed to 'low quality' information and provides a surprising answer.

High quality information is defined as highly reliable, detailed, accurate, supported by verifiable data. Low quality information is the opposite. It is assumed that the provider of each kind is competent, may even be the same firm. Both are purchased to aid in making decisions - or to reduce uncertainty - but, counter-intuitively, it can be demonstrated that the market prices low quality information at a premium over high quality.

That supply and demand governs the information market too seems obvious at first. Generic news, once charged for, is now given away on the Internet and used as a lead-in to other products or to sell advertising. The New York Times offers an Internet copy of their print version free and sells the data derived from subscribers. But the Wall Street Journal, an equally respected news vendor, makes profits from subscribers to the Internet version of their newspaper. The difference is in the 'quality' of the information. One is generic and is instantly verifiable from a number of different sources. It is high quality - reliable - information and the other is not. If it is true that excessive competition and surplus capacity commoditize products then the WSJ clearly occupies a different niche in the information market than the NYT.

An equivalent example in a consultative framework would be the case of an (e.g.insurance) company planning to make a significant investment in a new market or new line of business. The quality of advice offered to someone expanding into the Worker's Compensation line in California would be very different from that offered to the same company expanding into the same line in Malaysia. The California data can be supplied by numerous firms whose competition will drive down the price of it. Malaysian data is probably less developed, there is less of it, and the conclusions drawn from it will be valued according to the reputation and expertise of the consultant supplying it. A company with sufficient brand identity, reputation, experience and knowledge worker capabilities can compete in supplying either 'Californian' or 'Malaysian' data to its clients but the profit margins will always be higher in the latter category.

Differentiating away from the Commodity Trap

High quality information is a commodity. We tend to believe it has a value which reflects the time, expense and labor spent accumulating it but that is not necessarily the case. If essentially the same information is available from many different sources its value as a service and therefor as a switching cost to clients will be almost zero.

If the future, as Fortune magazine once predicted, is to be a competition between business models then the P&C industry will need help. The principal advantages of its past - the industry's conservatism, its over-populated value chain, its capacity for punishment - will easily be turned into disadvantages by virtual companies backed by entrepreneurial capital operating through the Internet. One rich source of future consultative opportunity for those capable of taking it will be in helping companies migrate between the old and new business models. (The consequences of not migrating may already be predicted in the p/e ratios of some e-business companies and their 'real world' equivalents in other industries.) This migration space is very much an area of 'low quality' information at present and, coupled with the existing financial and business consultative abilities of any leading company, could be a dynamic and valuable service.

How could these abilities be presented to current and potential clients? How can this information be converted into a switching cost to retain customers and develop deeper client relationships? Why is this being presented as an e-business proposition when this is what companies do anyway?

It may not be done as well as some in the industry think it is. Most of us still communicate 'outward' and relatively little comes back. Yet the means to become communication leaders are at hand. This opportunity to redefine and differentiate information services exists because the e-business model exists. If, for example, client-specific extranets were employed as the platform for an e-business strategy aimed at accomplishing these goals the following parts would come together to create a significant switching cost:

The industry could extend its value chain to provide a value added information service to their clients at each stage of the chain. It goes without saying, but is frequently unnoticed, that the viability of the reinsure'clients' own agency force is as critical to the reinsurer as to the insurer. This is an aspect of 'partnership' that the traditional reinsurer has yet to explore.

The alternative to commodity pricing is cooperative pricing. Cooperative pricing and flexible contracts in real time transactions will become a major part of supplier/customer strategy and their mutual interests in the e-business model. It will be possible to devise a reinsurance treaty program, for example, which adjusts and resets continuously during the life of the contract to meet the preset financial goals of each party. Facultative contracts can similarly be devised and self-priced for individual risks from the customers' desk tops.

Any concept which can be imagined and which does not defy the laws of gravity can eventually be realized through software technology. Through this use of extranet technology a company can occupy the same market space as its customers. Once in that space with them it can fundamentally change the traditional buyer-supplier relationship with 'low quality' information assistance, cooperative pricing, flexible contracts and strategic alignment simultaneously, and in real time.

(This article borrows from the insights into high and low quality information of James Anderson, Business Marketing Management: Understanding, Creating and Delivering Value, and from Philip Parker, Marketing Information: a competitive analysis.