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Commercial arms race for technological supremacy

Technology has the potential to transform business at its fastest rate ever. I have previously explored the subject matter in the following published articles about big data (“Big Data: He Who Owns The Past Controls The Future”, Mondaq, 6 October 2014) and digital technology (“Insurance – A Quiet Revolution in Digital Technology”, Mondaq, 16 March 2015).Of course, big data and digital technology are two aspects of the same thing. Over the last few years businesses that have been willing to innovate and embrace technology have grown more rapidly than those that have not and the pace at which technology is now evolving is such that businesses that fail to keep abreast will face an uncertain future. We are witnessing a commercial arms race for technological supremacy that will determine the winners and the losers over the next 5 to 10 years.

Even companies that are today’s market leaders cannot afford to become complacent or take the future for granted. The next 5 years, in particular, will see a huge leap in technology that will create significant market opportunities for existing and new businesses alike. In this arms race, information (data) and understanding its potential use, will become the strategic weapon in every business armoury. Nowhere has this been more evident over the last few years than in the insurance and health-care industries, two sectors worth trillions of pounds and which account for many millions of jobs around the world. Media grabbing headlines about the growing telematics market, watch and mobile-based healthcare/personal fitness apps, and smart-home technology are but a few examples of this phenomenon.

What does it all mean? Since customers are the lifeblood of every business, we can make a number of observations.

First, businesses that embrace technological change are more likely to use technology to assist them with the all-important customer service question: “what do our customers want and how best can we serve their needs or improve the customer journey?”.

Second, the ability to predict customer behaviour can not only improve customer satisfaction but also improve customer retention and profitability. As complex as that may sound it involves, at its simplest, understanding common human characteristics to assist in business decision-making (for example, underwriting and pricing). If customer behaviour is predictive, this can also help businesses positively influence outcomes in a number of ways, for example, companies can warn customers of certain risks, including potential accidents or healthcare issues to alter their behaviour.

Third, all service businesses are focused on customer numbers and trying to maximise customer value. Of course, not all customers are profitable and some customers are more profitable than others. There lies the conundrum. Successful businesses often choose between two financial strategies for revenue and profitability growth. One is to focus primarily on retention of the highest number of existing customers (including cross-selling opportunities), at the expense of growing customer numbers, to maximise present profitability by keeping acquisition cost down. An alternative strategy is to grow customer numbers, foregoing higher profitability in the short term due to the increase in acquisition cost but with the expectation of increased future profits as customer retention increases from higher customer numbers over a longer period of time. Both strategies leverage customer numbers and customer value as a means of achieving profitable growth. The advances in big data and technology in the future will allow companies to combine and manage similar strategies with better information and analytics than ever before, resulting in faster growth and greater profitability whilst at the same time realising more value for their shareholders.

If companies (even relatively new entrants) are able to harness this power of data and technology effectively, we could see businesses grow within a relatively short period (3 to 5 years) into billion pound enterprises. The risk for businesses over a longer timeline, however, is this, will the accessibility of such technology mean that all businesses will have the same advanced weaponry to neutralise each others competitive advantage? Or will certain businesses retain the technological equivalent of a nuclear weapon sufficiently long enough to overcome the competition? That is the Holy Grail in the arms race for technological supremacy that is currently underway and whoever cracks it will achieve significantly higher valuations than any of their peers.

Nigel Feetham is a senior partner at Hassans (a Gibraltar law firm) and Visiting Professor at Nottingham Law School, Nottingham Trent University. He is surprised how few undergraduates (save for students of actuarial science) ever think of a career in the insurance industry.

 24 May 2016

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