Centralizing IT by creating a separate company is a strategy that USAA, Prudential and Kemper have pursued to bring greater financial accountability to their IT operations.When USAA created its technology subsidiary in January 1998, the primary objective for the standalone, for-profit company was to introduce financial discipline to the San Antonio-based organization's procurement of information technology.
Judging from last year's results, USAA Information Technology Co.'s (ITCO) mission has been accomplished. The company's total expenditures were 20% below the projected budget, a "100 percent reversal" from the results a year earlier, says Stephen Yates, president of ITCO.
"The issue was simple: IT costs were increasing steeply, and the operating groups were not experiencing an equal return on investment," Yates says. "In fact, the IT budget was increasing more rapidly than the income of the company."
Creating a separate technology subsidiary is a strategy that several insurers have pursued as a means to bring financial accountability to their IT operations. And while industry observers say the concept enables carriers to better manage technology across their organizations, insurers should understand the implications of establishing separate IT entities.
"Anytime you create a separate subsidiary, you risk losing touch with the core values of an organization," says Charles Johnston, vice president and director, insurance information strategies, with Meta Group Inc., a Stamford, Conn.-based technology research and consulting firm. "But for a company such as USAA, which offers banking, mutual funds and property and casualty products, in order to leverage IT across different lines of business, you have to centralize application skills and IT development."
Managing USAA's massive IT infrastructure is a daunting task. Consider this: ITCO provides the technology backbone that supports 15 million computer transactions per day, 144 million inbound and outbound calls annually and 1 billion digitally stored documents.
USAA's telecommunications network, which supports customer service transactions, uses more than 6,100 toll-free telephone lines terminating in systems from Nortel Networks and Lucent Technologies. In 1999, USAA's voice-response system handled 20 million calls.
ITCO also is responsible for managing some 522 Compaq servers, 308 Unix servers, 1,830 LAN- attached printers and more than 28,000 desktop computers, in addition to the company's IBM distributed computing environment.
Given the size of USAA's IT infrastructure and the broad range of financial services the company offers to more than 4.3 million members, USAA executives determined that ITCO could bring financial accountability to current and future IT projects.
"We use balance-sheet accounting and keep track of our assets versus our expenses," Yates explains. "As a for-profit company, we had to educate all of our managers about accounting principles."
Companies that form separate technology subsidiaries can take advantage of other accounting measures to improve their bottom lines, experts say.
"It can be advantageous for a life insurer to push technology-related expenses to a subsidiary because it will have a positive impact on the carrier's rating," Johnston says.
"It's also easier to capitalize expenses when you have a subsidiary. If you are undertaking a large project, you can spread those expenses out over several years. And if you form an offshore IT operation like Prudential did, you can take advantage of certain tax laws."
Insurers that have formed IT subsidiaries say the structure enables them to work more closely with managers to prioritize IT projects.
Every summer, Yates asks business unit managers to forecast what their IT needs will be for the following year. "I have to calculate and set the rates for all operational items-personal computers, long- distance phone rates and what the per-hour cost will be for a computer programmer. That transaction processing cost is part of a business unit's annual budget."
In addition, each business unit also submits to ITCO a list of IT projects. Last year, of the 1,000 projects that were proposed, approximately 600 were eventually undertaken. "We receive a concept of the project and then it is the responsibility of my group to come up with an estimated cost for each project," Yates explains.
The ceiling for USAA's annual IT budget is set by Yates' boss, USAA CEO Robert Davis. Leaders from each business unit then determine which projects should be pursued. "Each project gets a 15 minute presentation before the committee, who determines the final list of projects across the entire company," Yates says. "That includes my own projects, such as computer security; we have to compete for money just like the other business units."
A top IT priority for ITCO this year is improving its business resumption/disaster-recovery capabilities. The company is also engaged in a multiyear project to enhance data security, and is devoting more resources to improve software application development.
ITCO, which has more than 3,000 employees, is also involved in rewriting USAA's entire suite of software supporting auto and homeowner policies. "The first step is sales and service and policy administration, which we have been working on for eight months," Yates says. "In the next several years, we will rewrite all of the claims, billing and policy administration software. We're using both internal programmers and some external people."
Recruiting IT talent
Reducing its reliance on outside IT consultants and beefing up its internal staff was a top priority behind the creation of Prumerica Systems Ireland last September, the offshore technology development subsidiary of The Prudential Insurance Co. of America.
"The last few years, we have been relying on consulting resources more than we like," says Bill Friel, senior vice president and CIO of the Newark, N.J.-based insurer. "The strategy behind it relates to the difficulty in attracting skilled technicians and competing for them with other financial services entities."
Locating the technology subsidiary in Ireland made sense, Friel explains, because the country has an excellent educational system that produces skilled IT graduates.
"We wanted to create a better balance between our resources and outside IT resources," he says. "You can spend a lot of money on consultants, but it's better to make the investment in your own people because they are more dedicated and loyal."
Prumerica Systems Ireland is a wholly-owned subsidiary of The Prudential and is headed by Paul Carmody, managing director, who reports to Friel. The company is responsible for applications programming, system development and technical support which Pruden-tial's Individual Finanical Services unit needs to sell and service individual life and property/casualty policies. Prumerica Systems occupies a 25,000 square-foot facility in Letterkenny.
Prudential executives are identifying IT projects that will be moved to Prumerica Systems, including policy administration and tech support for mutual funds.
"Applications that Prumerica is supporting include mainframe applications, client/server applications and Lotus Notes," Friel says. "We are adding network-based applications but we need to recruit workers who have the right skills. The applications will run in the United States, but they will be maintained in Ireland. We will utilize video conferencing so that programmers can share the same screen and pass control back and forth."
Prumerica plans to have 150 computer programmers by this summer, with the potential to grow to more than 300 "if we can attract the talent," Friel says. To that end, the company has established an internship program with the Letterkenny Institute of Technology in Donegal, Ireland.
Friel does not believe the fact that Prumerica is a separate operating entity necessarily provides greater financial accountability to IT projects. However, he believes the structure does provide operational benefits.
"The structure improves our focus on developing, delivering and maintaining IT. There is accountability on how well a project is managed," Friel explains. "There is accountability for the resources consumed to support the business units. When they are using consultants, it's much more expensive."
Cost considerations also were a motivating factor in Kemper Insurance Cos. decision to create Kemper Technology Services.
"The reason for creating a separate technology services company is to motivate behavior," says Jack Scott, CIO of Long Grove, Ill.-based Kemper Insurance and president and chief operating officer of Kemper Technology Services. "By establishing the company, we have moved from an allocation model to a pricing model. When you establish a price, it drives users' behavior in an infrastructure with high fixed costs."
When users are made aware of the costs incurred for implementing and using technology, Scott says, it motivates them to use technology more efficiently and effectively. Another motivation for creating the subsidiary was to give business unit executives more options when selecting technology. In some cases, business units will select an outside vendor over Kemper Technology Services.
"As CIO of Kemper, my objective is to obtain services at the least cost," Scott says. "I also am the manager of an organization that is competing for that low-cost delivery. It's our responsibility to advise them to get the maximum value for IT.
"In most incidences where it is the right thing for Kemper Technology Services to execute the business, we generally win. But in some cases, our advice may run counter to our best interests," Scott adds.
Kemper Technology Services contracts with Kemper's business units for systems development, strategic development, processing services, networking and consulting services. It is currently engaged in 100 projects ranging from developing back-end systems to support Web delivery for new products to upgrading infrastructure such as telephone equipment and desktop computers.
"We initiate the process in August to identify projects for the following year," he explains. "The process is driven principally by the business units we serve. The division CEOs work with their business leaders to identify key priorities as well as their tolerance for technology expenses."
The technology company then rates the importance of the projects and estimates the cost. In the case of strategic projects, a steering committee made up of business heads meets every six weeks to discuss their initiatives and the technology required to support them.
Kemper Technology Services currently has 800 employees, 75 fewer than planned. In 2000, its initial year of operation, the company was able to trim 8% from the projected technology budget, a figure Scott declined to provide.
"We accomplished more than we anticipated with fewer people," he says, "and the principal reason was because we moved the strategic decision process closer to users. Every month, we provide a report on the scope, framework, functionality and progress of each project, so that they can better understand the costs associated with a project and the tradeoffs."
Scott believes his biggest challenge as CIO of Kemper and head of the technology services company is to mitigate costs and leverage existing technology across the company.
"The diversity of IT dramatically raises costs," he says. "The challenge we have is how can we collaborate on data and application processing? There are synergies across Kemper's business units, and while we want the business units to act independently, we have to keep them cognizant of the technology implications."
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