For large and diverse insurers, the IT organizational model is an open or frequently debated question. Should IT be a centralized corporate function, or should it be completely delegated to the operating business units? Or should there be some kind of hybrid approach?

Few companies are completely federated or centralized, however. Even in federated companies, corporate systems like e-mail, desktop productivity and data centers tend to be centralized. And in centralized companies, business units often maintain at least some control over applications used solely by that unit.

The answer to which operating model is right for an insurance IT group is that it depends. It depends on the business' operating model and on factors that may not be directly articulated, such as the political power of various executives, the alignment of organizational incentives, the company's stated or implicit strategic goals and the operational maturity of the IT organization itself.

At the most obvious level, the IT organizational model must reflect the business' organizational model. If the business is highly federated, IT should be federated. If the business is highly centralized, IT should be as well.

For example, in a company where the business unit heads are held responsible for their own P&Ls and have control over product design, pricing, marketing, distribution, underwriting and even claims, it makes sense for them to control IT as well through a federated model. Business unit leaders who are incented purely on their units' performance will find the lack of control over IT budget and performance to be a significant problem. They often feel taxed and like they're paying for something they don't control. More troubling, they often feel like IT is not responsive to their needs and that they are being denied the resources they need to fulfill their missions.

But in companies where business unit heads are more like operational managers executing a plan set by the CEO or corporate president, it can make more sense for IT to be centralized. This helps the central leaders ensure that their operational leaders are not optimizing the parts at the expense of the whole, and that corporate resources are being deployed where they will do the most good.

One of the biggest challenges for IT is when the actual operating model of a company deviates from its articulated operating model in response to a crisis or a change in strategy. For example, the central leader of a highly federalized company may re-assert central control after a period of poor corporate performance. This often takes the form of a mandate for cost-cutting. In these situations, there is often pressure on formerly independent IT groups to consolidate in order to maximize reusability and cut costs that appear to be redundant.

Similarly, a centralized company may hire a dynamic new business leader to grow a certain area of the business and heavily incent him or her to drive performance in his or her area. This leader may chafe at the restrictions of depending on shared resources outside of his or her control and pressure the central leadership to devote more resources to his or her direct control.

The federated and centralized models have different advantages and present different challenges in different functional and strategic areas. Insurers using each model have generally taken steps to mitigate the challenges inherent in each. In both cases, mitigation strategies largely come down to improved communication and governance.

In a federated model, the important thing to realize is that the mitigation must take the form of soft power because, in this model, centralized bodies, like centers of excellence or standards committees, lack any actual hard power. At the end of the day, the business unit leaders pay the piper and call the tune. Business unit leaders may need to be educated and persuaded about the benefits of supporting these centralizing efforts. The most common incentive is the prospect of reduced future project costs through synergies with other units.

The most important element of the mitigation strategy for centralized companies, ironically, also is persuasion. But rather than persuading the people with hard power to act for the common good, a centralized group needs to persuade people without actual power that the central power is effectively acting in their interest.

For any insurer, the best IT operating model is the one that most closely mirrors the actual power structure of the company, takes appropriate steps to mitigate the inherent weaknesses of their model and has effective leadership and management to deliver on its mission.

INNSight is exclusive commentary from Novarica. Matthew Josefowicz is a managing director at Novarica, a research and advisory firm focused on business and technology strategy for insurers.

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