Good afternoon. Thank you for joining us. I serve as Guidewire's CEO. I was part of the original co-founding team that started Guidewire some 17 years ago. I want to set some strategic context for a bit and then share with you a whole host of metrics about our progress in the market. With whatever time is remaining, take as many of your questions as we have time for. As I trust you all know, we are a specialist company. We serve one industry, the global property and casualty insurance industry that indemnifies individuals and businesses against hundreds of varieties of loss. This is an industry whose salience, whose importance to us as a society is only increasing in a time of, as we grow into an increasing awareness of climate change.
This is just a picture from my home state of California, where we are experiencing, yet again, the most significant year of wildfire losses in both Northern and Southern California as part of a fire season that is fully 72 days longer than it was 30 years ago. Then, of course, on this coast, we have Hurricane Florence, only the latest instance of increasing frequency and severity of storm events that have caused, just at most recent counting, some $17 billion of loss in only a few days. We can expect this trajectory only to move in one direction. The P&C industry is fundamental to protecting ordinary individuals and businesses against these kinds of losses. It's been my privilege to serve the industry along with 2,200 other phenomenal colleagues that care similarly about the deeper mission at hand.
The industry is one of the largest in the global economy. It collects over $2 trillion in premiums. It's comprised of about 1,500 enterprises, primary insurers around the world that cover hundreds of different varieties of loss. That segment of the industry, the primary insurer who underwrites and bears that central risk has been our customer from the very beginning. It's our mission to make them ever more effective in this socially important task. Our mission is to deliver the industry platform that P&C insurers rely upon to adapt and succeed in a time of accelerating change. We always immediately follow that with an affirmation of our commitment to ensure that every customer succeeds in what is usually a very arduous journey to make that transformation.
Now, in this mission statement, particularly salient are the terms to adapt and succeed because this is an industry like many, but that is grappling with all kinds of significant underlying changes. Changes in end market behavior, changes in new market entrants, changes in the kind of talent that is accessible to the industry to undertake these transformations, then changes in the underlying nature of risk itself. In light of that, virtually every enterprise in the industry is embarking or is at some stage of a transformation program motivated by a set of imperatives to adapt in this changing world. The major themes of that could be summarized as follows.
First, to develop a much more streamlined and automated almost industrialized or manufacturing-like operational environment that can process a larger and larger volume of activity with less and less human involvement, but while actually increasing the degree of precision in the decisions that are made. Adapting to a really tectonic change in the preferences of both consumers and businesses to interact through a digital modality as opposed to always through face-to-face interactions or to have those face-to-face interactions embedded in a much more omni-channel comprehensive digital environment. To explore an expanding universe of data in all sorts of new ways, to visualize that data, to mine it for predictive insights, to be able to find patterns that were not easily discernible with smaller data sets or with less powerful tools.
To apply that to cover an expanding universe of different categories of risks than the ones that the industry has traditionally covered. Emerging risks like cyber, like business interruption, like supply chain disruption, like reputational risk. New categories of potential loss that require often new analytical techniques and new data sources in order to be able to underwrite and price. To interface with the universe of innovation that is happening in the InsurTech world, which I'll strive to quantify for you near the end of the presentation. To do this all in the context of scarce IT bandwidth and scarce IT resources, grappling with the need to simplify the underlying IT complexity that it takes to execute on all of these technology-driven initiatives. In light of these needs, our value proposition to the industry is what we call Guidewire Insurance Platform.
Traditionally in our history, we've described ourselves purely as a software company. Increasingly, you will hear us when we speak to the industry describing ourselves as an industry platform company because our value proposition and commitment to the industry extends beyond just the business applications that we're known for, all highly industry-specific and designed for insurance business users. This is the most significant year of releases for Guidewire in our history. You will hear Ali, our Chief Product Officer, give you an update on the many exciting things that we're doing across the entire suite of products. Of course, our first obligation is to deliver high-quality software that performs as delivered. Alongside that, part of the platform is a services proposition. Traditionally with Guidewire, this has meant services at the time of implementation, and then periodically in the future through upgrades.
In an increasingly cloud-based strategy and cloud-based value proposition, that service extends to us providing a turnkey, reliable business service that insurers can rely upon to operate with a minimum of IT complexity. All of the services that go along with that in terms of cloud operations, security, customer success encompass a broader universe of services that we bring to bear as our customers go through their journeys. Finally, part of our platform proposition is to bring an ecosystem that is connectivity with highly reliable at decreasing costs to all of the other partners that are important providers of either data or functionality or often services that are fundamental to fulfilling the full insurance promise, all the way from distribution to service and claims.
Increasingly, we see ourselves as a nexus and value provider in bringing together what is a very complex and at times bewildering set of offerings, many of which are emergent in this new era of InsurTech, and allowing insurers to unify them, integrate them into their core operating environments, and make maximum use of it. These three facets of the insurance platform are now how we characterize our value proposition to the market we serve. In doing so, we claim to help the industry we serve do all the core things that it cares most about.
Obviously, keep on the lights, run their operations as they are, further differentiate by disburdening themselves of the core functions that are no longer differentiating for them so that they can focus on the branding, the products, the pricing, the market strategy, market segmentation that allows them to differentiate and succeed in their market. Then also to grow, to identify new market segments that they want to pursue, potentially through different distribution modalities or different geographies or different lines of business, and get rapidly into market with a platform that takes care of the full lifecycle of activities and transactional needs that it takes actually to write business in the insurance industry. Running a business, differentiating that business, and growing the business are all different facets of our proposition.
This is a long distance from where we started the company 17 years ago, where our proposition could be summarized simply as, you have an old COBOL mainframe, we give you a new modern application that looks a lot better and has different features to it. It's a much more encompassing and strategic proposition that we're now committed to and that will occupy us for, I expect, the rest of our professional careers. At the heart of this is an evolution in the industry itself. As we evolved, we've been aligned with a deep pivot that's happened within the industry itself, and that is a recognition that in order to successfully undertake all of these grand ambitions, that they must dramatically simplify the amount of effort that they put into IT.
Also de-risk what are inevitably capital-intensive, expensive programs that involve lots of their professionals and distract them from the core task of running the business. Simplifying IT has gone from a nice-to-have to an absolutely central mandate at the heart of every insurer's strategy. This in turn has propelled Guidewire into rethinking the way that we go to market and what it is that we offer to now delivering all of our products in the cloud. Over the last few years, we have built Guidewire Cloud. We still have a long journey ahead of us to scale it to the needs of even our customer base and the broader industry beyond. Helped with the rise of public infrastructure that now offers elastic computing at declining unit costs, we're now able to extend a different kind of proposition to the market.
At the heart of that is a different division of labor than one of just a pure software company. If you think about and simplify it in schematic form, what it is that an insurer has to do in order to take a technology-driven strategy or transformation strategy, they have to start with software. They have to be functionally adequate to what they're trying to do. They have to manage the infrastructure that keeps that running in a production environment. They have to implement that software successfully and then handle all of the release management and upgrades and support that it takes to keep that production service going. Then they have to frame that in the context of business requirements, which of course constantly evolve.
Traditionally, in the on-premise model, our duties stopped at the waterline of delivering high-quality software that performed as promised and then supporting them through some of the steps of implementation, but then essentially having customers take the ball from there to run their operations. In a cloud-based world, we take on a significantly expanded mandate, which is not only to deliver the software, but also to manage the entire production environment, to obscure from the customer's need to think about all of the infrastructural tasks, and then also to manage all of the production releases, the upgrade process, the support that goes along with that business service.
What you find in our cloud strategy is a reflection of our market's desire for something that's convergent on a turnkey business service, something that they can use as needed and turn off and scale up and down only to the degree that it meets their particular requirements. With this expansion in responsibility comes a dramatically enlarging market opportunity for Guidewire in our expectation that customers will pay two to three times what they pay for us for just the software alone. Obviously, there is some element of cost transfer in that expanded revenue opportunity, but we're confident, and Curtis will frame for you in quantitative terms how it flows into our income statement over the years to come, what we expect that expanded market opportunity and impact on our profitability will look like.
Priscilla, who will immediately follow, will elaborate on some of the many operational tasks that it's taken on Guidewire's part to mobilize for us to be able to fulfill this proposition. I want to turn now to the different flavors of motivation that we are already serving and expect to serve more of in the market with respect to cloud. The first category of customers that we see moving to the cloud are those that are approaching the conventional question of legacy replacement, taking that 1980s, 1990s vintage mainframe application and moving it to a Guidewire core system, and to doing so, but in a cloud form.
We're already working with a number of customers in this mode, some with InsuranceSuite, a few smaller insurers with InsuranceNow, and we expect that a meaningful portion and a growing portion assuredly of some 1,100 other prospects that we are constantly pursuing over the years to come will adopt our core platform in cloud-based form. The second variety of customers are those that have already implemented Guidewire, our core platform, on an on-premise form, and potentially those that may choose, at least for their first iteration, to implement our software on premise. Today, that number is a bit over 575 implementations of one or more of our core applications at some 275 of our customers.
Today, as we have one publicly announced example of a customer making this migration, going from an on-premise implementation of Guidewire to a cloud-based one, but we are in dialogue with a very large cross-section of our current customer base, and we are confident in expectant of a growing portion of them to opt to make this journey. This is another segment of the demand. Then there's a third category of demand, which could be thought of as greenfield. These are insurers that in pursuit of that growth value proposition, decide to undertake a new core platform. There's no existing premium, but they are in pursuit of a new market opportunity, a new segment, a new line of business, a new geography and they wish to do it entirely in the cloud.
These are adventures primarily undertaken by larger insurers typically in the tier 1 or tier 2, though they're not necessarily restricted to them and we expect that this will be another kind of lateral source of demand for cloud-based core systems. We have several examples of this already in our customer base. We're honored to have Mike Keller to talk about Nationwide as an example of that with what they've done with Digital Small Business. Then the very first cloud-based customer that we've talked about with InsuranceSuite is MetLife which was in this form. Across these different categories of demand, we expect that a growing portion of our new bookings will come in the form of subscription.
We've modeled out our best guess of what that will look like on a fairly aggressive ramp that we're mobilizing both go-to-markets and internal operations to meet over the coming years. Again, Curtis will spell out to you what that means in economic terms. Now, it's worth pointing out at this point that across the entirety of our product portfolio, and this slide represents all of our products that are licensable. These are essentially all the SKUs that we license to customers today. All of these products are deployable in the cloud today, and a subset of them are licensable from Guidewire only in the cloud. This reflects the overall commitment that we made several years ago to offer that as an option to customers and we expect that more of them will take us up on that.
That includes our digital products, the core platform and the data products. At the same time, we're partnering enthusiastically with other partners that are relevant to what insurers are trying to do strategically. Some of these are InsurTech, but one of the most significant partnerships which we announced ourselves to be at the very start of about a year ago is with Salesforce in the CRM world. As insurers recognize the need to centralize their operations and their visibility and their go-to-market strategies around the customer, they've felt a growing need to unify that CRM universe with the transactional and operational world in which we traditionally specialize. It was very natural for us then to align with the market leader, with Salesforce, who's enjoyed significant traction in the P&C industry to deliver a truly product-based, cloud-native integration between the core operating platform world and the CRM world.
We launched our first versions for availability in May of this year. We have a whole set of very interesting joint customers already that have made strategic commitments to one or both of our companies already to pursue from here, and we've brought the first of these customers into live production recently. That's Amica, a very long-standing Guidewire customer, now a Salesforce customer as well that is using that productized integration between InsuranceSuite and Salesforce Financial Services Cloud in order to bring a truly digital front office into being. They believe they'll get substantial competitive advantage, as we believe they will for some time. We also expect that a digital front office powered by CRM linked to the operational world will become table stakes for the industry within a very short matter of time.
I want to turn now to talk about another important vector of our growth, another ambition that we announced publicly just a number of weeks ago and that is a new business unit that we call Analytics and Data Services or the ADS business unit in Guidewire. I want to elaborate a bit on why we've created this as a new unit, on the opportunity that we see ahead of us. Spend a little more time, actually a bit disproportionate to their actual contribution to our recent financial performance, because we believe it'll become an important engine of growth in the future. It also reflects, I think, a meaningful expansion of the total addressable market that we're pursuing as a company. To frame the opportunity simply, every dimension of the initiative that I described earlier have a data dimension to it, right?
To better instrumentation of core operations, recognizing and tracking in a much more data-rigorous way, customer behavior, especially at the point of distribution, especially digital distribution. All kinds of opportunities to visualize, model, and mine for predictive insights, existing data. Then again, the need to go for new risks, which often takes different data sources and different analytical techniques beyond traditional actuarial ones in order to pursue. All of these have a data dimension to them. Corralling them into one business unit that can focus on them, linked to but not necessarily beholden to the core system strategy, was an important decision that we just made.
In essence, we have an industry that is grappling with and excited about a huge abundance of new data sources that are available from the public internet, from proprietary sources, from all different approaches to harnessing data that was not so self-evidently available. At the same time that they want to intermediate new risks and also make the decisions that it takes to run their operations of the high-volume decisions in a much more machine-driven and precise way. In order to address that opportunity, they need a set of skills and assets that on their own they find themselves hard-pressed to meet. It takes a platform that is capable of ingesting and aggregating and curating that data. The machine learning and artificial intelligence techniques it takes to find signal within that data.
That data has to be harnessed in the service of models that are specific to the P&C industry, and then put into business applications that underwriters and claims adjusters and other business users are able to consume and make meaningful decisions out of. There is a need to do that, again, as simply as possible with a minimum of IT complexity and ideally at very high volume without escalating cost. This is a set of requirements that we believe we're well-situated to meet and through a combination of what we built internally and in the recent acquisition of Cyence. What we bring together in this division are three of the product areas that have been operating essentially as disparate adjunct to the core system business that we're now bringing together in this one business unit.
There's Guidewire Live, which already allows streaming from our core operating platform into a cloud-based data lake for primarily data visualization use cases to date. There is Cyence, the company that we acquired and closed in last fiscal year, that brings a data listening approach to help insurers underwrite and model a specific category of risk, namely cyber insurance, that we're now working to generalize to other lines of P&C for which we have 37 enterprise customers. There's our predictive analytics solution that originally started with an acquisition we made some four or five years ago, namely EagleEye Analytics, that embeds machine learning-driven predictive analytics scores directly at the point of decision throughout the underwriting customer service and claims life cycles. For which we now have 39 customers, all of whom are Guidewire InsuranceSuite customers.
By unifying these three sets of assets under the broader mandate to become a world-class analytics and data services provider to the industry, we believe we can more effectively address a market opportunity that is substantially larger than just an adjunct to the core system business. Over time, we think we can build an asset that is quite distinctive. Namely, an aggregation of data that uniquely combines all of the operational experiences of those participatory Guidewire customers, many of whom will be in the cloud, as well as all the different data sources that are available to be harnessed to find signal within. Both public sources, proprietary ones, sources that are now just beginning to be exploited for interesting and dispositive insight on customer behavior, fraud, and the like social media streams and the like, into a single data lake that we can then mine for insight.
Using different machine learning and P&C modeling techniques to be applied to both a new category of risks, some of which are not well underwritten today in the market precisely because there is inadequate loss experience or inadequate data to model and bring them to market in the conventional insurance modality. As well as well-established lines of business like small business or commercial auto and the like. Opportunities to apply those insights throughout the P&C life cycle from underwriting, distribution, services, and claims. We're compelled by the opportunity to create this data asset. Obviously, the asset in itself has to be translated into actual business value for our customers, there are substantial scale, skill, and functional benefits by having such a large data set to work with.
We think we're uniquely situated with our install base of some 380 customers, more and more of whom will be in the cloud, and therefore more proximate to contributory data than any other organization in the world today. Leading this effort is a great new leader within Guidewire. His name is Paul Mang. He was the CEO of analytics for Aon Benfield, one of the top three commercial brokers, and has spent his career in P&C and in P&C analytics, including as a leader of the insurance practice at McKinsey. I just want to give you a few quick examples of what sort of use cases we can address. I talked about the opportunity to help insurers underwrite and price new categories of risk more precisely. A schematic example would be a very classic insurance problem, which is, how do you underwrite a commercial risk?
The first thing you need to do with a commercial risk is gather some basic data about them. The conventional way to do that is to ask the insured, or the would-be insured themselves, to provide basic information that over time you've developed actuarial patterns to understand how they're correlated with potential future losses. What insurers have found is that there's a certain level of granularity that they can impose over the universe of risk to put them into different categories of low, medium, and high risk, and to price them accordingly.
What science has discovered is that, at least with respect to cyber risk, there's every reason to expect this will be true of every other category of risk, that by a finer-grained understanding of the data, like knowing more precisely what services are being provided, knowing what kind of products might be sold, understanding and listening to what is said about these different businesses on social media, geo-locating where their operations are situated, all of these other factors can lead to a different kind of calculus, a finer-grained calculus about both the risk and the way that should be priced. This is at the absolute heart of what it is that insurers do, and if we can provision them across different lines of business with that greater insight, there's every expectation that insurers that master this will do substantially better than those that don't.
Secondly, on the operational side, where many examples of how better data coupled with experience and embedded appropriately into the workflow of a process can yield materially better outcomes to all the things that insurers care about. For example, in the claims world, this is a case study from a commercial insurer, it's a customer of Guidewire's called Atlas. They focus on livery taxis and on the ride-sharing economy. They've done exceptionally well, growing at 30% a year over the last few years. They recognized they had a strategic need to be able to deploy their claims resources appropriately on the claims that require the most human attention while automating the settlement of meritorious claims as quickly as possible. They had a triage problem.
As new claims come in, making an assessment of how likely the claim was to escalate into a high-severity and expensive claim, resolving all claims as quickly as possible. By applying the predictive analytics tool, they were able to really bend the curve on what a claim looks like over time and to make a relatively incremental adjustment to claims that were standard and that had not aged, but make a very material change in the claims that were high severity and were longer in duration. They've quantified that potential benefit at something like 3 to 5 percentage points in their loss ratio, which is a highly strategic kind of improvement, were also able to accelerate dramatically those claims with the settlement in aggregate over the entire claims book.
If we can apply these kinds of predictive insights at the point of decision in all of these important steps, those insurers that embrace and operationalize those kinds of changes will have an enormous advantage over those that are approaching the process in a conventional, traditional tribal wisdom kind of way. That's at the heart of our proposition here. Now, in sizing the opportunity, we're very early in it, and a lot of what we're trying to do is aspirational. We don't have products that can address the totality of use cases that we can envision. We think that there is breadth in this approach to basically everything that an insurer thinks about in planning what products they want to bring to market, strategically how they want to manage that risk and book of business, sales and distribution, and of course, the claims process.
If we survey the categories of technology and data spend that the industry spends today in these respective categories with predictive modeling tools, with buying underwriting data and pricing data from third-party sources, fraud analytic tools, and the like, we come up with a number something like $8 billion or so that the industry spends annually on this universe of needs. We don't address the entirety of that today, but that is what we're positioning ourselves for, and what's exciting to us is that it is both lateral to and complementary to the core system operation that has been our business for the last decade and a half. Okay.
I want to now turn to the second half of the discussion, which is just to share with you the metrics that we've been collecting over the last year to give you a sense of our progress in the market. Of course, one of the basic counts is how many licenses are we selling across all our products in core data and digital. You see that reflected here. Last year, we had in aggregate over 1,200 licenses of our products across our customers. I think this slide tells the basic story of our growth strategy, which is to complement the effectively linear pace of adoption for insurers to modernize their core platforms with a host of data and digital offerings that speak to some of their more modern strategic needs.
We've enjoyed an exceptionally high attach rate of the new offerings that have been a combination of internal development and acquisition. That's been a highly successful growth strategy that we have every intention of continuing. Part of our original thesis as founders in the company was that if we successfully help insurers replace that legacy core platform, that we will be uniquely well-situated in order to bring additional offerings that both leverage and enhance the data and the workflows that are within those core platforms. That's essentially exactly how it's played out over the last five years. An expanding product portfolio has helped us grow licenses. As you can see here, this is the summary of overall data about our top line as it's grown over the years, all the way from the release of our very first product, ClaimCenter, in 2004.
There's been a combination of acquisitions. We've done five over our history. For the sake of posterity, we date our plunge into the cloud in fiscal 2017 with our first cloud customer in that life. A customer that we expect to join with many others to follow. I talked about the attach rate of our new data and digital products. Here, you'll see that we enjoy a very high attach rate of these new products as we continue to penetrate our existing customer base and continue to position the new products in the context of new sales. We expect that this metric will become less and less interesting over time. It's now a fundamental part of what motivates our prospects in order to work with Guidewire in the first place, some sort of digital transformation or a desire to leverage their data better.
We expect to see the percent of our install base that adopts one or more of our offerings in each of these areas to eventually converge on something close to 100% over time. This ability to expand beyond the core, both through acquiring new products and effectively bringing them to market while retaining much of the existing team, as well as building new products on our own organically that leverage the data model and the deep knowledge that we have of the processes in question, is a strategy that we'll be doubling down on going forward. Another obvious metric is the number of customers and the premiums of our customers in aggregate. What you see on the left is the 380 primary insurers that are now part of our customer community.
On the right, you see reflected the total premiums within those customers, not necessarily 100% within each, that have licensed one or more of our core applications. This analysis too kind of changes over time because it does not include our Cyence customers and the other Analytics and Data Services customers that we expect to acquire over time. As I mentioned, those are relationships that are no longer attached specifically to core system sales, but it's still a metric that we'll continue to measure. In aggregate, it reflects the fact that our customer community comprises roughly a quarter of the global industry, both in count of number of insurers and in the aggregate premiums represented amongst them. Here is a view of our customers by tier.
We divide the industry somewhat arbitrarily but following industry convention into 4 tiers, greater than $5 billion, $1 billion-$5 billion, $300 million-$1 billion, and below that. We've seen growth across all customer segments reflecting the fulfillment of a pretty important part of our strategy, which is that we want to build a platform that's sufficiently generalized that we can serve primary insurers of all sizes, essentially in all geographies and across all lines of P&C. Nonetheless, despite the progress that we've made, especially at the top end of this pyramid over the last number of years, we have a long way to go in fully penetrating the opportunity reflected in each. This is a geographic view. It shows us across the three theaters or the way that we segment the world geographically between the Americas, EMEA and APAC.
As you would have heard in our last earnings call, we had a year of really significant progress in EMEA with a number of important wins in the tier 1 and tier 2 with insurers domiciled in major continental geographies. Nonetheless, we still have an enormous distance to go and a lot of markets still to penetrate in EMEA. We are going to be active there trying to start new relationships for many years to come. If you take a look at how our sales have been split between expansions within existing opportunities and winning new logos for our business, it's been fairly consistent for the last two years at approximately a 2 to 1 ratio between expansion and new customer wins. Our expectation is that we'll be roughly convergent around this.
That's a combination both of increasing market stature and ability to win new customer mandates with the fact that we are broadening our product portfolio, which increases the expansion opportunity within each customer. The way that those two effects kind of net out, we expect will be something like a 2 to 1 ratio for some years to come. Looking at it globally, we serve a global industry, so we have always aspired to think of ourselves not as a Silicon Valley company, but as a company in the service of a global industry. We've now completed some 620 core system projects. We have 620 projects that have either been completed or are actively underway in 30 countries. We have brought 240 of our customers into live production with one or more of our core applications.
Just stating the obvious, this is our most important competitive asset because it's been arduous to achieve. Every one of these implementations remains extremely demanding and then provides a foundation for effectively a lifetime relationship on which we can continue to build, sell additional product and add additional value. Competitively speaking, there is little change to report from the last time I stood before you. We effectively compete with the same competitors that we have in the past. In the Americas, our primary competitor is Duck Creek, which is a private equity-held software company, approximately Guidewire's age that we've been competing with for many years, as well as a host of niche vendors that serve primarily smaller insurers in the tier 3 and 4. In Europe, we compete with a much larger universe of competitors, typically active in one or two countries.
I think with the exception of course of SAP and DXC, which is part of CSC. These are all much smaller companies than Guidewire. Despite that, they are very worthy competitors in particular geographies where they have a local advantage in knowledge, sometimes in local content or relationships. So competition in Europe has been and will continue to be substantially more challenging than in the Americas, though we made great progress this last year. In APAC, it is the one geography where we still encounter a meaningful resistance competitively with insurers that have a build inclination. That is a phenomenon that used to be global, but is now really just isolated to Japan. In ANZ, that is a geography where we have been pretty broadly adopted over previous years and expect that to continue as well.
Here I share with you a bit more color and data than we have historically about our win-loss rates. This is a 2-year look about core system decisions. We are not competing only in core systems today, but those are the most important decisions that we track the most closely for competition. On the left, you see just the total number of decisions. This is based on our analysis, and we are listening very closely around the world for whenever a core system decision is made. By our count, a bit above 50% of these have gone Guidewire's way against a very large array of competitors, none of whom won, by our count, more than two or three selections across any kind of customer size.
On the right, you see the DWP or premium cut of that same data, where the entire pie chart reflects all of the premium that was potentially up for license. What this reflects are the comparison between the two pie charts will just show that in general, the larger insurers we enjoyed a higher win rate across that same set of competitors. So by rough count, we are winning slightly more than half of all of the global decisions and about two-thirds of the total premium.
While there's a lot to be proud of in that fact, there's a lot to be discontent with as well, because every time a core system decision is made, even with a competitor where a customer may regret the decision in the future, the switching costs are such that it takes a great deal of effort for us to change that decision back to Guidewire in the future, often years. This is really the battleground for us in sales to win that core system mandate on top of which we have years of expanding the opportunity ahead to look forward to. Another measure is not just the number of wins, but how much remains for us to expand those relationships with and how much of the market still remains. We measure this a couple of ways.
One measure is DWP penetration, where the denominator is the total DWP of the universe in question, the numerator is how much is under license for at least one of our applications. Another measure, we gave this a different name in the past, but we call it revenue opportunity now, where the denominator is for a given universe, what is the total annualized subscription or license fee that would be possible based on historical pricing? What do we actually have in the numerator? These are the two ratios that we measure across different market segments. We can apply that both to the existing customer base or to the overall market or to segments thereof.
What you see here, first, I should say this excludes now the cloud opportunity, which is a multiplier effect, of course, on what we can license our product for. It also excludes anything that we may sell with the new data division because we're too early in our market experience, I think, for that to be meaningful. Excluding those opportunities entirely, this chart represents our degree of customer penetration. On the left, just by premiums, and you can see again that we touch a meaningful portion of the global market where we have at least a foothold. They have licensed at least something, one of our core applications. On the right, within our customer base, how much more there remains for us still to license. Right.
What this reflects that within our install base, even without considering the cloud and data opportunities, we have a significant room to grow just in licensing additional modules of InsuranceSuite, also our data and digital products. Right. Applying that same kind of methodology, but now to the overall market, again, excluding cloud and data. If you look at the overall market, you see the portion of the market that we touch. This maps to the roughly 25% that I showed on the prior chart. The market opportunity from there, you'll see that we're just barely scratching the surface in what's ahead of us. Again, excluding the opportunity to multiply existing relationships through a cloud migration.
We have a great deal ahead of us, and this is what consistently leads us to the conclusion that the highest ROI on any investment activities or new initiatives that we may undertake as a company are best directed toward further penetrating this opportunity and securing our market leadership position. Last topic I wanted to cover was the phenomenon of InsurTech and to give you an updated view of our view of what's happened in InsurTech over the last few years. This is a term that didn't even exist four or five years ago, and now it's become a significant investment category for early-stage technology investment. Roughly speaking, we divide the InsurTech universe into two categories.
Those that are digital attackers who essentially come with a distribution value proposition, either on their own or in partnership with some insurers to try to disrupt some given market segment with generally a digitally native kind of value proposition. On the other side, there's a much larger but often less flashy, less marketed category of InsurTech that we call process improvers, that are generally trying to apply some form of horizontal technology, whether that is data or drones or natural language processing or whatever it may be to a specific insurance use case. There's a much larger universe of these.
Parsing what that means in terms of its relationship to Guidewire, we see that of the $2.5 billion approximately that has been invested over the last five or six years in the industry the majority of that on a dollar basis has gone to new products and distribution whereas a meaningful portion has gone to data analytics and some of these process improvers. With only a small sliver going to core systems, which is a category, obviously, that we would put ourselves in. With almost all of that investment effectively going to existing players that have been around for long before 2012. What you see on the left is an incomplete inventory of all of the different emerging technologies that have attracted early-stage investments.
Fraud detection, underwriting analytics, IoT data, claims supply chains, machine learning-based, photo-based estimation of auto physical damage many of these categories, many of which are exciting and interesting complements to conventional insurance processes, and many of which are very logical integration partners into InsuranceSuite. This has captivated a great deal of interest in the industry. We believe that our role is first to make it as easy as possible for our customers using the platform to integrate those capabilities into what they're doing with InsuranceSuite in a complementary way. Then in select cases where we see real growth opportunity and true synergy that they are potential acquisition targets for us as we've undertaken successfully with the five we've done in our history so far.
I think it's also interesting to note that the majority of the investment that has gone into InsurTech has come from within the industry itself. Some 83%, by one estimate has come from insurers and reinsurers that are looking for ways to essentially verticalize these horizontal opportunities and make them effective for solving insurance problems. So far, the InsurTech phenomenon has been wholly positive for Guidewire. It's been an important strategic catalyst for insurers to undertake later technology investments, and it has expanded the universe of potential partners and potential acquisition targets for Guidewire. That's all been entirely welcome. We see no sign of that stopping in the near-term future.
Just to recap then I think straightforwardly enough, the things that Guidewire has to do is not expand the number of new strategic things that we're pursuing, but to execute on the ones that we have already made commitments to. It brings us to a pretty simple list of execution tasks as a leadership team. First, we have to win the platform mandate. That is another way of saying we have to make the sales plan. That is first and foremost, that will always be demanding. We are in the best demand environment that we've ever had enjoyed as a company with arguably an enlarging market stature even relative to years prior. We're up for that challenge. Secondly, we have to build on the great momentum that we experienced in Europe, which is hugely important to the insurance industry.
Most of the large multinationals or all of the large multinationals are based in Europe. They're all customers of ours to differing degrees. We have a significant opportunity to expand those as well as plant more flags with the domestic domiciled insurers in the major geographies in continental Europe which are more active in their technology initiatives than we've ever had before. Third, though not necessarily less important than the others we must achieve the cloud transition. A great deal of that involves operational tasks not visible in our financial statements, but are very fundamental to our ability to fulfill the promises that we're making to customers to dramatically simplify their transformation journeys and to take on as a trusted partner their risk and complexity.
Finally we've taken a bet on a speculative but enormously exciting opportunity to bring new sources of data and new kinds of data science to a whole host of insurance problems across their life cycle and to actually grow the insurance industry itself by allowing it to indemnify many categories of risk that today go effectively self-insured. If we do that successfully, we can not only do a good deal of good for Guidewire, but also help the industry itself perform its social function all the more expansively. With that, I think we have about 10 minutes or so left to be able to take questions.
We have one.
Sure. Justin?
Thanks, Marcus. Justin Furby with William Blair. I guess two questions. You showed the mix of new and cross-sell, and I guess I was expecting it to be a heavier cross-sell year than last year, just given your growth and DWP came down a bit. Is there anything else beyond that in terms of your landing bigger with that DWP or its cloud or what? Is there a number in terms of DWP growth where you start to get nervous, where you feel like you have to hit from a threshold? Totally separate, what does the data stuff you're doing, how does that impact your ability to better penetrate when you think about APAC and Europe, and you mentioned the competitors are tougher there?
Sure.
How does that inform that?
Your first question is about the kind of mix between land and expand and at what point does it feel good? Is it something that we would worry about? It's very much an aggregate metric because it combines lots of different factors. I would be thrilled for us to have an existing customer that's been implemented for a long time, that made the commitment to migrate entirely to the cloud, and maybe license more of our platform today. That would not move by $1 our new DWP mix, but it would be strategic for us and could represent a tripling or more of the ongoing value of that relationship to us. That would be hugely significant. On the other hand, of course, it would be very exciting.
It's always exciting when we win a mandate with a new large insurer, and maybe they're only buying BillingCenter from us or whatever, but they're doing it for a substantial amount of premium. We know, we have 16, 17 years of experience to know that's going to lead to buying a lot of other things with us over time, however long it may take. That does move that metric a lot, and it also changes the land and expand metric. Is one of those things more desirable than the other? No. They're both essential to the strategy. I think if we were to see that we were now, for some reason, incapable of selling new, winning new mandates, and those were going to some competitor, or our win rate were changing meaningfully, that would, of course, be extremely worrying.
We saw the opposite of that happen this year. If we were to see that we were able to win new mandates, but somehow existing customers didn't want to buy anything more from us, that would also be very troubling for a different reason. It would mean that we were failing in customer referenceability, and that was ultimately going to bite us in other ways, too. I think it's one measure among many, and my personal takeaway is that it's going to be a roughly 2 to 1 ratio for some time, and that feels pretty healthy to me. Your other question was about data and whether that would be an important competitive or useful competitive wedge, I think, in other geographies. I think absolutely.
One of the challenges in our business from the very beginning was that the minimum buy from Guidewire, the minimum commercial relationship we could have with a customer was to do a huge transformation program. Maybe it would only be for claims or only for policy or one segment of their business, but it was enormous. That was a big initial bite that a customer had to take, an enterprise had to take with a company. If that company is now based on the other side of the world, it makes it all the more difficult. Data is not like that.
Cyence, in a very short period of time, was able to build an extraordinary number of relationships because they were able to speak at the top of the house with a growth proposition that had almost no IT footprint but had a growth proposition to it, right? They were able to form astonishingly quick relationships at a very senior level. That's captivating to us because we think that data has that characteristic. If we can show for a new business, "Hey, here's an opportunity for you to underwrite something that you haven't done before. It's growth opportunities. You can be live on that quickly," then that could be the start of a relationship that, of course, we could leverage on the core system side as well.
I think it has that interesting quality, and that's one of the reasons that we wanted to decouple it from core systems and to give it the autonomy, the funding, the leadership that it took to go pursue those on its own. Yeah.
Could you tell us what the win rate looks like in that total chart by GL?
We don't have that cut for you, but I can speak to it directly saying that we do very well in two of the geographies, in the U.S. and APAC, excluding China, where we have not done well. Historically, we've done substantially worse in Europe. You saw that we have a much longer list of competitors. That 36 or 39 competitors that are shown in those tiny slices, the large majority of those are European, right? They generally serve smaller insurers. On the matrix of competitive results, where we've done the worst by far are with small insurers in Europe, where we're facing a focused competitor, speaks the language better, often comes from the industry there, and we're more expensive, and we're from a different country. The dollars involved are typically much smaller.
Nonetheless, those are losses, those are important winnings that we need to win going forward. Yeah.
How much does it drag down the total win rate, the European? If you were to exclude those two, would you guess that would be 75%-80% win rate?
I wouldn't want to guess just because I could be embarrassed by getting the arithmetic wrong. I'm sure that it makes a very meaningful difference, that the large majority of the losses that we would have had over the last three years have come in that segment. Yes, Ken.
Marcus, you mentioned being in dialogue with a lot of your existing on-prem customers. I guess first, just wondering how that dialogue might be different from some of these net new or greenfield opportunities and whether or not it's a much longer timeline, potentially.
A second question, I can't help but notice that you focus quite a lot on the ADS business.
I think in the past, you guys had quantified it as being roughly the size, or data and digital being roughly the size of claims.
Is that meaningfully larger now?
Sure. With respect to new versus existing customers and the relationship, or the nature of the dialogue that we have with them, they're not as different a species as you might think. In part because we're ultimately selling to human beings and people change roles. We have, in many cases, our implementations or our relationships have survived multiple changes in leadership over five years, 10 years, et cetera. Even though the software is, we enjoy an extraordinarily low churn rate, we still have to constantly validate our worth and worthiness, especially when we're talking at the time of expanding the relationship. No customer treats us as entitled to the next decision, even though we obviously have a lot of advantages in the sales process. I would say with respect to Cloud, that we find an equal appetite across our existing customers and new.
It's not as though new customers are more urgent and excited about it. We see nothing like that. I think that there's a very broad-based kind of universal appetite for along the lines that I described, a desire for that risk transfer and complexity reduction that I talked about. Your other question was about data and kind of quantizing the opportunity. That's why I tried to put some disclaimer around the big number that I put before you, because we're early in that, and we don't have solutions that cover that waterfront comprehensively. I think we are well-situated to develop that. We have a data science team of 100 professionals. We have a great leader who knows what he's doing in that. We have a customer base that we're showing actually huge value for.
If we can move the needle two or three percentage points of operating income just for one slice of predictive analytics, and if we can industrialize that and show that that's true for any insurer, we should enjoy an exceptional attach rate on that over time. I think we have a new appreciation of the economic value. I think we have more assets to pursue that than before. I think we've now recognized the power of treating that as a distinct vector of approach to the market than just an adjunct to the core system sale. Yes, Sterling.
I want to follow on the ADS question from this perspective. You sound excited about it. It sounds like it's an incremental investment, but we heard that excitement when you launched Guidewire Live as well. Everything you just said was from a Guidewire perspective.
Big question from my perspective is why now?
Why will the customer choose now to finally embrace this?
Yeah. I think you're right to hold us honest, Sterling, we did have a lot of excitement about Guidewire Live. Most truthful answer is we were young and stupid then, we're a little older and hopefully a little wiser now. That's the most truthful thing, we were new in a domain that we did not have much expertise in, we have dramatically more in the company than we did before. We've been humbled a bit by that. Secondly, I think that the world has changed with respect to insurers' willingness to syndicate and contribute data. It has to be done very respectfully with all kinds of security and controls, things that we have to do naturally because of the cloud journey as well. We're much more mature in our ability to discuss that.
I think that as we have used, even though it's been much slower than we like, as we're able to now bring forth references and examples of the actual economic benefits. It's not a theoretical, yes, they're signaling here. There's a treasure there if you look for it. Actually, this insurer is able to attest to the needle moving in their underlying core performance. As we have more and more of those references, I think we end up with a very different dynamic. There's one final thing that we've done that I think will make another big difference, is that at a functional level, we have integrated that product much more intimately with the core platform. Right? Now, for example, predictive analytics is now embedded directly within InsuranceSuite.
If you're a claims adjuster, you see at the same time that you're making a settlement judgment, you will see advice scores broken down by parameter on why you should go one way versus the other. That's not some other tool that you have to go through. There's no other mysterious integration. There's no other login. It's right there in the same screen. It turns out that that moves the needle as well in adoption. These are all bases for optimism, but obviously, as in so many areas, other places, we have to prove it with results. Do we have time for a few more? Darlene, can we do a few more? Okay. Sure.
Hey, Marcus. I have two quick questions.
One, does Guidewire Cloud, does that change the win rates at all long term? Do you see any impact on that in terms of addressing pain points or adoption? The second question I had was, this slide was really fast on the flip, you had that slide about the market opportunities across the different tier segments of insurance customers.
The tier 4 and 5, that was as big as the tier 1 and 2 category. I was just curious why the dollar opportunity is so large there.
Sure
If you consider the fact that most of the DWP is concentrated at tier 1, tier 2.
Great. Question one with respect to win rate and cloud. Too early to say that will happen, but I think all logic suggests that as we can have more customer references that say Guidewire is operationally capable of delivering in the cloud, this has dramatically simplified our life, and now the service actually works as a reliable business service. I think that's what the market has been hungering for for a long time. If you were to look at the single largest competitive objection that Guidewire's had over the years, it has been the projects are too long and complex. Right? If we can address those, we will be at the heart of what drives customer adoption. The second question on this chart, it's simply a matter of differential pricing. Smaller insurers pay dramatically more per unit of premium than large.
Or you can think of it as a volume discount. This is the way that it actually has mapped out historically. It leads to the result that despite the fact that premium is, as you point out, quite heavily concentrated in tier 1, that the four segments, almost just by coincidence, but the four segments are roughly equal in market opportunity for Guidewire, which is one of the reasons, well, that is the reason that motivated us to acquire what is now InsuranceNow. What is the pricing differential I couldn't compute the pricing differential for you exactly. You can back into it. Yeah, but you can kind of back into it from that look, yeah. One or two others? One.
Maybe one more.
Okay. Let me check.
Who are you on video with next? Thank you. Hi, Colin Deschamps with Sterling Capital. Just curious to ask about the ADS TAM and the data lake.
Number one on the ADS TAM, the $8 billion figure, I'm assuming that's kind of a best estimate on current market today.
That's right.
I'm curious, is there a cloud transition element at all to that or potentially more of a value add given your large installed base where that $8 billion could indeed be a multiple of that down the road?
Right.
Number one. Number two is I'm curious on the radius of the moat this data lake-
can potentially fill. You talk a little bit about the permissions that are currently in place with the data, i.e., if I'm a tier 1 client of yours, do I have to opt in to allow you to use it, or can you use it already in some anonymized way?
Sure.
Give an aggregated anonymous solution or-
Sure. I'll take question two first.
Okay.
With respect to permissions, obviously this is not our data, it's the customer's data. We have to be utterly respectful about usage. There's a whole PII dimension to it that our customer and the industry is hypersensitized to, appropriately so. It's not as though, hey, you've used ClaimCenter, therefore, we have access to the data, we're going to start doing interesting things for you. Everything is very carefully controlled, permission, legally negotiated, and so forth. One basis for optimism is that this is an industry that has, long before any of these kind of sophisticated advances in data science, has always syndicated its data. That's kind of fundamental to the insurance model. They already have well-established practices for anonymizing things and getting things to a level where they can come up with actuarial loss tables that are shared across the industry.
This is sort of the next generation of that, but it requires great care, as you point out. That's right. The other part of your question was the quantizing the opportunity. We thought that the most objective way was to look at, well, what are insurers actually spending, right? That is a kind of replacement-based TAM analysis. There's a more interesting TAM analysis, which is as a percentage of value creation. If you can actually affect the underlying profitability of the whole industry, then what's a reasonable capture for a technology provider in that? I think that leads to a number so dramatically large that it's not helpful to put it on a slide, but it is motivating for us as a business. Okay. Thank you all, and I'll be available for other questions at the end of the day.
Thank you, Marcus. Thank you for your questions. Marcus will be available at the break and at the end of the session as well in case we didn't have time to get to all of the questions. Now, Marcus obviously talked a lot about the importance of cloud with respect to our platform and how we're investing heavily in cloud. Here to provide more detail about our business readiness for that is Priscilla Hung, Guidewire's Chief Operating Officer. Priscilla.
Thank you. Hello. Good afternoon. My name is Priscilla, and I think I've met a few of you already over the years, and I'm very delighted to be here to share with you how Guidewire is getting ready to support a cloud business. I've been with the company for over 13 years now, and currently, my responsibility is primarily to focus on getting the company ready to succeed in the cloud and execute our cloud strategy. My team currently comprise of roughly about 1,000 professionals across teams like product development, not professional services, product development and strategy, M&A, business development alliances, customer success, business strategy, and go-to-market teams, as well as the technology operations like cloud ops and information security.
In this session, I'll share with you how we're getting ready, what is the cloud's impact on the Guidewire internal operations in order for us to gear up to support our customer and the market demand. Guidewire Cloud. What is really Guidewire Cloud in light of the impact of the Guidewire operation? Let's take a step back and look at what that really is. Guidewire Cloud really is about transferring a risk and application management responsibility from the Guidewire customers to Guidewire in a utility-like model. As a result, the customer is free up to focus on bandwidth and the resources in what matters to them the most, like business agility and strategy. We are, in turn, responsible for the ongoing customer success of the application. All that predicated on a platform that is economically viable and financially profitable to us.
Under this model, Guidewire Cloud, technology-wise, is hosted by AWS, and Marcus mentioned that early on in his presentation. The cloud operations team is responsible to keep the lights on. What that means is that we're responsible for the ongoing infrastructure uptime, we're responsible for ongoing upgrades, post-production support, and everything has to do with the application management of the Guidewire solution. We also assume service level, like uptime and response time guarantees, and we are accountable to keep the customer data secure at all times. In addition to cloud operations, we also offer the cloud assurance services that provide training and certification, assure quality of implementation and upgrade with our partners and customers, and also execute the gating process and cycle for production release. In a way, cloud assurance services really wrap the cloud operations around and manage the entire lifecycle of the Guidewire application.
If you look at this business model, it's very different. It looks very different and feels very different than our on-prem business that has been running for over a decade now. What it means is that to succeed, to take on a cloud, and to be able to meet all this demand, it really requires us to fundamentally think and operate differently within Guidewire. It requires us to build product differently, to sell differently, and to support it differently. What that means is that to win in this game, we need to transform the entire operation. We need to mobilize the entire company, all facets of the organization, in a very organized and coordinated fashion.
My foremost objective in my job is to make sure that we are ready to take on the cloud business and to be responsible and get the platform ready to ensure majority of the Guidewire customer can run the core in Guidewire Cloud in the next couple of years when they're ready. What is the benefit of a cloud? Marcus touched on that a little bit earlier. To recap a little bit, why does the customer really want to run the portfolio in a cloud? There are many reasons, and some of the top reasons are accelerate speed to market, and that may be offering new product or expansion to a new geography or market segment. As we discussed, they can transfer the risk and IT complexity from them to us so they can focus on what matters the most in the business.
It also allows a faster innovation platform through test and learn and adoption of InsurTech. Why does Guidewire want to adopt the cloud? First and foremost, our customer requirements and the market needs is very important to us. We want to be able to continue to deliver the value proposition by being the industry platform. Offering the cloud solution accelerate our mission in that regard. While we're taking on the risk and liability of being responsible for the entire application lifecycle, we do gain, as a result, intimate insight of our customers' operation, which is very important to us. Being able to use cloud and power by the cloud offers faster, innovative technology to our market through a rapid cadence of software releases and also much less disruptive and less expensive upgrade.
Standardization and conformity in the cloud also allow us to focus our investment in R&D much more sharply. All that results in a higher revenue capture for Guidewire. Everything gets better when we practice more and with scale. This whole cloud journey really motivates a virtuous cycle and creates a network effect that offers us a couple of really good benefits, including onboarding a large community of partner on our platform in much more rapid and frictionless manner. We're able to accelerate their adoption of best practices and therefore standardization and conformity. As a result, lower the runtime cost when we're at scale, and therefore in turn, increase the profitability of the business model. Marcus mentioned that a little bit about the cloud driving a different kind of division of labor.
Since the inception, when we're offering the on-prem software, what we do is we offer high-quality software. We participate in implementation and some ongoing upgrade. However, at large, we ask our customer and their appointed SI to be responsible for the entire lifecycle of the application, including ongoing upgrades and also infrastructure. In the cloud model, it is completely different paradigm. We take on a lot more. We take on a very different kind of a division of labor, a lot more ownership of the application. Which then entails a utility-like business model, which is very different than the on-prem. The utility-like model would entail subscription pricing, as we're all familiar with.
It would entail a new type of contract that would have Guidewire assume terms that we never had to deal with before, like security guarantee, like a continued maintenance of industry standard compliance, uptime, response time, so forth, and the associated liability if we fail to deliver. As I mentioned, it also cloud offer a rapid platform for innovation through faster release cadence. Customer success would offer a quarterly check-in with our customer to ensure ongoing adoption of our product and customer satisfaction. Very importantly, because of the division of labor is now different, we're taking on a larger ownership of the application management cycle. The rules of engagement or the split of roles and responsibility between us and the SI will be modified as we take on more responsibility and ownership. SI will continue to be very important in our cloud journey.
We will do what we can to continue to enable them, train them, so on and so forth. Because Guidewire now is assuming a lot more downstream risk and liability, we will be raising the training certification level across our SI ecosystem for them to participate in the cloud implementation. As I mentioned, in order to transform the operation to support the cloud journey, it really requires a very coordinated approach. It requires many teams within a company to transform together in an organized and managed and coordinated fashion. It also necessitates a multi-year investment plan across certain key initiatives. Those investment plan will be then reflected in Curtis' long-range plan that you'll hear later on in this session. A couple of orgs that require this kind of care and ongoing investment outside of the market-facing organization includes product development.
Needless to say, we will need to continue to invest in engineering to transform the architecture on the underlying on-prem software portfolio to take advantage of the cloud. We need to continue to invest in Cloud Operation and infrastructure. We need to continue to increase scale in those teams to keep up with the market demand to drive efficiencies and then therefore they allow margin expansion in the future. We have no choice but to make sure that we continue to invest and take information security extremely seriously. We are absolutely on the hook to protect our customer data as well as to continue to keep up with industry compliance mandate. Customer success is a necessary function.
It is something new that we recently created to address the customer satisfaction and allow a very high-touch approach for ongoing visit with the customer to make sure they adopt our solution, they're happy with it, because it eventually will translate to the customer's willingness to renew the business relationship with us over time. Needless to say, partner enablement continue to be very important as our SI ecosystem continue to be a critical role in our cloud journey. Even though we're still early in our journey, many of our customers have already adopted running the application in Guidewire Cloud. Today, 100% of our solution portfolio can be enabled in the cloud regardless of the underlying architecture, may it be on-prem or cloud-native. Our credential shows that over 150 customer today is already running at least one product in Guidewire Cloud.
39 of our core customer, may it be InsuranceSuite or InsuranceNow, already adopting the cloud. You'll hear later on Mike Keller, one of our customers, who will be sharing the cloud story with you. Speaking of SI, the SI ecosystem is very dear to my heart, and in fact, my first job at Guidewire was the head of alliances and cultivated many of those early relationships, and they will continue the strategic and crucial role in our cloud transformation journey. As you may all know, in the last decade, we have enjoyed a very, very solid and very exciting relationship with the SI partners as we cooperatively bring to life hundreds of successful Guidewire projects. Also over the last 10 years, the SIs have been focused on investing in the Guidewire practice at a CAGR of about 50%, approaching over the 7,800 SI professionals worldwide today.
The cloud does not change that. The only thing that the cloud changes is a slight division of labor between the partners and us, whereas we are being asked to take on more ownership in the application management. In fact, I would say that the SIs are fully engaged, if not more engaged with us for cloud market development and bringing up these SIs customers and migration going forward, as well as the on-prem deployment. To make sure that they are engaged and to make sure that they have what they need, I participated in a two-week roadshow in late August, early September to visit a couple of our biggest SI to make sure that they're mobilized to take on some of these cloud projects with us in the current fiscal year. In addition to SI partnership, we also formed some strategic alliances with key cloud leaders.
Marcus mentioned Salesforce. The other one is Amazon. This whole cloud journey wouldn't have been possible without the adoption and maturity of public infrastructure like Amazon. We selected Amazon, or we selected AWS rather, as our cloud platform back in 2015 after an extensive diligence exercise. Today, we're the lead partner in the insurance sector at AWS, and we're also one of the top three strategic partners across all the financial services sectors within AWS. Our partnership is multifaceted across multiple different components, including executive sponsorship, mutual financial investment, collaborative development, and very importantly, our access to the deep cloud domain knowledge and also the technology services. Let's take a few moments to look at a video, which is a testimony by Amazon and also Salesforce, our partner, as well as our Head of Cloud Operation, Oleh Ganapolskyi.
If you talk to most CIOs, roughly 70% of their IT budgets is relegated to maintaining their legacy systems and the status quo. At the same time, the business wants new digital channel strategies, social strategies, enter new markets more quickly than their competition, introduce new products more quickly than their competition, the cloud starts to break up that burden of legacy and enable those agile skills that these insurance companies need.
The impact of cloud computing on the insurance industry is huge. Over $400 billion in premiums are up for grabs. The reason why is because over three-quarters of policyholders say that they're willing to switch carriers if they could receive more personalized experiences elsewhere. From an insurer's perspective, they have tons of data about their policyholders, and yet they're not able to take action on them. In the last two years, 80% of the data was created in the entire world. About 70% of that data is customer-related data, and yet less than 1% of it is either analyzed or acted upon. As we acquire more data about consumers, and about employees, and about partners, end users of cloud computing are going to be able to leverage that data to be more predictive, to be more proactive.
When you think about insurance and P&C insurance companies, the heart of the innovation, the heart of everything they do, is in the core systems of record: policy administration, billing, and claims. There's a lot of interest from our customers for core systems that can run in the cloud. Guidewire is the leading example of that in property and casualty insurance.
The whole point behind the Guidewire and Salesforce partnership is to create a one plus one equals three relationship. You've got the number 1 CRM provider across sales, marketing, and service, which is Salesforce, and you've got the number 1 insurance platform provider in P&C, who's Guidewire. By combining the strengths of these two solutions, we're able to provide a richer and deeper interaction with the policyholder.
Guidewire has embarked on a journey to make every product native to a cloud. With our InsuranceNow products and our predictive analytics and underwriting management, we have nearly 150 customers who are on a cloud. In addition, we take a number of our clients to a cloud with our InsuranceSuite offering. At this point, we are starting to go to market and start positioning our product as a right choice for our carriers to be in the next generation of P&C insurance software.
I've been with Guidewire for over 13 years. It's a very long time. One thing very special about this company, and that's one of the reasons why me and my colleagues have been working here for such a long time, is our single focus on our customer. Our customer has always been the most important thing in our mantra. As Marcus has pointed out, we are the insurance platform powered by the cloud. In a way, we are like serving as a springboard to propel the customer to where they want to be. It's very exciting. Over the last decade, I've done many jobs, and I've seen many changes and challenges at Guidewire along the journey. I've seen the company evolve from a single product ClaimCenter to now with a rich portfolio of product. From a small private company to now a global enterprise.
From a very small private company to now a public company. It's all very exciting along the journey, but I've never been more excited as now, being part of the next phase of Guidewire and be part of the company that can potentially transform the industry. I really see that as a once in a lifetime opportunity. If we really get this right, we'll see billions of business going through our business platform, powering up and offering vital utility insurance services to millions of people. I'm pumped up, Guidewire is all ready. I'm surely making sure in my power we don't screw this up. Thank you. Can I answer any questions?
Right here.
Hi. Maybe can you talk about, as you move your customers to the cloud, how you think about splitting the work between the SI partners, how much work they can take on, and how much work Guidewire, you may have to deploy with your services organization?
Well, absolutely. You're talking about migration, taking on an existing install base. I want to clarify that the only difference between what we're doing in a cloud versus on-prem is to taking on the post-production support, right? The ongoing application maintenance of the Guidewire portfolio, the upgrade, and so on and so forth, and also the assurance services around it. Everything else, the split of responsibilities between Guidewire and the SI pretty much remain unchanged. Therefore, when you're talking about the migration from on-prem to Guidewire Cloud, the one thing that we'll make sure that we're responsible for is what I've just said, is the application management cycle and the post-production support of the Guidewire portfolio. Now, there are certain parameters that we draw and, at the point of sales or the point of transition with a customer to say, "This is the scope," right?
The SI partner can take on all the other scope. In fact, this migration can also be part of a larger managed services initiative that the SI offer to the enterprise as well. That could be outside the Guidewire transition. It could be just a component of it.
Hi, Priscilla. Brett
Hey, Brett
Wilson from B.V. Merrill. Good to see you.
Hi. Good.
Thanks for doing this. Just a question on multi-tenancy. Is that in the roadmap? Is that important for InsuranceSuite Cloud? Could it be a catalyst? Could it change that ratio of 2x-3x uplift from term license to subscription over time?
Great question, Brett. I would say that I would defer to Ali to address the multi-tenancy question. Ali would be the next up, our Chief Product Officer responsible for the roadmap. Let me share two thoughts. First of all, multi-tenancy is not a goal, right? Nobody say, "I'm buying you because you're a multi-tenant solution." They are buying the Guidewire Cloud because of the business benefit that both Marcus and We shared earlier in terms of agility and focus and transfer of risk and so forth. It's not necessarily multi-tenancy they're asking for. However, in order for us to make the platform much more cost efficient for us to drive profitability over the years, we need to be able to deploy or transition our on-prem architecture to whatever it takes to make that happen. Right?
Multi-tenancy could be one of the components that we will consider. You will hear Ali mention microservices, stateless or serverless architecture. That will be the goal as well. What we're trying to do is to be more cost efficient. Yeah.
Sterling Auty with JPMorgan. As you think about your system integrator partners, since they've had such success with the on-prem world, do you find that they're willing to train up a larger portion of their consultants faster this time? Where are we in terms of the building of that army that you're going to need to help with the client migration to the cloud?
Great question, Sterling. Of course, nobody wants to be told that they want to take more exams, right? The same for the SIs. I think it's important to share with them why we raised the bar. If you look at the cloud model, as I described, we are taking on a lot more responsibility after the implementation is done. We're responsible for all the risk and liability of security, of the quality of the product, all the defect remediation to a certain extent. We need to make sure that the SI partners, while we work with them, they want to up their game, right? We want to make sure that the quality of the work product is something that we are willing to take on the risk in the downstream. When you raise it with them, of course, they are not totally happy about that.
The thing is, they understand that this is what is required. We also offer some initial incentive to bring up the initial group of SIs to a high level as well. They welcome that. I also think that because they see as much as Guidewire the growth of the market direction towards the cloud, they see the opportunity for them, right, in setting up this cloud incentive. Very importantly, they also see multi-year opportunity for them to move hundreds of our on-prem customer to the cloud. This requires a lot of services that we're not going to take on all of them ourselves. We're going to take on a small portion, crucial portion of it. The rest all go to the SIs.
I wouldn't say that for the training one, they are absolutely welcome and are lined up, they understand that this is the standard we set, they would like to play that game.
Hi, Priscilla. Ken Wong from Guggenheim.
Hi.
Building on Sterling's question, you showed a slide earlier where you had 7,800 SI partners in terms of the headcount.
Should we envision that that entire 7,800-person army potentially could be cloud deployers, or is it just going to be a subset of that at the top or specific teams within some of your SI partners?
Right. Good question. Let's look at what the 7,800 is. 7,800 is like the entire universe of the members of the Guidewire practice across all the different SIs. There are different roles that all rolled up in the 7,800. You can be a QA, you can be a tester, you can be so on and so forth. There are different roles. Now, the specific people or a description of the consultants that will be in the cloud role with us would be like the developers or the business analysts. Those are the two key constituents that we would love them to re-up the certification and be more advanced or maybe ace level or Jedi level, right, to participate in this cloud journey with us.
I would say that because, if you look at InsuranceSuite today, it's the same InsuranceSuite we put to the cloud, right? Many of the SI partners are already familiar with that. All they really need to do is to recertify at a higher level, take some additional training, and so on and so forth. I would say that a portion of the 7,800 is already cloud-ready. It's just a matter of raising a comfort level of Guidewire so that, again, we're comfortable to take on the work product as we are responsible for the downstream risk and liability. That said, of course, over time, as the market expands, I would expect the SI ecosystem continue to grow the Guidewire practice to meet the demand. You would see the 7,800 become something bigger, right?
Hi, Priscilla.
Hi.
Justin Furby with William Blair. A question on the time to deploy. Is there enough evidence yet to suggest that that's materially different than on-prem? Is that part of the pitch to customers today, or is it more about just post go-live and the efficiency of the upgrade cycle?
Yep.
Anything you can share on just how much faster or cheaper it is today versus a on-prem deal?
Yep. You actually touched on three questions that are very important. Let me try to break it down. First of all, you talk about sort of time to deploy, right? This cloud transformation journey will take a better part of the next decade. It doesn't take place over time. Just to transform the on-prem InsuranceSuite architecture to cloud native would take five, six, seven, 10 years. You'll hear more from Ali how we're doing this. The time to deploy today, if you're asking the question today, is no different than the time to deploy an on-prem application. The only difference is we are now taking on the post-production support. We're going to host it on behalf of the customer. In today's value, really customer is looking for is for them to transfer all the risk and complexity to us.
Again, to free them up so that they can focus on what's most important to the business. Now, from a cost perspective, as Curtis and Marcus would have told you many times before, these cloud contracts are much larger than on-prem, right? If you are asking today, are they paying us more? From the cash perspective, they are paying more for the services that we render for them. Ongoing upgrade, the defect remediation, and everything else that we take care of, and also infrastructure. The cost is predictable. They don't have to do the work. It's predictable because subscription price is priced at a certain level, at a point of sale, and based on a certain scope. As long as the customer doesn't change the scope, the price is constant.
It's not necessarily at this point they're paying less, but they're paying predictability and also free up their attention to do something else.
Maybe one more.
One more question.
Hi, Priscilla.
Hi.
Tom Roderick with Stifel. Thanks for being here today.
Of course.
You and Marcus both talked a little bit about the Salesforce partnership. You've gone live with one customer now. Curious if you could kind of share your learnings with going to market with Salesforce, and what the learnings of the go-live have taught you. What did they particularly need from working with Guidewire that they couldn't do themselves, and what are the opportunities going forward with Salesforce? Thanks.
Absolutely. Thank you. Let me also break up your three questions. First of all, what is the lesson learned working with Salesforce? I would say that it's not specific to Salesforce. Building these strategic alliances, particularly two relatively big companies, are different and difficult. You think about within your firm, trying to motivate other people to do things. Unless the person works for you need to influence. It's difficult just within your firm to influence others to do things. Imagine that you're now influencing a multi-billion dollar company, 10 times your size, to try to go towards the direction you are going. That alone is difficult. The thing is, we have been successful so far because our strategy aligns.
In terms of what they do versus what we do and why do I think that they work with us is, we're the industry leader with deep domain knowledge. It's really difficult for any horizontal player to be going that deep. The investment needs to be very focused, and we're talking about the last 17, 18 years, we do nothing but do P&C. It's something really difficult to replicate for horizontal. Therefore, I think that between Salesforce and us, we understand that they are the CRM and we are the domain, and we have a good marriage. When strategy-wise in the leadership level, both companies believe this is what we want to do, I think is a key element to make sure that the strategy ongoing is successful. The opportunity is vast. We only have one, but we have a couple of dozens of joint customer.
That is existing customer in the install base that we can go back and sell this value proposition. We can have more Amica going forward. That, it does not include the future opportunities. Therefore, we believe that it's a tremendous opportunity for both companies going forward. Thank you.
Can I have the clicker, please? Thanks. Thank you. Thank you, Priscilla. As Priscilla mentioned, we're investing a lot as a business to make sure that we're ready for today and the future with respect to cloud. Now to get a little bit deeper on that topic with respect to our product strategy is Ali Kheirolomoom, our Chief Product Officer.
Thank you, Brian. Good afternoon. My name is Ali Kheirolomoom. I serve as Chief Product Officer. I've been with the company for about two and a half years now, focused on developing the organization globally and evolving and modernizing the technology platform to provide further differentiation for our customer. I'm excited to share with you an overview of our platform strategy and roadmap and the investments that we are making over the course of next 3-5 years. Marcus talked earlier about the business and IT imperatives that are driving the P&C disruption and evolution today. I want to key off these imperatives and walk you through the strategy and roadmap in five different chapters.
As what we have learned over the course of last few years interacting with our customers, we are realizing that these imperatives are fundamentally driving the way they are looking at how they want to drive their evolution in the industry. Let me start with optimizing core operations and the investments that we are making in that area. First investment was around modernizing user experiences, standardizing product definition globally, and enabling data-driven insights to drive straight-through processing for our carriers. I'm going to walk you through some of these investments and what we have done. In terms of modernizing the user experiences, InsuranceSuite 10, which is the release that will launch at Connections this October, provides persona-based dashboards that aggregate content from multiple sources. They provide and offer a digitized mobile first and touch-enabled set of interactions for our carriers.
What you see here is the account holder summary dashboard that creates a 360-degree view of the customer. It provides a unified engagement timeline to bring in all the interactions and transactions that a customer has had with the carrier, with the insurer, brings it all into one picture, and provides one-click action. The persona, whether it's the underwriter or adjuster, can quickly invoke the appropriate insurance processes. In this dashboard, you can see that we are aggregating data from the customer, the profile information, the current policies, billing statement, delinquencies, and so on. All of this data, again, can come from a variety of different information sources, internal to the organization or outside of the organization. Here you see an underwriter dashboard. If you look at the world of underwriting, you're dealing with a lot of information sources.
Some, again, inside their corporate enterprise, a lot of them outside, a lot of them on public internet, on internet and cloud-based data sources. We wanted to provide an easy way for that underwriter to bring, again, all the data into one single place. If you look at some of the segments in P&C, like global commercial, where the complexity multiplies. You're not dealing about just one single entity that you're insuring. You're dealing about complex building, commercial building. You can imagine the amount of data that you have to aggregate and bring together. We are, again, with these investments we have done in InsuranceSuite 10, we want to make that very easy for our insurers. ISO is a subdivision of Verisk Analytics and is recognized as the statistical and actuarial standard for the most majority of the commercial business today.
I'm really pleased to announce that as of last June, we have completed all ISO lines, all six ISO lines of commercial content across all 50 states. We are the first company to fully automate ISO delivery lines into the rating and policy systems. This really hasn't been done before, and we have done it through a visual automation tool that gives you a content authoring, publishing, and management framework for bringing that ISO content and publishing it to our policy systems, our PolicyCenter. You can see a picture, a screenshot of the tool depicted here. This has multiple benefits. First of all, automating ISO content creates a greater barrier of entry for many, including Guidewire.
We spent many years building these ISO lines and now have an automated supply chain that allows us to not only deliver those ISO lines but refresh them on a quarterly basis. It significantly improves our win rate in commercial segments and reduces the customer's total cost of ownership. We pre-configure commercial content that we can provide basically in the box. Let's turn our attention to the next chapter and investments that we are making to help insurers meet their digital imperatives, including linking to insurers' digital transformation initiatives. As we know, digital is a catalyst of why insurers today are undertaking big core system implementation projects. It's a catalyst because it represents both a significant opportunity for insurers, as well as a significant risk posed by InsurTech. Again, it's been a great catalyst and continues to be for our insurers.
In addition to digital transformation, I also want to talk a bit about how we are embedding insurance in front-office CRM and then delivering personalized omni-channel experiences again for our customers. Today we offer a wide range of persona-based applications across the entire P&C lifecycle. Some of the applications here include CustomerEngage, VendorEngage, ProducerEngage, and ServiceRepEngage. These applications fundamentally externalize interactions with our underlying core system into digital front end. So far, we have exposed these applications on top of InsuranceSuite, our core system. Now starting this fall, we are adding support for InsuranceNow starting with CustomerEngage. You can see that we are really moving towards this notion of a unified pane of glass, regardless of the underlying core system that you're interacting with. What's exciting for us, we are moving towards now the next generation of digital engagement applications.
This next generation are all designed to be fully cloud-native and business user configurable. There are two examples that I am going to talk about today. One is Digital Small Business solution or DSB, and the other one is InsuranceCRM. Let's drill down into each area a bit more. Digital engagement experiences today are delivered through, again, a single pane of glass that interface with the underlying core system, being InsuranceSuite or InsuranceNow. It supports multiple engagement channels. Insurer customers can come in, let's say, through web, through mobile. They can come in through Alexa, through chatbot, through Salesforce channel, and we are going to continually add new interaction channels, engagement channels as we move forward. They support different interaction modes. This can be self-service or assisted service. I am really excited about Digital Small Business, or our DSB solution via Guidewire Cloud.
99% of digital insurance products today are delivered through the traditional broker channel, and they are dealt with basically paper-based applications. What DSB represents is a cloud-native, online, personalized insurance product for small business owners, micro-business owners. These are businesses that have five or less employees. To give you some stats, 62% of all businesses in U.S. are micro-businesses today. 540,000 new businesses are created every month, micro-businesses every month in U.S. One third of millennials, a population of roughly 71 million, already have a small business. Another 49% is going to basically open up a small business in the next three years. A very significant portion of the industry, and we are really excited to have a solution that brings it all together.
We are extremely proud having Nationwide, the largest small business insurer in the nation, as our strategic partner and advisor putting this solution together and an early adopter customer. Michael Keller is here today, and will talk about the investments that Nationwide has made into DSB and where we are headed jointly in the market. In terms of key capabilities of DSB at a high level, we provide a consumer-grade buying experience for that micro-business. We provide a visual market segmentation and personalization tooling, and also building analytics and monitoring that allows carriers to pursue test and learn opportunities to experiment with new products, launch them in the marketplace, and then evolve them and adopt them. Let me give you a bit more overview on what DSB represents.
Again, DSB, think of small business owners, micro-businesses that can go online, do a quote and bind completely online using their device of their choosing. It can be a mobile phone, it can be tablet, it can be desktop. Again, different channels of interactions. Manage their policy and pay premiums from anywhere at any time. Another aspect of DSB that was, again, really powerful for us was that we are constantly learning from the experiences. We are constantly analyzing and monitoring the experiences so we can optimize the experience further for our insurers. What is unique about this cloud-native SaaS solution is that it comes with Engagement Manager. Think of Engagement Manager as a completely visual product configuration and personalization module.
So if you are a product manager at the insurer, you can go use Engagement Manager, and it provides rule-driven interfaces and experiences to customize the experience you want to deliver to that small business owner. It allows you to do market segmentation, what segment of the market I want to launch this campaign on. And again, we provide in-depth user analytics, allowing that insurer to now customize the experience to understand what works, what doesn't work, bring it back to that Engagement Manager, allow the product manager to visually change it, and then put a new version up. So you can have multiple versions running simultaneously. And again, for me, if you look at what DSB represents, it gives you an initial glimpse of where we are headed with our transformation and modernization journey that both Marcus and Priscilla spoke about.
You're going to see digital experiences unifying core data and digital functions together, all delivered as a cloud-native SaaS solution. So that's fundamentally where we are headed with our cloud journey and enabling this new generation of solutions to the marketplace. Another solution that we have invested in is InsuranceCRM. And the insurers are now realizing that they need to combine and unify the world of customer CRM with the insurance transactional and operational world. So we partnered with Salesforce to bring together our digital engagement products and combine them with Financial Services Cloud, FSC, and use these products to optimize the front office interactions for P&C.
And the goal of that optimization is to enable the call center reps and agents to have a better sales and servicing experience as they're serving the policyholder, unifying those interactions and bringing that 360-degree view of the customer together in one place for them. Let me show you a couple of screenshots of what we have done here. So here you see, again, focus is on 360-degree view of the customer, their policy information, their billing information, claims information, all brought natively into Financial Services Cloud, leveraging FSC's native technologies such as Lightning and Canvas technology. So now you see all of our data here. You can see account details, customer profiles, policies, all from Guidewire systems, all unified and brought together into a single pane of glass.
And that's the strategy fundamentally with digital, bring data from any source and bring it to where the user resides, so they don't have to jump and go to different applications to see the data. Bring all the data together in one place. Here's another screenshot, and here you see our personal auto quotes wizard fully embedded, again, inside FSC. So now that call center rep has full interaction with the Guidewire system in the back end directly from that Financial Services Cloud. And in addition to running and providing a quote right there online to the user, they can also navigate down and look at policy information or account information without leaving the environment. And the fact that the data is coming from multiple sources is completely transparent to the user. And we are doing that because we have now native insurance objects that we have embedded inside FSC.
Very seamless and transparent interaction for call center reps and agents. Let's move on to the next chapter and investments that we are making to help insurers use data in new ways, including enabling analytics-based smart core by infusing analytical data directly into core operations, streaming real-time operational insights, and delivering persona-based application. Here you see that we are enabling smart core by taking predictive models and infusing directly into that experience for the knowledge worker, into the ClaimCenter experience. As Marcus indicated earlier, these are not different. I don't have to go elsewhere to get that, and that's the power of data and unifying that with the underlying core system. Whether these are transactional data, whether these are historical data or predictive data, we can bring it all together and infuse it into the same environment.
Here you see an example of a litigation risk detection that's brought together right there for that claim adjuster who's reviewing that claim and deciding whether they want to approve it or not. Again, in addition to the score that now comes from that predictive model, from our predictive analytics application and embedded inside the core, you can also see now all the factors that lead to that prediction. Every data, every piece of data, again, available seamlessly inside the application. The same data and the same score can also be used in business rules. Now imagine the power of that. Now you can automatically approve a claim. You can route it to SIU department for exception processing. Again, the data is not just visualizing it and presenting in your application, you can also use it to do straight-through processing and automating.
Marcus talked a little bit about Live Analytics. As you know, with Live Analytics services, we are streaming transactional data from underlying core systems, and we bring all of data to a data lake. We also augment that with third-party data sources that are also added to that data lake. Imagine you have the universe of transactional data, third-party data. We can apply rich predictive models on top of all the information that's available in the lake. What's exciting for us with the Cyence acquisition, we now have a data listening engine that can bring a vast majority of third-party data sources. Cyence processes terabyte of information every month. Imagine all that rich set of third-party data sources also available on the same data lake.
Very much like what you saw before with Live Analytics and sorry, predictive analytics, we are doing the same exact model that the data can be analyzed, it can be transformed, it can be embedded inside the core, or used in processes for straight-through processing. In addition to aggregating the data and placing it on the lake, we also visualize it through a series of cloud-native analytics applications. Here you see an example of one, our Claim Explore application. If you are, let's say, that claim advisor, adjuster, or supervisor, now you can see all the claim information, whether it's claim activities, cycle time, trends, service levels, how many claims have I processed, am I meeting my service level objectives? All of that is brought in real-time. It's not a batch process. It's not transactional. In real-time and presented to the user.
You also see data such as, workload for my adjusters, who's processing how many cases? You can dynamically change that distribution and make the workforce more and more effective. Again, the power of data here is allows you to operate the insurance processes a lot more efficiently than before. We have approached this by business domains. Currently, we have Explore applications for claims and underwriting, and this fall you see Explore application for policy. We'll continue extending, again, this library of cloud-native analytics applications that we are developing. Let's move on to the next chapter now and talk about investments that we are making to help insurers embrace InsurTech that's out there. Starting with offering a curated marketplace of partner add-ons and reducing the complexity of integration through open APIs and also facilitating, again, that rapid test-and-learn environment for our insurers.
We launched a Guidewire Marketplace about a year and a half ago. We currently have over 500 accelerators, and 89 of which is developed by Guidewire partners. What's really exciting for me is the investments that we are making in fiscal year 2019 in terms of DevConnect, which is a new technology innovation that will be part of the Guidewire Marketplace in fiscal year 2019. To describe DevConnect and its relationship to the Marketplace and how it will enable a plug-and-play integration for our insurers, let me use the analogy of the Apple App Store. Today, if you are an iPhone developer, you can go ahead to Xcode environment, which Apple provides, write the application, and then go ahead and publish that application, which takes it to a security and compliance review by Apple team.
Once you pass that review, the application is now added to the Apple App Store. Then all of us as consumers, we can go ahead and discover the application, we can purchase it, we can download it, and then we configure the application, and it's ready for you. Truly a plug-and-play experience. These applications continue to work independent of iOS upgrades, at least most of them do continue to work, and then that's something that we all have relied on. We wanted to repeat that type of experience for the investments that we are making in DevConnect and Marketplace. As a partner, you can go and start adding these add-ons for Guidewire, these functional extensions to the platform. Once you're done with developing that application, that application goes to Guidewire for security review and compliance.
Once it passes that, it's added now to Guidewire Marketplace, which again, becomes now discoverable to our insurers. Insurers, again, very similar to the iPhone model, can go ahead, once they discover it, they can purchase it, they can download it, and now they're visually configuring the application. Again, I emphasize that because it's visual configuration of that add-on. You're not coding to take advantage of that add-on, which is very different, drastically different from what happens in P&C today. Let me elaborate on that some more. This is kind of a before and after of DevConnect. Today our customers, our insurers, are writing the adapters. They're writing the code to take advantage of these third-party adapters. They're not only writing it the first time, they have to modify it every time the platform is upgraded.
They have to go there and constantly ensure that this add-on is going to continue to work. What we have done now after leveraging the DevConnect technology and framework, we are now allowing that add-on, again, to be downloaded by that insurer. They are going to configure it. They're not writing a single line of code. The partner who wrote that add-on is responsible for maintenance of that add-on, not the insurer any longer. We, Guidewire, ensures that the add-on continues to work regardless of the platform upgrades that we are doing. Again, seamless experience for insurers and add-ons that are fully upgradeable from one release to another. That's going to significantly reduce the total cost of ownership. If you look at the whole integration landscape for insurers, that's roughly 50% of the project implementation cost is third-party integration that insurers do.
A typical insurer has upward of 100 integrations that they're dealing with. It was really important for us to make that very seamless. In addition to that reduction of TCO, this provides a fantastic opportunity to now ingest new technologies. As an insurer, we can now ingest new technologies, that allows us and positions our core system as an orchestration layer for all the technology innovations that are happening in the industry, all the InsurTech. We can now bring it into an environment that's safe, that's reliable, and start realizing the value of some of these InsurTech add-ons and decide whether they want to take advantage of it or not, we make that ingestion very simple.
In addition to all the capabilities you see here, we are also going to provide analytics capabilities for both the insurer as well as the partner that's writing the add-on. Here I'm showing you an example of insurer analytics. As an insurer, I can look at how many add-ons I have running in my production environment, how many vendors are providing those add-ons. Most importantly, what's the uptime and reliability and SLAs associated with that add-on. In the future, you see us even apply things like machine learning to automatically pick the right service that is applicable to what the insurer is trying to do. Again, we are super excited about the investments that we are making in this area. If you don't mind, let's go ahead and roll a video of one of these DevConnect partners, WeGoLook.
When I think about how business is changing and how people are engaging in multiple locations around the world, I see a big challenge. How do you gather and validate information on the ground, in person, at any location, at any time? If you really want to verify and validate something, you need people that you can trust, and you need them everywhere. You also need the technology to empower them, communicate with them, and connect them to the customers that need their help. WeGoLook helps insurance companies, financial institutions, and distributed organizations verify what is true. Now Guidewire customers have the ability to engage WeGoLook's on-demand workforce of over 45,000 Lookers to capture data and perform custom tasks from directly within Guidewire ClaimCenter. We can be your eyes anytime, anywhere. WeGoLook. That's what we do.
We're very excited to have WeGoLook as one of our key partners, DevConnect partners in the Guidewire Marketplace. Let's turn our attention to the final chapter. These are the investments that we are making to help insurers gain business agility and simplify IT complexity by leveraging cloud as a strategic enabler. Investments here include optimizing InsuranceSuite for Guidewire Cloud to, again, reduce our cost and improve efficiency, deliver P&C Cloud microservices on top of the AWS platform, and enabling business-driven visual configuration. We are leveraging our cloud technology playbook. There are five plays that we are executing as part of our cloud transformation journey. First, the focus is around delivering a cloud-native P&C platform to drive standardization. Again, the platform analogy I make here, you have a Force.com that has allowed Salesforce to build a library of applications and solutions on top of that platform.
We want to create a fit to purpose- Vertical platform for P&C that allows Guidewire and our partners to develop a new generation of P&C applications that are running on top of that platform, very much like the Digital Small Business that you saw. Naturally, again, the focus is on top of this platform, we want to assemble and deliver this next generation of solution and application, again, both by Guidewire and our partner community. We also want to make sure that we have visual configuration everywhere. That's a key part of the value proposition. If you look at the investments on Digital Small Business, if you look at the amount of configuration that are needed or code customization, it's barely none. It's all done through that visual configuration, through that Engagement Manager that allows you to very quickly change the definition of the product and personalize it.
Again, that's the future, where we are headed with all our cloud investments. It allows us to grow the community and network through this DevConnect and ecosystem that you saw earlier in the Guidewire Marketplace. We want to establish that vibrant development community and Guidewire Marketplace around Guidewire. Finally, in that context of continued modernization, we want to deliver a growing library of core data and digital microservices. Let me drill down into an example of one of these microservices, a crucial microservice in the context of core, so you understand what we are doing with this microservice. That's our rating service. Today, we provide an industry-leading rating engine.
As we set forth to go ahead and develop the next generation rating engine, we wanted to make sure that this next generation is going to take advantage of everything that cloud has to offer, leapfrog the current capabilities that we have. If you notice what we are doing, we are now building a hyperscale service leveraging Amazon cloud infrastructure and machine learning, an engine that does pre-compute in milliseconds of rates, and then allows us to do impact analysis on how effectively that is executing. Being able to change parameters and see what's the impact of that to your entire book of business, again, the type of things that wasn't feasible few years back. Now we are again leveraging the elastic computing of Amazon and the services that's available to us. We want to open up the possibilities with this rating engine.
As you can see with this rating engine, it leverages, and the rating microservice you see here, very much like every other microservice that Guidewire is developing, it leverages this common service fabric. What this common service fabric is, it gives us the 24 by seven uptime. It gives us the failover, the load balancing, the logging and monitoring. As we develop these services, they all exhibit these behaviors. They are services that are built to last. They are services that are built to be 24 by seven because as you saw with that Digital Small Business, the generation, the population that we are serving is not dramatically different. They are now millennials that expect to come in at 3:00 A.M. and get their insurance.
We need to make sure the services that we are developing and delivering use and apply that type of philosophy in terms of their uptime and operation. Where we are headed, when you take this playbook and you bring it all together, now you're seeing where we are headed with this InsurancePlatform business architecture. Which is comprised of several building blocks. At the heart of it, you can see P&C core services, and the business services that are leveraging a growing library of common cloud services. You see digital engagement services, microservices that are agnostic to the underlying core, working with InsuranceSuite and InsuranceNow services, data and analytics services that are pervasive throughout the entire platform.
You see visual configuration and tooling everywhere, product model standardization globally, a growing platform and developer ecosystem, all of which are layered on top of AWS cloud infrastructure, both AWS as an infrastructure as well as a platform as a service. On top of our InsurancePlatform, we'll have our point products, but you also see this growing library of cloud solutions that we are bringing to market, like Digital Small Business, like InsuranceCRM, and like future solutions that we are building, digital claims consideration and so on. That's really the opportunity and excitement around where we are headed with this platform. Again, to give you a sense on some of these services, when you're talking about P&C business services, think of this as task-focused microservices that we are building for P&C.
Things like rating that we talked about, submissions, commission, and a growing list of other microservices that we want to have here. Or you'll see P&C core services, which are now more macro-level policy administration and claim servicing set of services, both of which are leveraging and using a growing library of common cloud services, things like authentication, authorization, geocoding and so on. It's absolutely an exciting future for Guidewire and our customers, and we are really, really happy and looking forward to seeing it all come to fruition. With that, let me stop and see if you have any questions.
Hi there.
Yeah.
Tyler Radke with Citi. I think there was probably enough content up there to go a full hour, so thanks for the details. I don't know if half hour was enough. I had two questions and related to kind of the Engage in digital products. Could you just walk us through how you think about Guidewire's addressable piece of that market in the context of where Salesforce plays and your partnership there? And then as a follow-up, could you just give us kind of the walk-through of the monetization of how you're monetizing Salesforce's Financial Services Cloud when you kind of have a joint customer using Guidewire and Salesforce.
In terms of the use scenario for InsuranceCRM, as I mentioned, the digital engagement products in general, we wanted to make sure we can aggregate the experience regardless of the channel, the P&C experiences, and then make sure these experiences can be embedded. Whether we want to embed them into an Alexa on the front end or a chatbot on a different channel, we view Salesforce as another channel of distribution. If you have personas that are already leveraging Salesforce, they're already in Financial Services Cloud. I'm a call center rep, because that's my CRM world. I'm using Salesforce on that front end, but when I have a prospect, an insurance customer policyholder coming online, I need to have all the information that's coming from my system of record around that policyholder needs to be available to me so I can make that informed decision.
I don't want to jump around across multiple applications. The partnership was realized and recognized the fact that Salesforce is the number one CRM company in the world. For us, we didn't want to say that now we are going to provide a better CRM capability than Salesforce. What we also provide, we have the system of record for all the transactional data about that policyholder and P&C. The marriage was, can we bring these sources of information together in a seamless fashion? Notice that we put the focus on two personas, call center reps and independent agents, which are more casual users that are not captive users, like underwriters that we have, or claim adjusters or claim managers that are sitting in our systems.
They are more kind of casual users that need to have access to information provided by Guidewire, as well as all sort of other information about the customer and 360-degree view of the customer, if you will. That's how we divided the roles and responsibilities in that context. Obviously, we sell digital engagement products to customers who may not have obviously Salesforce, to customers and personas that are not part of that front office CRM world. For us, think of it as digitized interactions for P&C that can be embedded in any channel. In that sense, our digital focus is figuring out what those interactions are. What is that personal auto quote visit? Then where that auto quote visit runs, we want to be as flexible as possible, given where the user resides. Does that make sense at a high level?
Hey, Ali, two quick questions.
Sure.
One, on InsuranceSuite Cloud, what's kind of stopping you from being, I guess, more aggressive in rolling out a multi-tenant InsuranceSuite Cloud environment? Because if you just think about multi-tenancy SaaS and all the benefits, faster implementation, you don't have to manage 100 different runtime environments, and it just seems like kind of a pretty big benefit for you guys. What's kind of stopping you from doing that, and why not just start on it today? What does that take? Is that an entire rewrite of the code base, or is that something incremental you can do? The second part, maybe you presented that was what the last thing was about, but the microservices.
Is that just for the ancillary data products, or is the eventual plan you're going to turn literally every single core function of InsuranceSuite into a microservice, that's kind of how you get to cloud-native multi-tenancy? You just turn everything into a microservice.
Yeah. Let me answer your second question first, then I'll go back to multi-tenancy. You're looking at modularity and microservices across the entire landscape, across insurance platform as a whole, and that includes core functions, data and digital. The way we are coming at it in terms of why we have listed some of the microservices you see here, as you see, these are core services, submission, commissions, rating. Why we are doing microservices, we are doing that to enable a new generation of applications that have all the attributes. These applications or solutions are obviously very effective. They are very cost-effective. They operate 24 by seven. The lens why we are doing that is to enable that, to do things like Digital Small Business, like InsuranceCRM, and future applications. Solutions help us identify what are the building blocks that we need to explore.
As we start doing these solutions, they are becoming more core data and digital, all unified and orchestrated. That's why when you look at our microservices strategy, it really spans the entire spectrum, and we are exposing all those building blocks that are needed. Yes, the plan is to expose as much as it makes sense to generate or allow us to generate this new generation of solutions. You have seen some of what we have listed here, the investments that we are making. Going back to your question of single tenancy and multi-tenancy. I've been in this industry for many years. I've dealt with single multi-tenancies in my previous careers. I think the technology is moving very rapidly. I can even argue that multi-tenancy was 15 years ago. If you look at what's happening in the industry now, people are starting to look at serverless.
They're looking at elastic computing. You're not allocating a space. You're dynamically leveraging the compute or database as you need them, then you let go of it. You don't use them as much. You don't reserve them. I think there are a lot of different technologies that's available to us right now, and multi-tenancy is one of them. We have some services today that are multi-tenanted. Rather than saying we need to be single-tenant or multi-tenant or tenantless, we want to come back and say, what is the main objective that we have for this cloud solution we are delivering in terms of its cost-effectiveness, in terms of efficiency, in terms of uptime?
We use all of this technology that's available to us as a lever to get us to that end goal, which as you can imagine is more and more is going to be extremely high gross margin for us. Multi-tenancy is definitely something we are looking at, but it's not the answer all the time. Sometimes serverless and tenantless is a much better way of achieving our objectives.
I think one more.
Yes. Last question.
Thank you. Thanks for your time. Could you talk about how you're looking to monetize the marketplaces approach you talked about, and maybe the revenue share arrangement you have with the app developers like you talked about with WeGoLook?
No, thank you. Yeah, we are in early stages of the marketplace revenue sharing model. It is more of a revenue share. We are looking at every add-on, every provider has a different way of how they are monetizing their value-add services. In some cases, it's transactional. In some cases, it's based on DWP. In some cases, there are free services that they're offering with a premium, if you will, with the idea of advancement to a higher-paid subscription model. What we have decided to do, and we now have some flavors of all of that under conversation with some of the add-on providers. Where we have put our focus and energy right now has been on DevConnect platform and making sure that we can collect all the raw data so we can apply different type of financial models on top of it.
Whether it's going to be, again, more of a transactional usage base or it's going to be a flat fee, we are building the infrastructure in DevConnect to keep track of it, which then allows us to have personalized revenue share models or other revenue models as appropriate with our add-on providers. We are in early stages of that as we're adding more partners to the DevConnect layer. All right. Thank you very much. Thanks for your time.
Thanks, everybody. We'll take a short break. Please convene back here at 3:30 P.M. Thank you. Thanks, everybody. If you could please take a seat. Okay, thanks, everybody. If everyone could please take a seat, we'll get started. Thank you. I feel like a bartender at the end of the night. Could you please? Yeah. Thank you. Yeah. Great. Thanks, everyone. Thank you also for your great questions, and I think we have to find a way to make sure we have enough time for people to answer the questions in session. Just wanted to remind you that the Guidewire team will be here afterwards for the cocktail reception, so that outlet will be available to you. A final reminder, please do fill out the evaluation surveys. They should be in front of you, and we'll take that feedback on for this next event.
Of course, up to now, we've been talking about how we are evolving our business and our platform, accelerated by cloud in service of our mission. There's no better way to tell the story of our mission in flight than to invite one of our customers to tell their story. I'm privileged to be able to welcome Mike Keller to share Nationwide's story. Mike has a long history of service to Nationwide and the industry. He joined the company in 2001. He served as EVP and CIO for 17 years at Nationwide and was one of the key executives driving their technology-driven transformation, which is really remarkable, and it's gratifying to serve Mike and his team. Please join me in welcoming Michael to the stage.
All right. Thank you. Good afternoon. It is a pleasure to be here to share with you the business and technology transformation journey that we've been on at Nationwide in a strong partnership with Guidewire. I'd like to begin by introducing you to Nationwide and providing some of the strategic business context behind these large transformational investments that we're making. Those that aren't familiar with Nationwide, we are a mutual insurance company that currently ranks number 66 on the Fortune 500 list, and we offer a wide variety of insurance and financial services products. We are a top 10 provider in almost all of the product categories that we participate in, and we're number one in a number of them, including insurance for small businesses, for farms and ranches, for pets, as well as the largest provider of public sector retirement plans and corporate-owned life.
The diversification that you see indicated on the chart really isn't an accident. It is a part of our strategy. It's our belief that we will be more valuable to our customers and to our distribution partners if we offer a breadth of complementary solutions. It's also the case that we pay a lot of attention to the different kinds of risks that we underwrite, and the diversification of risks allow us to have more consistent, stable earnings and really focus on making sure we have the capital strength that we need to continue to grow. I'm going to talk to you mostly today about the work we're doing with Guidewire in our property and casualty businesses, but I want to provide a little bit of kind of historical and strategic context behind why we're making these investments.
If you look at our core insurance businesses, which is personal lines and standard commercial for small and mid-market customers, that core we are investing over $1 billion in doing product, process, and technology transformation. That's a really big bet and something that has obviously gotten a lot of play at the board, CEO level, and across the company. Very not only big investment in financial capital, but also in human resources. The question is kind of why would we do that? To understand historically how Nationwide came to be, at least in that part of our business, was really through the merger of multiple different companies. Nationwide Insurance historically was a kind of super-regional carrier, exclusive agency-focused, and predominantly played east of the Mississippi without a real strong presence in the Northeast.
In the late 1990s, we acquired Allied Insurance, which had a very similar product set, but different distribution model. They played predominantly west of the Mississippi. About 7 years ago, we acquired Harleysville Insurance, who predominantly plays in the Northeast. We basically had, no pun intended, a nationwide footprint in personal lines and small commercial. Under the covers, it was 3 different companies. About 7 years ago, we embarked on what we call our One Brand, One Company Strategy. The one brand part was relatively straightforward and, at least on a comparative basis, easier. As we branded what used to be Harleysville and what used to be Allied, Nationwide, you had to change signage and websites and forms and bills and all that kind of superficial stuff. The really heavy lifting is beneath it.
If you think about the fact that you had 3 longtime established carriers, they had developed different products and contracts, they had different underwriting appetites. All of their business processes from distribution to claims, billing, customer service, underwriting and rating rules, it was all different under the covers. These transformation programs are really about bringing us to be 1 company with simplified and modern products and processes. A big play is the technology side. Those 3 companies had completely independent IT stacks in every area, and in most cases, they were pretty heavily dated.
Trying to look like a national carrier, we typically had to try to do work on 3 different platforms, in a lot of cases, the same kind of work, and then create integration layers and those kinds of things to try to provide any kind of consistent digital experiences and the like. A lot of the rationale behind this was to try to get to a point where we think we could be long-term competitive as a modern national carrier. The work that we did started, and I'll talk a little bit more about the projects with claims, and then went into personal lines and is now going into commercial.
When it's done, we will have, across personal lines and commercial lines, common products, common processes, simplification, and we will have all of it on a modern technology platform leveraging the major components of InsuranceSuite, PolicyCenter, and ClaimCenter. We're also leveraging a lot of the Guidewire products and the data in the digital space. The basic business case behind it, one on the one brand side there's a major advertising and kind of brand war, and brand matters in personal lines and small commercial. If you look at what we spend in traditional advertising, in digital marketing, in sponsorships with the PGA and the NFL and NASCAR, we invest a tremendous amount of money. That money can now be used on a national basis. In addition to that, there are significant benefits to distribution partners.
Like in commercial, where there's been a lot of consolidation, a lot more power is being held by national brokers and agents, and they want somebody that's going to be easy to do business with, not somebody that looks old and different and complex across the geography. We think it'll really help us there. From an internal perspective, there are tremendous efficiency benefits, both speed and cost, both on the business side and IT side. We've already seen in the places where we're done, it'll enable us to better leverage data and create a much better digital customer experience. That's the business case behind it. In terms of what we've actually done, I said we started with claims. That is complete.
The good news is that kind of our hypothesis was if we didn't get to clean business processes and clean core systems, we really couldn't do what it is that we wanted to do in areas like data and digital. We could never be as fast, agile, or customer-friendly as we wanted to be. Now that that's complete, we're actually seeing that play out. I could give multiple examples, but when Hurricane Harvey hit Texas, we had a business rule. It was hard-coded in those old systems that had said, "You only have one automobile on a flood plain." Because it's pretty unusual to have that kind of flooding. But in that case, we had a lot of customers with multiple vehicles that were all hit by the same incident, and they didn't want to file 3 separate claims.
We were able to change that business rule, basically code, test, and put it in production in a day at the request of the business. We could have never moved with that kind of speed. If you look at what we've been able to do with things like mobile technology, both for claims adjusters and end customers, the same thing. Very anxious for the day where we will be in the same place with personal lines policy and commercial lines policy. On the personal lines side, that's a single biggest project. That project alone is over a $500 million investment. It shows on the chart that we're 50% done. From my perspective, it's actually quite a bit higher than that. There's a tremendous amount of process and technology work that has to be done before you get your first product into your first state.
We are well past that. We have all products done and kind of all of the core functionality in. We're in half of the states right now, but really just at a point where we're doing mandated state-based variation from the departments of insurance and completing the rollout. Even though it shows it'll go on to 2021, we're also doing a bring people onto the Guidewire platform at renewal. That can be a six-to-12-month period after we go into the state to have everybody on it. There's a real heavy lifting will be done by the end of 2019. Commercial lines we're earlier in the process. We have our first products up in our first state, but a lot of heavy lifting to do to both get additional products done and additional geography.
It is our belief, it was at the beginning, these are high-risk, high-reward projects. We really believed at the time that it was something that we had to do for long-term competitiveness. In spite of the fact that the industry doesn't always have a great track record for delivery of these kinds of large, complex transformational programs, with the success that we've had so far, we're feeling pretty good about the prospects for completing them. I shifted gears a little bit. That's really what we're doing for our large-scale, core traditional P&C businesses. We also have a number of specialty businesses, and in this case, we're really driving the transformations with InsuranceNow. We actually started with private client, which really wasn't a transformation. It was actually a new business startup. We predominantly appeal to a class or segment of users.
There are some very high-end customers serviced typically by people like Chubb that we weren't after, there was a mass affluent segment that we had looked at that we believed was underserved, that really couldn't be met with our current approaches to product pricing and underwriting, customer service, or claims. We basically created a new business and sent some outside leaders and combined them with some strong internal folks. When we were trying to decide what to do from a technology platform perspective, what we really wanted was something that would allow us to basically support all dimensions of the business and move as fast as we possibly could. We picked InsuranceNow, actually, when it was independently ISCS. It was pretty much the software equivalent of a carrier in a box.
It met functionally very well with what we'd want to do with a startup. It was also cloud-based, and it's faster and lower total cost of ownership. That is now fully implemented, and it is a $300 million in premium and growing business for us. The other ones on this chart are transformational. Our excess surplus business has multiple companies and lines within it. We have a couple of those done, but the two biggest are contract and brokerage lines are yet to go. We've had good success in the lines that we have up. Finally, I mentioned that we're the largest provider of pet insurance. That's on a very old platform, and we studied kind of everything that was available in the marketplace and, again, selected InsuranceNow. We've done all the planning work.
We funded it and are just in the stages of starting development. Our most recent partnership with Guidewire, you heard a little bit about Digital Small Business, but we're actually working in partnership with Guidewire to create a compelling digital insurance offering for small businesses. Just to provide a little bit of kind of historical context and an analogy, Nationwide was actually pretty early to market in around 2000 with a very effective quote and bind for personal lines auto insurance. For a whole bunch of reasons, profitability, changes in leadership, channel conflict, never really stayed focused and never really made the investment it required. If you fast-forward 18 years later, we, like almost every agency-based carrier, are losing share to folks like GEICO and Progressive who are direct and more digital.
We believe that for particularly the micro commercial segment, but probably even up into small, where the risks are relatively less complex, that it will go the same way as personal lines. As the number one writer through agency channels, we believe we have significant knowledge, data, and capability. We really wanted to go in a pure direct digital fashion. We got into discussions with Guidewire and wanted to see what we could do in partnership to get a good offering in the marketplace quickly. We initially thought we might go with InsuranceNow for that, but we ended up deciding to go with InsuranceSuite in the cloud. Biggest reason was we had invested a lot of time and money already through our commercial lines transformation in building out commercial products on PolicyCenter. We also had all of our commercial claims on ClaimCenter.
The solution that we ended up leveraging takes advantage of our ClaimCenter implementation on-prem, both PolicyCenter and BillingCenter in the cloud. While that provided the core, what we really wanted to do was to have a really robust digital offering both for sales and service. That was really where the partnership came in, and Guidewire developed the Digital Small Business capabilities, and we were able to go in and do things like personalize journeys. We actually, in eight months from the time we started in January to a launch just a couple of weeks ago, August 27th, were able to get 18 classes of small business insurance up in the market in Illinois. It's going to be a test and learn. It's really too early to say. We are just beginning the digital marketing campaigns to try to drive volume to the site.
If you look at it, the journey and the experience that somebody would have coming in as a micro business owner is very different if you are a barbershop versus if you are a florist. We would not have been able to do that without things like the Engagement Manager component of DSB. More to come on that. It is still early, but I do have a short video that talks about this that I would like to show.
At Nationwide, we are committed to protecting businesses of all sizes with innovative insurance solutions that meet their unique needs. In our research, we found that micro businesses, those with fewer than five employees, are underserved by today's insurance market. Consider this. In the U.S., 62% of all businesses are micro businesses. More than 540,000 new businesses are created every month. Nearly a third of millennials, the biggest generation in U.S. history, with 71 million individuals, have already started a business, and almost half of them, 49%, want to start a business in the next three years. To help this growing group of entrepreneurs, Nationwide has teamed up with Guidewire to create an innovative new solution, Nationwide Commercial Digital Direct. Nationwide Commercial Digital Direct delivers end-to-end digital capabilities across the entire insurance life cycle. Why is Nationwide launching a digital solution? Consumer shopping behavior is changing.
Millennials, the fastest-growing group of micro business owners, are a digital-first generation, with 9 in 10 owning smartphones and 78% purchasing products online. Other generations are adapting digital as well, with many of them preferring to start their transactions online. Nationwide has designed Commercial Digital Direct to align with these preferences. Micro business owners can quote and bind business owners' policies online using their mobile phones, tablets, or desktops. They can also manage their policies and pay their premiums from anywhere at any time. All of this is done using Guidewire's digital front end, powered by Guidewire InsuranceSuite and the Guidewire Cloud. The solution opens a new market to Nationwide, a market that Nationwide can attract and serve easily with the second component of Nationwide Digital Direct, Guidewire Engagement Manager.
Guidewire Engagement Manager is a digital tool that empowers our Nationwide teams to create personalized digital experiences for specific segments, leverage third-party data to personalize and pre-fill information for prospects, launch marketing campaigns, conduct A/B testing, quickly make changes based on the results. Will micro business owners insure their businesses with Nationwide Commercial Digital Direct? We believe so. The solution is tailored to their digital preferences while still offering call center support. Other insurers are just beginning to figure out how to sell and service commercial lines through an entirely digital experience. Nationwide is well-poised to gain an early-mover advantage by starting now. When can you expect Nationwide Commercial Lines Digital Direct? We launch in August 2018 to target approximately 50,000 micro business owners in Illinois with business owners insurance.
From there, our solution will position us to quickly learn from the marketplace, adjust our product offerings, expand up to the small business segment, and scale nationally. Commercial Lines Digital Direct from Nationwide, an innovative new solution for innovative business people, micro business owners. Nationwide is on your side.
Right. For my final topic, given that there's been a lot of discussion around cloud, I wanted to take you through a little bit Nationwide's perspective and our strategy in that area. Nationwide's been moving workloads to the cloud for many years now, but it has been predominantly software as a service or SaaS offerings. Whether it's moving from Siebel to Salesforce or from on-prem service management to ServiceNow or from PeopleSoft to Workday, we predominantly moved that kind of workload to the cloud. When we had looked a number of years ago at a lot of things that would be more in the infrastructure or platform as a service area, we just didn't find moving to the cloud to be advantageous. There were still significant security concerns. There are a number of cases where our on-site, on-prem hosting was just as efficient.
Quite frankly, it takes work to get there, and we had a lot of other priorities on our plate, including the big transformation programs that you've heard about. We really didn't do much outside of the SaaS arena. Given what we heard going on in the marketplace at the beginning of 2017, we decided to really take a hard look and craft a more robust and comprehensive cloud strategy. We did both some consulting work, and we did experiments and vendor visits and all the kinds of things that you would look to do. We really came up with a different answer this time. We really found that from a security perspective, there are some different things that we need to do to really be secure in that environment.
In an awful lot of ways, the cloud providers are actually better at security than most internal shops. If we manage it properly, we got very comfortable with that dimension. We also found that there were significant areas where the financial benefits were meaningful. The other one that really kind of caught our attention was the speed and agility advantage. Just one example is we started to do more and more work with telematics, collecting large volumes of data from vehicles to try to do better underwriting. We didn't try. We did stand up a big data Hadoop-based environment internally in our data center, but it took months to get it up in place. We got it up in place with one vendor, and they shift strategies, and we had to migrate it to different software.
By the time it was done, it was expensive and slow to get up. We ended up getting it working. When we looked back and kind of did the case study of what would have happened if we had done that in the cloud from the beginning, it would have been far faster, far cheaper, and it would have created a much better development environment for our folks to be able to spend their time doing innovation rather than core plumbing. We found a lot of different areas and a lot of strength in a number of the business cases, not all workloads. We believe that we will go from about 20% in the cloud and 80% on-prem today to more like 80% in the cloud and 20% on-prem by 2021.
What that means in terms of our relationship with Guidewire, for all the work we've done with them with InsuranceNow, it's actually pretty easy because it was in the cloud from the beginning. If you look at what's going on with InsuranceSuite, we're having our first experience with InsuranceSuite in the cloud on the Commercial Direct project that you just heard about. We're also beginning to work doing development on our core InsuranceSuite platforms from the personal lines, commercial lines, and claims transformation in the cloud. We'll take the learnings from those to figure out what to do with production. If we could even move development and tests, when you look at the size of these projects, we have massive development teams in multiple locations. We have a huge amount of integration testing that needs to be done.
We have a tremendous investment in infrastructure for development and test environments. Just getting that to the cloud could be very helpful to us, could lower our costs. Today, we put all those environments in and provision them, and they get used part of the time. In the cloud, we can turn them on when the developers are using them, turn them off and not pay for them when we don't. In addition to that, there are just things that the developers can do without talking to infrastructure. The software enablement in AWS is such that they can basically turn things up, experiment with it, try innovations that they wouldn't do in the current on-prem dev test world. Long-term, I expect that we will get all of our production InsuranceSuite to the cloud, but that's going to take a while.
We've already invested in the infrastructure, so we own it. We've invested in the licenses. We have a huge business case and an awful lot riding on completing those transformation programs. We will just stage the movement of the current on-prem stuff to the cloud based on a whole variety of factors and the business case behind them. With that, I'd like to thank Guidewire for the great partnership and for inviting me today, and I'd be happy to answer any questions.
Thanks, Mike. I guess three very different questions. The SMB initiative that you guys are doing, what's interesting about that is it seems like Guidewire is going to have the ability to then take it to the State Farm of the world and your competitors. What drove that partnership, and are there any safeguards for you? Number two, Marcus or Curtis probably prepped you for this question, Guidewire talks about cloud and their ability to charge a vendor two or three times as much as if you're taking a term license on-premise. Does that-
I'm sorry, could you say that last part again?
In other words, you're paying $1, which is probably more than that for a license a year. The idea is to pay $2 or $3 in a cloud environment. Does that make sense? Lastly, you guys have a big life insurance business. Do you guys talk about, with Guidewire, about getting into that, or what do you use for your life insurance space? Three very different questions, but-
Yeah. All right, I'll try all three. First, on the Digital Small Business or commercial direct initiative, we did negotiate some kind of first-mover rights that at least prevent the competitors we would care about the most from implementing right away. That doesn't last forever. As the number one carrier, we actually think we have already an advantage just in terms of our customer base, our brand, our data, and the like. First movers always get additional advantage. In the long run, we believe. The final thing I'll say is if you look at the DSB tools, they're great tools to personalize a fully digital experience for small businesses. We have the business insight and knowledge and expertise to be able to do that, which a lot of the startups, for example, would not.
We believe that we can be first to market with a better offering, and that if other carriers get that same toolset a little bit later, they would eventually get there anyway if they were seriously interested in going after that segment. Is that good on that one?
Yeah.
Okay. Second question on cloud economics. If we were going to pay $3 for what we could pay $1 for on-prem, I guarantee you we would not go there, regardless of what everybody's saying about innovation or speed or agility. I don't think that's what's really going to happen. If you take a look at it, the money that Guidewire is saying takes them from $1 to $2 or $1 to $3 just to basically do services that we otherwise have to do ourselves. My hope and expectation is that they're going to be able to double or triple the revenue in that space, do it profitably, and I'm still going to get a better solution for the same or less money than I'm paying today.
Right. Can you talk through your thought process on that distinction?
If you just take an example, one of the things that's pretty expensive is going through major version upgrades. It's disruptive, it's expensive. It's hard to get the business to want to do it because in the short run, like one release, you don't get that much for it, but you still have to go through all the disruption. If you wait multiple releases, it becomes this insurmountable object, and it's just very hard for most IT organizations to stay current with packaged software. Things like Guidewire doing that for all of their InsuranceSuite cloud customers, they should get very good at doing it. They should be able to do it more often, more seamlessly, less expensive, in a less disruptive way for us.
Those things that they were talking about in terms of upgrades, application management, and that kind of thing, I think we're okay at it, but if somebody was doing that many, many times more often than us, and they know their product even better, they should be able to do it faster, better, cheaper, whether it's multi-tenant or single tenant.
Right.
Final on life insurance. Guidewire did not have an offering. We have a transformation going on in our life business as well. It's part of the reason I have gray hair and had to stop after 15 years of doing so many of these. We actually have multiple older life platforms, and there's a mandate to move to new products with new mortality tables and new accounting codes and that kind of stuff. We were going to have to redo essentially all of our life products and market, and we didn't want to do it on those old platforms. We have a major investment to put a new life platform in, move all of our life products, at least new for sale life products, not all of the legacy, onto that platform.
The platform we chose was the Oracle OIPA, Oracle Insurance Policy Administration, I think it's called, but that platform.
If Guidewire came out with a great life insurance product tomorrow after spending $hundreds of millions and having all new business processes and products on that platform, for us, it wouldn't make sense for other customers that haven't yet made that kind of investment in mind.
Hi, Mike. Thanks for doing this. You mentioned trying to get all processes, all IT onto a single common platform. You obviously showed that you have on-premise, and then you have Guidewire Cloud and then InsuranceNow. On the InsuranceCloud, it sounds like you guys are going to migrate to on-premise at some point to that direction. How should we think about the InsuranceNow versus the Guidewire Cloud component? Is InsuranceNow something you guys will graduate off of, or will that forever kind of stay on the specialized brands that you guys have pushed out there?
Yeah. We would not move off of InsuranceNow for those specialty businesses that we've moved on, unless we had to. If you think about one of the differences between InsuranceNow and InsuranceSuite, is InsuranceSuite was really built for large-scale tier 1 carriers. If we ever reached the point where kind of InsuranceNow couldn't handle the weight and the growth, but I don't see that being very likely. Hopefully it'll continue to improve its ability to scale up. In terms of one platform, it's really kind of by business area, right? We wouldn't put excess and surplus standard commercial lines, standard personal lines on all one, but all like businesses, we want to have on common platforms. Does that answer your question?
Yeah.
Hi. I think over here to your left.
Yeah.
Hi.
Hi.
Thanks for doing this.
Yeah.
Michael Turrin with Deutsche Bank. I'm just wondering if you could talk a bit more about what drove your decision to use Guidewire for some of these processes beyond claims transformation, personal commercial lines, the use of InsuranceNow for some of the specialty businesses. How much of it was Nationwide's core vision versus what you'd seen from the relationship working with Guidewire prior to, versus some of their efforts to sort of help keep you aware of what they'd been working on as well? Yeah, good question. We have treated every one of the major initiatives or investments, we typically call them transformation programs, as an independent business case and as an independent look at what is the best solution that's out there. At the time that we started the relationship with Guidewire, it was really before our One Company, One Brand Strategy.
We were originally buying it for Nationwide and Allied. We hadn't even bought Harleysville fully yet. We didn't know if we were going to use it for ag or excess and surplus or the other areas that we've subsequently used it for. That was a very successful program for us, and we got the whole business there. We knew we needed to do something on the policy front because we had three legacy systems, none of which were in great shape. Literally, I used to talk to people when people would complain about, "Why is it so expensive, and why does it take so long to do this digital experience for the customer?" It's because I have to do it three times instead of once, and I'm doing it on a technology that was never built for it.
In some cases, no matter how hard I try, I just can't fake it, right? If I'm on batch COBOL systems, I can't provide a common real-time experience across channels or technologies. We knew we needed to do something, and we looked at what was in the marketplace, and we also looked at what it would take to either modernize or build from scratch our own solution. Quite frankly, there was a lot of debate on whether we should put our eggs in the Guidewire basket at that time. I had multiple people, both inside the company and outside, tell me, "This is stupid. You won't have your job in two years." Seven years later, I retired of my own will. It turns out, in hindsight, to be a really easy decision.
If you look at the record of the number of large carrier wins that Guidewire is having, I think today, if I was making this decision, it was easy. At the time we made it seemed a little bit riskier, but clearly the claims experience helped us get comfortable with it. Then, once we had done claims and personal lines, the commercial lines decision was easy. Yeah.
Hi. Thanks for your time, Mike. I think I have a question on the slide where you were showing the implementation times of the projects. I think it was on the personal line where you showed that starting 2017, 50% done, and it will be done in 2021. It seems like four years kind of implementation time. Could we talk about why is the implementation time that long?
Yeah. I've been asked that question many times by our board. I will try to give you a good answer. They didn't usually like it, policy systems sit at the core of everything you do. It interfaces to service, to billing, to distribution. It's kind of the center of what one of my peers calls the Gordian knot of complex legacy IT systems. Trying to pull that out and replace it with something new and then do all that integration work is a tremendous amount of heavy lifting. We just have tens and hundreds of difficult integrations that need to get done. On top of that, you need to do all the data conversions, and in our case, it was from multiple different legacy systems and multiple different legacy products to a new product.
You're re-engineering a tremendous number of core business processes, you have to work with the business and get all of that engineered and then configure it into Guidewire so that that works. You have to go state by state and get approval to implement the new products.
You have to work with your distribution partners and your customers. In our case, since we went with a new product, basically the way it's experienced by the customer is we're canceling your old product because the regulators make us say that, and we're trying to sell you on a new product. Just when you have millions of customers, trying to get everybody through that process takes a tremendous amount of time and effort and work. Long-winded way of saying it's really hard on the business side, it's really hard on the technology side. It basically took about two years to get one product in one state. It took another year to get all products in one state.
Once that's done, you've kind of got the hard part behind you from a technology standpoint, but the business side of rolling it out against all of those geographies and across all those customers and distribution partners is still a lot of work. All right. Thank you.
Mike, that was a great session. Thank you very much for your faith in us on behalf of the Guidewire team, and congratulations on what you've accomplished, you and the team at Nationwide. Our closing session today is hosted by Curtis Smith, our CFO.
Thank you. Great. Thank you for joining us today. We really appreciate you taking the time to better understand Guidewire and its financials. Also, a special thanks to the Guidewire team members and all of their work in putting together the materials to make this day happen. Really appreciate it. I'm Curtis Smith, Guidewire's CFO. I'll be joined by Jeff Cooper, VP of Finance, and together we're going to present the financial update and respond to your questions at the end. There are four key themes that we're going to talk about today, and they set the roadmap for our presentation. Understanding ASC 606, the impact on revenue, primarily due to our term contracts, and also the impact on commissions. Cloud driving business model changes, the transformational shift, expanding the TAM that we've been talking about. The subscription revenue growth and the concomitant impact on margin.
Cloud driving sort of a new division of labor with our system integrators than we've seen over the past year and a half with our cloud implementations. We're going to talk about some key metrics today that we have foreshadowed in earlier earnings reports, then we'll end with our target five-year model. We note, and you've heard this many times today, that our cloud transition is not a three to four-year project. It is a multi-year opportunity and journey. Our five-year target model is not a terminal model or value. All right. First, let's start with our favorite number, 606. We've read a number of auditor reports on the topic and some software research reports as well, and noted one from Stifel that was titled "ASC 606: Bringing Accounting Confusion to Software." Also one from Goldman Sachs, "Deep Dive: ASC 606 Impact on SMID Software.
We Expect a Somewhat Messy Transition Period. We've been discussing 606 with you over the past two years, and we're hoping to bring some clarity now to its impact on our 2019 financials. We'll put three slides together today to kind of go over the impact of 606. First, a summary slide. You've seen tables like this before that indicate the impact on 605 and 606. I will also use an example that illustrates the impact on our 2019 numbers and why we chose to do these remediations. Finally, we'll talk a little bit about the impact on accounting for the commissions. All right, the summary table to begin with. If you start at the left of it and come over, we looked at contract type. Again, the contract that has the biggest impact for us in 606 is a term license.
What we've noted here, too, is a multi-year term license deal, either one-plus year or two-plus. Under ASC 606, the treatment, an annual fee up front at the earlier of due date or cash collection. Under 606, that annual fee up front for an entire initial term. If there's a multi-year term license, you get all of it in year one. In 605, you'll just get one year of it. The fiscal 2019 revenue impact is significant for a multi-year contract in a 606 world. We go down, term license annual renewals. Under 605, ratable revenue recognition. Under 606, annual fee up front on renewal date. The impact on our 2019 revenues, significant in 605. Lastly, the subscription contracts. Under 605, ratable at specified annual fee. Under 606, ratable at an average of annual fee in committed term.
The impact for 2019 for us is moderate and really with ramps. Annual payments, we accelerate over time. We take an average of that over the entire time period versus just looking at one period and then the ramp periods. When we analyze then the impact of the loss to retained earnings when we implemented 606. Together with the benefit we get from it equaled a largely neutral impact. Let me walk through that a little bit. On the red arrow down, we went through this process of remediating almost all of our contracts so we could avoid a big loss to retained earnings. There were some that we intentionally didn't target because it was too difficult to change. Some of those contracts were lost into retained earnings.
The other big piece of that is in 2018, when we implemented the two plus one term contracts with our new contracts and new customers going forward, we got one year of revenue recognized, but the second year was lost into retained earnings. That's basically what made up that loss to retained earnings for 2019. If I look in more detail around the benefit from 606 in 2019, it's basically those same two plus one contracts. When we anticipate signing so many two plus one contracts, we will get two full years of revenue in 2019, but we won't get the second year in 2020. There is some benefit in 2019 to having these two plus one contracts, and it will be based on the number of two plus one contracts we end up putting in place.
We took those two things, we analyzed it, we weighed them against each other. It was largely a wash for us. There is one thing we will note, though, on the benefit from 606, the green arrow, it will depend largely on our mix between subscription and term contracts. We have assumed a certain split. If we see a lot more term contracts with a 2+1 structure, we will see a bigger benefit. If we see fewer, we will see less of a benefit. All right. Here is an example that we are using to illustrate the impact on our revenue of 606. What we have done here is we have split the slide into two parts. The left-hand side we are calling the old world, and that consists of fiscal 2018 and prior years under a 605 standard.
The right-hand side of the slide, it is our new world, or it is fiscal 2019 when we implemented 606 and then the years going forward. If I go to the left-hand side of it, we are looking at one example of a 4-year term license contract that generates $1 million a year in revenue. It renews in year 5, in 2021, and the start date for it is in Q4, which is when the bulk of our contracts come in place. In that scenario, in the old world, we recognized term license revenue on an annual basis in Q4 of each year based on earlier payment received or due date. There you see it, $1 million in 2017, 2018, 2019, and 2020. That is how it would roll out. At renewal in 2021, in the fifth year, we begin ratable revenue recognition because no VSOE.
That is how it looks, that contract in a 605 old world. We take that same contract under capital A there, and we do not remediate it. It is the exact same contract, we bring that over to the right side of the table into our new world of 606. It is that top piece there. 2017 and 2018, $1 million in revenue gets recognized the same way it was in the past. Under a 606 world, though, unremediated, those 2 out years of the term are lost into retained earnings. There is a $2 million negative impact to our revenue if we had not remediated that 4-year term contract.
That is one of the reasons we went out and spent a lot of time over the last 2+ years targeting and successfully remediating over 300 of our contracts with our customers to avoid that big loss of revenue into that retained earnings. If I go back all the way down to B, same 4-year term contract that we then remediated so that the initial term ends in fiscal 2018, and then it goes to automatic renewals in 2019. We look at that remediated now contract, 4-year term contract, into our new world, and we start with it under 606 remediated. Because we remediated it and now it is on an annual renewal basis, under 606, we get the full year in 2019, and then we will get the full year again in 2020, in the fourth quarter when it renews.
So recognized term license renewal on an annual basis in Q4 of each year going forward to 2019 and 2020. That's comparable to that same contract in a 605 world. When we look at that same remediated four-year term contract, and this is the bottom B example here in the new world, the 2017 and 2018 revenue gets recognized as it did in all scenarios here. Then in fiscal 2019, under 605, we recognize the term license revenue on a ratable basis, in this case, beginning in Q4, which are where many of our contracts are signed. So we only end up getting one quarter of that ratable recognized revenue in 2019 versus the full amount that we'd get in a 606 world right above. So that's why we say that's not comparable. Not comparable to the 606 and not comparable to 605 with that same contract.
There is a significant benefit of remediating contracts and not losing revenue loss to retained earnings. That's part of the story here. The other part, and I think it's equally important too, so that we could make our 605 numbers comparable. Revenue under 605 in the new world, as we've noted here, is not comparable to 605 in the old world. Therefore, when we talked about this in earnings, we said all of our guidance would be on a 606 basis going forward. All right. One more 606 slide. The other impact of 606, and I think this is one that's generally well understood, is the commission's expense impact. The idea here, in general, is to match up the cost to obtain a contract, the commission's cost, which would be the biggest piece of that, with the revenue recognition of that same contract.
We've assumed a 5-year amortization period. That was one of the key pieces of analysis that we did in putting this together. There's one anomaly that we just point out here. For our term licenses, if you look at that commission type here, and we're saying the 2 plus 1 contract. 2-year initial term plus the annual renewal. Under 605, recognized as incurred. In this new standard, license commission cost will be recognized 40% in year 1 because we see 2 years of revenue recognized in year 1. Then we get 40% of a commission there. In year 2, 0% of that commission is expensed. In year 3, 4, and 5, 20%. That's 1 thing to note if we have a term license with a 2 plus 1 contract that we'll sign in 2019.
For subscription, it's recognized as incurred under 605, and under 606, recognized ratably over the 5-year amortization period. What we noted in earnings is that there will be a benefit of this treatment of our commission's expense, capitalizing it and then amortizing it back in 2019, and we said that benefit to our 2019 financials would approximate about a 1% increase in our operating margin. All right. That's 606. Let's move on to cloud-driving business model changes. As we've noted in the past, subscription as a percent of new sales has been increasing. We noted where we were in 2018, this is not drawn to scale, and then our anticipated range of 40%-60% in 2019, and we expect that to grow over time as we move out over the next 5 years.
There's an impact of that move to more subscription revenue, to more cloud-based revenue on our license and other margin. We'll try to illustrate it here. On the left-hand side of that, these are the statistics we've talked about before, subscription as a % of license and other revenue, where we were in 2018, the midpoint of the guidance range we gave for 2019. The license and other gross margin on the other side of this slide in 2017 at 97%, as subscription grew. In 2018, that came down, as it grows again in 2019, we expect that gross margin to naturally come down as it costs more for us to maintain and support a cloud product than it does for us to support a term license.
The benefit, as we've noted though, is there's a pricing multiple that we get, that's one of the reasons why it makes sense for us to keep taking on more subscription revenue, even though the margin in the short term is coming down. There's a pricing benefit for us selling the cloud license versus the term. The other impact of the cloud business model change is on services. We're showing you the long history here of our services as a % of our mix, our services as a % of total revenue. You can see it elevated in prior periods. It came down to that 30%-34% level in 2016 and 2017, then it bumped back up to 40+% in 2018 for some of the reasons we've noted and we've talked about in prior earnings calls.
We guided for that growth rate to come down in 2019. Our expectation, we'll share more about that will come down more and more as a % of revenue, closer to that 30%-35% that we've seen historically in the past, we'll talk about some of the things we're doing to drive that in the next couple of slides. This is one of the impacts of the short term. There's been more services revenue as our attach rate's been higher with some of our cloud implementations and have required more attach of our service. Our expectation is going forward, though, that that will come down over time. Okay. Now we'll talk about some key metrics, I will invite Jeff Cooper, our VP of Finance, to come up and walk us through those slides.
All right. Thanks, Curtis. My name is Jeff Cooper. I'm the VP of Finance. I joined Guidewire just under a year ago. My background is a mix of investment banking and finance operating roles. I had the distinct pleasure of working on Guidewire's IPO when I was on the investment banking side. I distinctly recall sitting in a conference room with the IPO working group talking through key metrics for the business and which metrics would be instructive for investors to consider. One of those metrics, as you all probably know, is 4-quarter recurring revenue. That was a good proxy for ARR at the time of the IPO and continued to be a good proxy for ARR as a result of our term licensing model.
As we've migrated to the Cloud and as ASC 606 has a pretty significant impact on our stated financials, four-quarter recurring revenue is no longer a great proxy for annual recurring revenue. We're going to introduce some new metrics today, and I will walk you through those. First is subscription new sales as a percent of total new sales. The first two metrics are transitional metrics. We're highlighting those as transitional because we think that there's value while we're in the early stages of the Cloud transition to these metrics, but we do not intend to provide this on an ongoing basis. You've heard us talk about subscription new sales as a percent of total new sales, and we announced on our earnings call that our outlook for that would be between 40%-60%.
I do want to take a moment just to make sure people understand the metric new sales. Total new sales is an internal measure of the annual average contract value over a five-year period. It takes some credit for future ramp periods into what is an internal bookings metric. It also adjusts down perpetual licenses into what would be an ARR equivalent to Guidewire. I want to make sure people understand both the numerator and the denominator for this metric, and we will continue to update everyone on this as we work through the year. The second metric we thought was instructive was InsuranceSuite Cloud deals, and we said on the earnings call that we expected between four and eight. This could include a new core module sold to an existing InsuranceSuite Cloud customer who did not purchase the full suite previously.
This is Cloud deals, not Cloud customers. To date, of the four IS InsuranceSuite Cloud customers announced, three have purchased the full suite. The fourth purchased the full suite in a piecemeal fashion, and so four Cloud customers via five InsuranceSuite Cloud deals. Moving to the go-forward metrics. First is subscription revenue. We committed to breaking that out once it reached 10% of license and other, and we expect it to reach 10% of license and other this year. We will treat our subscription revenue disclosure very similar to how we disclose perpetual licenses. It won't be on our stated financials, but we will talk about it on the earnings call, and it will be in the notes of our financials. For the year, we guided to a range of $48 million-$54 million. At the midpoint, that would be around 75% year-over-year growth.
Last year, we grew subscription revenue over 350%. Finally, annual recurring revenue. This is a replacement metric to four-quarter recurring revenue, and we're excited to announce that today and committed to providing an update on that on an annual basis moving forward. ARR. We define ARR as the annualized amount at the end of the period for all active term licenses, subscription agreements, maintenance contracts, and hosting contracts. It does not include the impact of perpetual licenses but does include maintenance associated with perpetual licenses. It obviously does not include professional services. That's what is in the number of ARR. Last year, ARR grew 20%, which had some impact of inorganic ARR from the Cyence acquisition, but we do not intend to break out organic and inorganic ARR as we move forward. We measure ARR in ramped agreements tied to the invoicing schedule.
If payments ramp over time, our ARR will also ramp over time. Please note this is different than revenue recognition under 606, which would recognize the average amount over the contracted period. Our definition of ARR is a bit more conservative. As an example, if a customer with a 3-year contract grows from $1 million in year one to $2 million in year two to $3 million in year three, during the first year of this contract, ARR would be $1 million. Reported subscription revenue would be $2 million because we average over the contract period. ARR growth is sensitive to a number of factors, such as the % of our deals sold in a ramped context and the steepness of the slope of a ramp. If we see either of these measures increase year-over-year, we would expect to experience a negative impact on ARR growth.
In FY 2019, we modeled an increase in the number of ramps over FY 2018, and in our early experience with the cloud, we have seen a significant number of the cloud deals in a ramp format. We are modeling an increase in the number of ramp transactions that we sell in this year. Additionally, ARR can be negatively impacted by ARR churn, which we do not intend to disclose, but ARR churn has been negligible over the last couple of years. For FY 2019, we expect ARR growth of 15%-18%. We have not assumed any M&A in this growth rate. Additionally, I wanted to note that ARR does include some lower growth components of revenue, such as maintenance and hosting. With that, I will turn it back to Curtis.
All right. Now to the fourth theme that we wanted to share with you today, and that is the target 5-year model. Before I get into the model, I want to review our current financial profile, where we are in 2019, or at least the guidance we provided in 2019, and what led to that or how we got there. I'll share some of the drivers around how we're going from where we are today and how we get to that 5-year target that we've been talking about. Finally, I'll share with you that 5-year target model and walk you through some of the components of it. Okay. To start with, where we are today and some of the drivers that got us to 2019.
As we've talked about before, to start off at the top there, subscription as a % of new sales is increasing. Subscription as a % of license and other revenue is increasing, and we expect both of those to increase over time. The natural consequence of those increases is the lower gross margin that we're showing there, coming from 69%-62%, and then based on our guidance, at 60% in fiscal 2019. The other thing we note on the services side of it, services was elevated in 2018 for significant reasons. We expect to see that to continue to come down over time, at least the projection is slightly to be below where it was in 2018, in fiscal 2019. GM, as I noted, lower due to natural impact of more subscription revenue.
To some extent, because of the increased services in the revenue mix, still at a fairly high level with the lower gross margin associated with it. OM is driven by lower GM and by some of the investments that we've talked about earlier and referenced again today. The investment in R&D spend that we made in 2018 and will be fully annualized in 2019, then the additional investment that we talked about into the ADS business. We also note some of the efficiencies that we've seen in OpEx over time. Sales and marketing is not shown here, but if you go back to 2018, sales and marketing was 18% of revenue in fiscal 2016, and you can see how that's come down to 15% of revenue in 2018. We expect some of those same efficiencies in both R&D and G&A going forward.
I'll note our free cash flow margin and the association with our operating margin. We've said in the short term, free cash flow is going to be a better indicator with some of the accounting impacts on our operating income. In the longer term, we expect that our free cash flow margin will correlate better with our operating margin, given some of those puts and takes from the accounting side of things will largely be neutralized. Okay, that's where we are. What are we doing to get to where we want to be in our five-year target model? Here are the key drivers that we are pointing to. You've heard a lot of these already in some of the presentations that have been made, both on the product side and then also on the operations side from Priscilla. Let's start with new sales.
Our expectation is that we'll continue to add more and more subscription. Right now, or in fiscal 2018, our subscription as a percent of new sales was 36%. We expect that to grow to 80% plus in fiscal 2023, or that's the target model. Also on the sales side, as we've noted, there's a tremendous opportunity for us to expand within our existing customer base and to migrate on-premise customers to the cloud. The biggest box here is cloud operations, and it's going to be one of the biggest drivers of expanding our margin going forward. We've noted some of the key things that we'll be focused on over that five-year period, and we've already initiated standardized contract terms to optimize margin, maximize deal sizes to absorb fixed costs, drive standardization and conformance, drive cost efficiencies.
We see this on the product side as we've talked about some of these microservices, but in general, that will be one of the key drivers going forward. That is not a one-year issue, that is a multi-year journey for us. Balance offshore and onshore resources and then streamline processes via automation tooling. There is a plan in place. These things won't just happen in a one-year period. It will be a multi-year period. Those are some of the key drivers that we expect to drive up our operating margin, in particular, our subscription or cloud gross margin. Service is also a big piece of the plan going forward. We talked about this a little bit in earnings, but we intend to mobilize our SIs to own a larger share of the cloud implementations than they have over the past year and a half.
Priscilla talked a lot about the plan in place to do that and the path forward on that front. Decrease services as a percent of revenue. We're up at 40%, 40%+ right now. We're targeting 30% in 5 years from now, which has been consistent with that mix that we've seen in the past. Drive services margin to 20%. We've seen that a couple of years ago. This past year, without the one-time charge we had, we would have been at 19%. There's some incremental things we'll be doing there, both on the InsuranceSuite front and also on the InsuranceNow front to drive that services margin going forward over the next 5 years and targeting that 20% margin. On the OpEx side, drive down expenses as a percent of total revenue.
We've had some success in doing that on the sales and marketing side of it. We'll continue to focus on those efficiencies and do the same thing on the G&A side of it, too. Many of which should come after we get through this pretty heavy period of essentially installing some pretty big systems and at least for one year closing two different sets of books. Okay. We talked about where we are in 2018 and 2019, the drivers that we're going to put in place, the plan in place we have to sort of drive that expansion and the margin, the profitability expansion, and the growth into our 5-year target model. Here's the last part of it then, the actual 5-year target. I know we've said this a number of times, but we want to emphasize it's a target, not guidance.
Important to note, this cloud transition, as we've said many times, is not a couple-year project. It is a 5 to 10+ year journey for us, and this represents a 5-year target and not the terminal model or the terminal value. On the subscription, the percent of new sales, you can see up at the top there, we're targeting 80% from the sort of 40%-60% range we have currently. On the sales growth, we're assuming 50% of license and other revenue is cloud and expect maintenance and services growth to decline while targeting a license and subscription growth rate of 20% over that time period. As we noted before, services expectation is to bring that down from 40%-30% based on some of the things we talked about earlier. Overall gross margin gets up to that 65%-67% range.
Research and development comes down from 22%-17%-19%. In the short term, we've made some pretty significant investments in R&D in both 2018, and will continue to happen a rollover into 2019. We expect to be able to leverage that in the early years of 2020, but then incrementally expand our investment in R&D going forward. When we look at the absolute dollar amounts, it's going up even though as a percent of revenue, it's coming down. The other thing, sales and marketing, we expect efficiencies there. We've seen that historically where it went from 18% of revenue in 2016 to 15% in 2018. We expect that to come down to that 12%-14% range.
Similar efficiencies on the G&A front from the 8% and where we are in 2018 to the 6% of the midpoint of the range that we're targeting for fiscal year 2023. All that lands us at an operating margin of 28%-30% and at a free cash flow margin at 29%-33%. As I noted before, earlier in the short term, operating margin didn't correlate well with a free cash flow margin because of some of the accounting impacts. In the longer term, we expect those accounting impacts to largely offset each other and that operating margin is a good proxy for free cash flow margin. The other thing that I would note here on the growth part of the target is that while we understand a cloud inflection point is possible, we have not modeled that.
We are assuming a steady rate of customer conversion to the cloud and a steady rate of new cloud customers going forward. In summary, the two key themes impacting our financials in 2019, and then going forward, are 606 and cloud. 606 we believe is a short-term impact and hopefully will get clearer and be less relevant as we continue to progress through 2019. Cloud is the bigger opportunity. As Marcus has mentioned, it's an all hands on deck priority for Guidewire this year and going forward on this multi-year journey. When I think back just personally on our cloud readiness just six months ago when I joined and compare it to now, it's clear to me we've taken a huge step forward, there are many steps for us to take in this multi-year journey as we go down this path.
With that, I'd like to invite Jeff back up to the stage here, we'll be happy to respond to questions you have. Also, we know that we may not get to all of them today, we'll be happy to schedule some follow-ups with you next week either on the phone or in person, which we will already schedule. Sterling.
Sterling Auty from JPMorgan. There's two questions.
Yeah.
Sterling Auty from JPMorgan. Actually, if you could put the five-year model back up, I think we're all going to ask questions around it. Two questions, one here and one on the ARR. The first one, not to be nitpicky, but I know you're saying it's not guidance, but when you're saying it's a five-year target, is this 2023, 2024? Because we're all going to do the same thing. We're going to take your free cash flow margin guide that's there, multiply it times the revenue, come up with a free cash flow number, throw our own multiple on it, discount it back, and say, "How does that equate to the stock?
Yeah.
I think it's going to be meaningful in terms of where that is, and I have one follow-up.
Yeah. We noted it. It's 2023. It's five years, 2019, 2020, 2021, 2022, 2023.
All right. Perfect.
That's on that point. We thought both of those were important, both the year, the approximate revenue we're expecting there at $1.3, and then the margin profile, as we've noted.
Very helpful. Again, we know it's not guidance, and we hope that you're going to do better than that.
That's an important point, too. Sorry. Clearly. I think it's important, and we're trying to notice that this is not a terminal model for us, right? We understand that in five years from now, here's what we're targeting, but we expect there will be growth going forward. We're only at 50% of our total revenue in subscription based on this target, right? We expect there to be growth going forward and some additional efficiencies on the OpEx side of things, too.
Perfect.
It's just where we're pointing to in five years, but this is a five- to 10-year journey, as we've talked about.
Perfect. The one follow-up is around the ARR metric that you put up and what you're guiding to.
Yes.
Can you help us with a little bit of the detail behind it in terms of the impact from the ramp deals, maybe quantifying it? We're all used to seeing that four-quarter rolling number that was well above 20%. Heck, it was above 30% for a number of years. Some immediate reaction getting is, "Boy, I'm surprised it wasn't a 20% guide.
Yes.
Understanding what those impacts are and that that doesn't maybe fully reflect the power of ARR as it grows going forward.
Yes
would be helpful.
Sure. I don't think we're prepared to quantify the impact of ramps. As we have modeled that, it is quite sensitive to the ramps. That is one of the largest sensitivities in the overall ARR analysis. We can consider, at some point in time, thinking through ARR backlog that is tied to some of those ramps. Not in position to disclose that here, but there's a number of factors that influence ARR. There's other things, such as hosting revenue, which we felt was more appropriate in our ARR. It's tied to product revenue that's related to one of the acquisitions that we did that currently sits in our professional services. That's not a growing component of ARR. That's just kind of trailing off ARR. But there are a number of factors that went into that guide.
I'd add to that, too, that we're putting out this new metric for the first time. We don't have years of operating experience around it, too. We're taking that approach when we put that number out there to say, "Hey, this is the first time it's out here." We'll continue to get more experience with it every quarter, where we're in a place where, hey, it's more part of our operating cadence where it hasn't been in the past.
Thanks, guys. I really appreciate the detail. Rishi Jaluria at D.A. Davidson. Two quick questions. First, going back to the target model, if I compare the target model that you're laying out versus your prior target model.
Yes
Sales and marketing is lower under the new model versus the 16%-18% in the past, and same on the G&A side. Stripping aside 606 and the benefit you're getting on sales and marketing, what's leading the greater leverage on both of those lines as a percentage of revenue relative to your prior model? On the ARR side, I can see you put the disclaimer there that you can't calculate it from the financial statements because you know we're going to try to do that as soon as we get home. If we were to try to do that historically, how wildly off would we be from that?
All right.
Thanks.
Let me do the long-term model question, Jeff will pick up the ARR. On the long-term model, two years ago, we put out a model, we pulled it back because we realized as we're moving into the cloud, it's going to completely change how we were initially thinking about that margin profile going forward. We pulled that long-term model off, and we said, "Hey, wait. Once we get a little bit more experience with this transition to the cloud and a better understanding of its impact on our model going forward, we'll share with you that five-year model," which we shared today. Specifically, on the sales and marketing, it's not a good comparable, right? To look at that one and compare it to this one, right? It just didn't assume the cloud transition back then.
To your question around sales and marketing, I think even two years ago, as I've noted, in 2016, we saw sales and marketing as 18% of revenue. We're now seeing it at 15 or lower, currently just over a three-year time period. There's some nice operating history that gives us some comfort that that ability to continue to leverage that sales and marketing expense going forward is out there. I think the other key part of it, now this existed back then and it still exists today, but we just have more experience with it now on the go-to-market side of things, is we have a limited number of customers we're going after, 1,500.
Many of those are already customers, it's even a smaller number that we're going after, and our sales force has a relationship in place with many of them, if not all of them. The S&M expense should be able to be leveraged given that sort of more defined set of potential new customers that are out there.
On the ARR question, look, you can get pretty close to calculating ARR based off of our historical financials. You would need the breakout of subscription revenue in order to annualize that number, which we are now providing. The real complexity is moving forward. Under ASC 606, where we have multi-year revenue recognition for new term licenses, ARR will normalize that down to an annual amount. That's kind of where a lot of the complexity lies moving forward. Historically, four quarters of recurring revenue was a good proxy for ARR. You had to normalize for things like early pays and adjust out perpetual licenses. You could get pretty close. It's just going to get more and more complicated, and as the subscription piece becomes a bigger part of the business, we wanted to give that clarity.
There was another part to your question, I mean, it's the G&A piece of it, too, the leverage we expect there, too. I don't know that we anticipated this two years ago, we probably did. There was a significant two new systems that we've deployed, that have a lot of expenses associated with them, that bring that number to the 8%, too. At least for 2019, because of the modified retrospective ASC 606 we were doing, we will be closing against two sets of books for a full year, under ASC 606 and ASC 605, and reporting under both. That is, at least in the short term, elevating that number. We expect to absolutely be able to drive efficiencies out of that going forward. Okay.
Right here, Justin Furby from William Blair.
Yes.
I guess a few questions, I apologize if you hit this, Curtis, in terms of the linearity over the next 5 years, should we expect it to be pretty consistent after this year at 300, 400 basis points? Is that as good of a guess as any in terms of how we get to the 5-year? The gross margin assumptions on cloud, you guys have talked about 60-65. There's this pretty big variance of what you've talked about for cloud pricing, 2x-3x, which I'm assuming has a pretty big impact on margin. What gives you the confidence, and is that the right assumption, is that mid-60s or 60%-plus gross margin on cloud?
Yeah. On the gross margin on the subscription, a year ago, we put out a slide in Analyst Day that talked about where we are with a very low cloud gross margin. That over time, and with some scale, we expected that to get to 65%-plus. The way we have modeled that in is, yes, we are expecting, and it's a low gross margin right now, we are expecting it by 2023 to be at 65%-plus on the cloud gross margin side of things. What's driving it, though, isn't just one variable, like the number of IS cloud customers or scale, but all of those things that we talked about in that cloud operations bullet point and the things that Priscilla referenced in her presentation, too, and that Ali represented, too.
The standardization, the microservices, making it less costly for us to maintain cloud products going forward. That's multi-year. Those are all key parts. Scale and all these other operational things and product things that will lead to us to be able to bring the cloud margin from where it is today up to that 65%-plus, which we expect to be there by 2023. That's our target.
The linearity on-
Oh. I think maybe this is what you were referencing, but I think we didn't assume some cloud inflection point. Like, at some point, there's going to be a big uptake and the demand's going to go through the roof. We assume just a steady rate of conversion of existing on-prem customers to cloud over time, and the same sort of steady rate of new cloud customers coming in. It's not like it bumps up like this, but just a steady rate of that over time to get us to the numbers we talked about in the five-year model.
One other thing to add to that is, when do we expect to bottom out from a margin perspective and start to see that margin progression as we march towards the long-term model? I think that's a hard thing for us to answer. It depends on hiring plans, it depends on a variety of things. It could be next year where we see margins bottom out, and then start marching back up towards the long-term goal. Does that make sense?
Do you think that it could be lower next year?
It possibly could be. It depends on hiring plans and a variety of factors. There is that possibility.
Hey, Curtis and Jeff. Two questions.
Yeah.
I was just curious whether we would, on GAAP margins, including SBC, which is a real expense, do you expect to see similar operating leverage on SBC as a percentage of revenues or however you guys look at it? Any clarity on that? Just to clarify, the 5-year target model that you have right now, that has existing customers converting to cloud, some assumption underlying that, would you say that is the majority or minority or roughly half? What's the assumption behind that?
On the first one, SBC, we don't expect changes to our SBC going forward, we really didn't spend a lot of time on the GAAP side of things. It's really non-GAAP, you assume you're right. On the second part, we're not sharing those specific conversion rates. We did look at 2019 when we put our guidance together there and assumed conversion rates, new customers coming in on iNow, on InsuranceSuite cloud, a number of those that are going to be converting over from existing. We maintain that conversion rate to be consistent without any sort of big fluctuations going forward. We haven't shared those rates, and we don't intend to.
Okay.
Hey, guys. Brad Sills over here.
Okay, Brad. Yeah.
Yeah. Thanks. I think in the past you guys have kind of endorsed 20% as kind of the true growth rate for the company, and it was easy before the transition to see that in term license. Last year, you provided that bridge for the subscription mix to get us to what that normalized would look like. What's your view? Has that changed at all? The true growth rate of the company, would you say, is 20%, we should now be looking at ARR, that 15%-18% with upside gets us there? Or how should we think about just what your view is on the underlying growth of the business?
Yeah. A couple of things. One of the things we did for our long-term model, overall growth rate is impacted by services coming down. If that growth rate goes from 50% to much, much lower than that, then the overall revenue number growth rate's going to be impacted by that. We also see the same thing happening on maintenance. We expect that to get smaller and smaller over time, and eventually become part of the overall subscription. That's factored into how we at least think about the growth rate here. The other thing we did note, though, is that we are assuming and continue to target a 20% growth rate for license and subscription revenue over that time period. That is still a stated target for us and a goal for the 2023 model.
Great. Thanks. One more, if I may. You've seen a nice acceleration in Europe. I know that's been an area of investment, building the content out so that you're competitive in those markets, the compliance content of different countries. Do you feel like you're there? Are you kind of hitting a tipping point in Europe? Is this part of the new norm? How early are we in the adoption cycle in Europe?
Well, this year was a big year for Europe. They've kind of been chugging along for several years, and this was the breakout year from new customers, new deals, our country coverage. With that bump, we don't expect similar year-over-year growth rates. We do expect us to be able to maintain that higher level of activity going forward here. We're optimistic about that. For 2019, it's one of our stated three or four priorities for a company, and we'll be very focused on Europe in 2019.
Curtis, I think we have to.
Okay.
Yeah.
All right. Thank you, everyone. Really appreciate you spending some time with us today.
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