27 August, 2010
by Martin Friel
Martin Friel talks to Theo Duchen and David McDonald about how Acturis is over-delivering in professionalism and efficiency in a bid to achieve greatness
Theo Duchen, co-chief executive of software firm Acturis, asks: "What makes a great company?" "Tell me what a great company in the insurance space looks like. It's a difficult question isn't it? We are not quite there yet," he says with strong emphasis on the word "yet". Mr Duchen is talking to Insurance Age alongside fellow CEO, David McDonald, about Acturis, its struggle to prominence and its hunger for expansion‚ and greatness.
"Google is a great company," he continues by way of comparison. "I can't explain it - it's just great."
But he proceeds to explain why he thinks his own company is on its way. "We can achieve greatness because we over-deliver and exceed expectations. If rivals are talking us down, that means we are doing something very well," he says with a nod to some of the company's market detractors. Mr McDonald takes up the thread: "Great companies have something that is different. You might find this odd but every single person who has entered this company has been interviewed by myself and almost everyone has also been interviewed by Theo. "Usually, that is delegated right down the organisation. Getting the right people is job number two after our clients, which is completely different to our competitors. We probably have more engineering graduates from the top universities than all of our competitors combined," he says with obvious pride. He believes that this expertise comes through to the client base, which has grown considerably since Acturis launched as a leftfield idea nearly 10 years ago. Mr Duchen and Mr McDonald were both partners at global management consultancy firm, McKinsey, running the insurance and e-commerce practises respectively. Mr Duchen explains that as he was consulting in the industry, he was struck by the inefficiencies of its business transactions. "I had a sense of how brokers and insurers worked and where the inefficiencies lay and as David was running the e-commerce practice, he was able to translate that into a technological solution," he explains. But it wasn't as simple as identifying a malaise and curing it as Mr McDonald explains.
A cynical market
"When we started out in the e-trade world, people in commercial insurance thought we were bonkers, that it could never happen." So what was it that Acturis was proposing and why was it met with such scepticism? What Mr Duchen and Mr McDonald had identified was that commercial insurance was, relatively speaking, scrabbling about in the stone age while its financial cousins were firmly in the digital era. Brokers and insurers were still using paper slips, telephone calls and face-to-face meetings to conduct business. Acturis aimed simply to make conducting business in commercial insurance much more efficient through the use of technology - namely straight through processing where business could be completed between a broker and an insurer without picking up the phone or signing a single piece of paper. "We could see that it could work but that it would have to be real-time connected between the broker and the insurer processes to get the efficiencies and make it trustworthy from an underwriter's point of view," says Mr McDonald. "We did our first real-time trade between a broker and an insurer in 2002 but it took us another three to four years to get enough buy-in to get the whole thing cranking." It was hard going for many years and both are happy to admit that they underestimated just how difficult it would be.
"It was a lot harder than it appeared at the outset. We didn't expect it to be easy but we didn't think it would be as hard as it was to gather the momentum," says Mr McDonald. He goes on to explain that a book called Crossing the Chasm by Geoffrey Moore laid out almost exactly the experience he and Mr Duchen went through in Acturis' early years. "His concept is that in technology or adoption-type markets, often what you get is an initial wave of people signing up but then everyone else waits to see if the initial wave really takes off. "In 2002 we had some very early adopters and there were others we were having conversations with. It was really only in about 2004 that we began to cross that chasm and get out the other side of it. Then it took off." Again, the two are in agreement that those two years were rather dark times. "You don't sleep so well going through a period like this," offers Mr Duchen.
But they did get through and with recent big contract wins such as Willis and RSA Mr Duchen and Mr McDonald are ready for the next wave of growth. "For insurers, for the first time the needle of electronic coverage for a portfolio is creeping up. Traditionally, the only thing that was e-traded was packages, which account for about 8-9% of a broker's premium," says Mr Duchen.
"Suddenly now we are into the big stuff like commercial combined and fleet, which is 22% and 18% of the average broker's premium respectively. That's 40% with just two products. Only 18 months ago, some insurers were telling us that we couldn't do it," he laughs.
He also predicts that brokers will easily be able to e-trade business up to premiums of £10,000 and even predicts that this could move up to £20,000. "Even if something has to be referred, it's still electronic," he explains.
"I don't think there is break point - it's a continuum. At the small end it's 100% electronic completion and then you move along the spectrum where it is more about electronic communication without interference in the rating." He makes it all sound so simple and logical but if that's the case, why did it take so long for people to see the value? What made them drag their heels? "I don't think brokers were scared of e-trading but they were sceptical," says Mr Duchen. "They were willing to give it a try but they were already convinced that they wouldn't get any success out of it. Now that they have given it a try, they can see that it works.
"The most successful folks we see in this e-trade arena are brokers that have embraced it for their small to medium-sized enterprise business and even their mid-market commercial. It's still brokered but they are not doing it manually - they are doing it electronically." As Mr McDonald puts it, they are "cutting their customer service time down from three days to half an hour". "There is a fundamental difference between the way we are set up and the way our competitors are," he adds. "We are software as a service so it's all centrally hosted - the others have a distributed system."
For all the Luddites out there, put simply, this means all users of Acturis are running off the same system whereas other software providers often configure their systems to an individual broker's needs. The pros and cons of this could be argued for many moons, but Mr McDonald and Mr Duchen are convinced that theirs is the most efficient system option not just for their own users, but for the entire market. "When we set up," Mr McDonald continues, "this was an industry with many, many people participating in different parts of the chain - the idea was that they are all using common data so let's just create one instance of that. Let's not have 6,000 instances of that. That's the big difference." "That was another reason the chasm was so severe," Mr Duchen chips in. "This was not only a new business, it was a different business."
And this "new business" is entering a new phase with European expansion the main aim. A couple of months ago, the Acturis board sold a minority stake to "growth equity firm" Summit Partners with the express purpose of helping the firm establish itself in Europe. Although they won't be drawn on just how much of a minority shareholding they have sold, the co-CEOs are adamant that the focus of the company is still the UK market. "We have a market share in commercial insurance of about 20% and there's no reason why we can't double that," says Mr McDonald off-hand. And as Mr Duchen points out: "The UK is the best route into Europe - if you continue to do a great job here, you not only have wonderful references, but a lot of the companies are global so if things work well here, they tend to support that in other places. This market is very important to us - it's number one." Mr McDonald picks up from here. "In each of these [European] markets there's going to be a mix of different approaches - working with existing clients, taking advantage of country specific opportunities and possibly making bolt-on acquisitions. It's not like we have a singular plan." The possibility of acquisitions is an interesting one. Both point out that the reason they believe their system is much more efficient is that it doesn't have to labour under several different systems. So surely it would be folly to follow the same route? "In regards to an acquisition - in some of these markets, there are providers with very good platforms but they are specifically tailored to the structure of those markets," explains Mr McDonald. "What we've got is 10 years' experience of taking a market that is totally unelectronic to a new world and that migration could involve the use of the Acturis platform or it could involve us using our expertise to develop a different one. "If you purchase a platform and don't do anything particularly coherent with it as part of a larger plan, there's a risk you end up with multiplatform issues. Our model is about connected business - it's about connecting the different players in the industry whether it's using our system or another one. It's a philosophy." Is it too much of a stretch to suggest that Acturis is about a way of doing business rather than the technicalities of a software system. Mr Duchen: "It's half and half I'd say. If you ask a lot of people in the market what the difference is, it is professionalism and efficiency." Which brings us back to what makes a great company. It appears that Acturis is on the cusp of something but it is too early to say if that is greatness. Mr Duchen and Mr McDonald have spent nine long years convincing a sceptical market that not only was their system a viable alternative but that theirs was a completely new way of doing business. In an industry that is notoriously slow to pick up on innovation, they have done a remarkable job in convincing some of the most influential players that there is a more efficient way. But their sternest test awaits them. They've got a fifth of the UK commercial market under their hat and are aiming to double that in conjunction with an assault on Europe. They seem sure they will not allow this to distract them from the fundamentals and they've got previous to show they won't. Back in 2002 when all around them were telling them that they were mad, they persevered, remained committed to their vision, and carried on regardless. If they can draw once again on this same focus and determination, there's no reason they can't repeat their domestic success on the Continent.
Biography - Theo Duchen
Theo Duchen is co-chief executive of Acturis. He was previously a partner at McKinsey & Company, having joined McKinsey in 1991 and becoming a partner in 1997. He led McKinsey's general insurance practice in the UK, was a member of McKinsey's European insurance leadershpi group, and has worked extensively with both insurers and major international brokers over several years. Theo is an actuary by training.
Biography - David McDonald
David McDonald is co-founder of Acturis. He was previously a partner ay McKinsey & Company, having joined McKinsey in 1990 and being elected to partner in 1996. He co-led McKiney's e-commerce practice in the UK and has extensive experience of business-to-business e-commerce. David has worked across a number of industries and was first involved in e-commerce in 1993 while working int he US. Before joining McKinsey, David qualified as a chartered accountant and received an MBA from INSEAD, France