In spite of recession-related constraints on financial resources allocated to technology, there is still a proven demand for insurance IT. This puts the onus on CIOs, who for years saw annual increases, not decreases, in their IT budgets. Now forced to be creative in their efforts to economize, successful CIOs are rethinking their IT spend plans for the remainder of 2009 and into 2010, and approaching this difficult task by responding - not reacting - with a steady, thoughtful course of action. Somewhat surprisingly, their actions are also based on a measure of cautious optimism. That optimism is derived from taking a pragmatic approach to new and existing projects, setting realistic delivery lead times, and being able to communicate IT's inherent value as a business enabler. For some examples, read on.

It's not surprising that insurance IT departments are sick of hearing about recession-driven cost constraints. Having wrung just about every penny out of each and every corner of their operations, many are now being asked to re-evaluate yet again how and where the bulk of their IT dollars will be spent during the remainder of 2009.

The fact that they are re-evaluating doesn't necessarily mean that they are facing cuts, however. In fact, insurance research analysts and consultants continue to predict that across most lines of business IT spending will remain flat. The exception is in health care, which Gartner, a Stamford, Conn., research firm, predicts will actually grow 2.6%, largely due to anticipation of federal financial incentives for electronic health records.

In most other sectors, including property/casualty, life/health and commercial lines, however, insurance IT spend will remain on an even keel throughout 2009.

Mike Gantt, a former industry executive and IT consultant, noted on his blog site some positive signs on insurance IT spending, noting that prominent financial services solution providers, including SunGard, Fiserv, Fidelity National, Metavante and Jack Henry, recently reported good quarters.

Gantt observes that "while everyone speaks cautiously, they all report a continued interest in IT investments for financial services, including insurance. I've heard of no major shutdowns of IT spending. More thoughtful spending, yes; but no mindless moratoriums. Therefore, in spite of the doom and gloom pouring forth, there's ample reason for cautious optimism. The insurance industry needs technology, perhaps even more than ever in difficult economic times."

STEADY, THOUGHTFUL COURSE

Results of a CIO survey, conducted by Boston-based research firm Celent last October and November during the unfolding financial crisis, appears to validate this opinion. Insurers in the survey reported that large existing projects were being maintained with no changes to IT spending plans for the coming year.

"Despite the drama and uncertainty present when the surveys were completed, the overall results show a group of CIOs who are maintaining a steady and thoughtful course," writes Craig Weber, SVP of Celent's Insurance Group and coauthor of the report.

Tom Pettibone, founder and managing partner at Transition Partners, a Reston, Va., IT management consulting company, confirms this. "We are still seeing a certain amount of demand for IT, but people are being cautious about starting new projects or initiatives." Pettibone, who served as SVP and CIO at New York Life from 1984 to 1990, offers regulatory compliance as the exception, where insurers continue to invest in discovery, auditing and security software and services.

ISACA, a Rolling Meadows, Ill., nonprofit association serving 86,000 IT governance professionals across a broad landscape of vertical markets, recently surveyed more than 500 IT professionals in the United States. The survey found that 25% of companies queried planned to actually increase IT investments, while only 16% of companies are making across-the-board cuts in IT spending and 14% are freezing at current levels.

IT SPEND Vs. BUDGET

How an insurance company spends its IT dollars may be largely about delivering and communicating resultant value, but it also is affected by how and where the spend is allocated.

"IT spend is talked about often in our industry," says Deb Smallwood, founder of Boston-based consulting firm SMA. "But sometimes we use the terms budget and spend interchangeably and they are not."

Smallwood explains that this continues to cause confusion and, ultimately, communications gaffes with regard to IT delivery expectations, especially during this economic crisis.

According to Smallwood, an insurer's IT budget (see "A Typical Insurance IT Budget,") always includes certain things such as salary, benefits, headcount, hardware, software, install base, networking, services, and maintenance contracts and enhancements.

"What you don't see are funds for big ticket items, such as policy administration, or large strategic projects, which are typically managed outside an IT budget. When you look at IT spend, you should look at both."

The problem, notes Smallwood, is that the headcount/labor dollars accounted for in the IT budget are being put toward the labor assigned to the larger projects.

"We are seeing some shrinkage in original scope of dollars assigned to these large projects, so insurers are feeling that tightening and pressure on their IT budgets," she says.

Rick Roy, SVP and CIO of CUNA Mutual, admits to feeling IT budget pressure, but stresses that his company continues to benefit from a scenario-based strategy plan implemented earlier this year (See "It's All in the Planning," above), which helped prepare the company and its IT requirements for the economic downturn.

"We look at our IT budget and allocations for our large projects separately, but we also look at them together," Roy says.

The company segments out expenses for infrastructure, data center and security, as well as for smaller project work (functional areas that comprise smaller scope, dollar amounts and elapse time), which are funneled into the insurer's core IT budget. Larger projects also are segmented.

"We are cautious not to count a bunch of little one-time things as run-rate adjustments," says Roy, "and like many insurers, we've had to rethink our larger IT spend strategy. But technology continues to be treated as a key enabler of the company's growth and diversification."

TECHNOLOGY ENABLES BUSINESS

Roy's philosophy comes from first-hand experience. After having served as the insurer's CIO from 2003 to 2005, Roy took the helm of CUNA Mutual's customer operations unit, only to return three years later to his current post.

Employing nearly 4,500 people worldwide, the Madison, Wis., insurer is a unique B-to-B-to-C company, servicing 98% of the 8,200 U.S. credit unions by offering insurance to members of credit unions through credit unions. CUNA Mutual's recent announcement to partner with Humana to provide a Medicare suite, along with a variety of other new consumer financial products, is testament to its growth commitment, and CUNA Mutual has since invested in business intelligence tools to warehouse and mine data.

Blue Cross Blue Shield of Vermont (BCBSVT), also feels pressure, but not necessarily related to IT spending. As the state's largest health carrier, BCBSVT provides coverage for more than half of the state's insured population, whether through BCBSVT itself or its affiliates.

Already an award-winning service provider, BCBSVT has a long-term culture of continuous improvement based on using Malcolm Baldridge National Quality Program criteria. To date, the carrier has completed a major IT systems unification initiative that combined three claims systems, rolled its membership and billing systems into one and put all of its systems on the same software. Yet, like most insurers, the company has been pressured to find even more cost efficiencies, so it established a team of business and IT leaders to evaluate how well IT investments were satisfying business objectives tied to the carrier's continuous improvement initiatives.

"We've had a full plate with IT projects, especially with the adjudication system, slated to finish this year," says Chris Masi, who, as document management and automation services supervisor, represents the business side. "We already had a CRM system in place, but we were tasked with improving on that while meeting the needs of our member base. Ultimately, the changes we proposed became a business decision."

That business decision included moving its document management and workflow solution outside of the BCBSVT infrastructure, and forming a contract with Hyland Software, Westlake, Ohio, for its OnBase OnLine hosted solution. BCBSVT already owned the software licenses, so the entire system was migrated to Hyland's data center. Today, the carrier pays only for the hosting services.

"Using Software-as-a-Service, there is little to no upfront capital investment," notes Masi, "and although we use the on-demand software largely in the claims area, the images stored in OnBase are used regularly by about 75% of BCBSVT work force. Our OnBase solution is really owned by the business."

CREATING EFFICIENCIES

Smallwood agrees that reconciling technology to the underlying business need is key to improving the state of the IT budget.

"There was a trend where the business went shopping," she says. "They saw a solution at a tradeshow and wanted it. But the CEO is aware that this is not always the best approach. The business must articulate the needs, but it's up to the IT department to provide the most appropriate, reliable technology, and find it at a reasonable price, because ultimately, that's where accountability for failure lies."

The pressure CIOs may feel to find a reliable solution at a reasonable price is being abated somewhat by cloud computing, which is quickly becoming a more viable choice for insurers trying to show immediate IT cost savings.

At Tower Hill Insurance Group LLC, Gainesville, Fla., cloud computing is one of the ways the company is reducing IT spend, but not by necessity. As a result of the mass exodus of insurers following the turmoil related to several P&C catastrophes, Tower Hill has become one of Florida's largest writers of residential property insurance, and keeping up with the company's growth has become a "good problem," according to Brian Elsmore, Tower Hill's CIO. Elsmore says that for the past two years, the company's IT budget has been "running flat," except for one area: a recently expanded storage area network (SAN) that will be used to accommodate growth.

"Hardware turns old quickly," Elsmore says. "If I had made the decision a couple of years ago to put an infrastructure in place, we wouldn't need the cloud, but when we do a large project, we'll push data out there."

Elsmore predicts the company will spend less on provisioning of disc space as a result.

Transition Partners' Pettibone cautions that there are kinks related to access, data quality and security to be worked out on cloud computing, but that may be true of other data management issues, such as virtualization and server consolidation, too.

"You get a certain distance with virtualization, but some insurers are running into organizational issues that impede virtualization, so we are called in to do the utility work, but tend to run into politics," he says. "Consolidating applications sometimes requires software changes, which hits the pocketbook in surprising ways, and instead of cost saving, the insurer may face hidden additional costs."

SMA's Smallwood says that, nonetheless, a lot of insurers are being pressured into looking at data infrastructure, collapse and consolidation of their servers.

"In many cases, the install base of maintenance applications is under fire, and IT is being asked to sunset low-value applications, and continue to collapse and virtualize their data center platforms," she adds.

NEGOTIATING PRICE

As Tower Hill continues to experience growing pains, the pressure remains to cut costs at every turn. Elsmore reports that the company continues to take advantage of the slowed economy in order to negotiate better pricing for IT-related purchases. With a fleet of 150 outdated BlackBerries in hand, its mobile carrier quoted $200 each to upgrade.

"We are not normally a big enough company to drive discounts," he says. "But we found if we upgraded six months earlier, we would spend only $1 each per device."

In addition to looking at hosted services and better pricing, Tower Hill has taken advantage of market conditions to recruit newly available IT talent. Not surprisingly, however, most insurers are struggling to maintain the headcount they have.

With an eye on keeping the most appropriate talent, CUNA Mutual has found other cost efficiencies by leveraging some of the better pricing offered by vendors and partners.

"On the application development side, we've worked with our larger vendors not just on rate concessions, but other concessions, such as time, locale, etc., and placing people at their costs to keep the right people engaged," notes Roy. "We slowed down our hiring, reduced headcount a bit from attrition and we have had to reduce some of the outsourced contractors attached to those projects that were assigned reduced spend."

Robert Stroud, international VP of ISACA, notes that many organizations are trying to avoid making widespread cuts in IT. "There is a growing awareness that IT, when implemented strategically, has the potential to deliver tremendous business value," he says.

For BCBSVT's Masi, it's a question of organizational fit. "We look at ways to deploy people so that we don't need to reduce our workforce," he says. "Our goal is to make small incremental progress so we don't forget about where we need to be, or forget what technology we'll need to meet the needs of our customers."

For those carriers forced to make tough human capital decisions as part of their IT spend reductions, global services firm Towers Perrin, New York, offers a Human Capital Metrics Database that includes benchmarks and metrics in such areas as talent, rewards, the HR function and premiums per employee for insurers.

GOVERNANCE IS KEY

Regardless of where reductions take place, the most successful insurers are those that track reductions using formal governance techniques, notes Pettibone.

"The process of governance is extremely important," he says. "The governance process is uniform across companies, but all decision making and metrics are different company by company. There are still several insurers that are highly siloed, and don't have a uniform decision-making capability, so governance for them would be extremely helpful."

CUNA Mutual is taking its formal governance program to a whole new level - from changing how the company funds projects to looking at each project from a business perspective.

Working with the company's CFO for several months, Roy reports that the carrier's goal is to revisit the multiple paths that a business area could take to acquire funding and instead, establish a single Business Investment Council comprised of the CFO, CIO, head of operations, and several major product line business managers that track all costs, not just IT.

"The word technology is no where in that name," Roy says. "Although most things that come out of a project will have IT in it, we want to look at the total project costs and not get too heavily into IT costs. It's more of an umbrella - how do we manage the entire set of projects, who gets funding, what's the criteria? It's no longer some guys in IT - IT is involved with the business leaders and they strategize together."

CUNA Mutual's new governance program is designed to hover over the enterprise of portfolio projects, keeping a careful eye on how much the company invests.

"Does a harvest business get as much funding as a growth business unit?" Roy asks. "Probably not. You need some structure," Roy adds.

It is apparent that some insurers need more out-of-the-box IT governance structure than others, as evidenced by the growing popularity of spend management software currently in use at Aviva, a U.K. provider of life, pensions and investment products. Known until June as Norwich Union, Aviva currently operates in 28 countries, delivering on its "One Aviva, Twice the Value" philosophy of finding ways to deliver business value quickly to the carrier's five regions.

Johnson Idesoh, director, IT strategy and architecture for Aviva, says that from a technology perspective, the company considered, in addition to the spend software's functionality, four criteria that software would need to support: architecture, value, costs [to keep the company competitive over a three-year horizon, and speed [products out the door].

"We chose spend management software from Ariba due to its blend of content expertise (sourcing) coupled with technology leadership," he says.

In particular, Aviva will combine its own sourcing expertise Sunnyvale, Calif.-based Ariba's eAuctions strategic sourcing, which optimizes the sourcing process and spend analysis to provide visibility into what has actually been spent, as a helpful governance check.

To date, Aviva has broadened its use of the Ariba solution, tracking payouts for everything from paper clips to office space, and execute contracts, source purchases and track supplier performance. Although the company has not released formal returns since its initial implementation in 2006, Aviva is shifting to a SaaS version of the Ariba suite, which will give the carrier a 360-degree view into spend across categories, divisions and geographies designed to identify opportunities for savings and optimize information on existing and new suppliers.

SMA's Smallwood sees the value of spend management software, especially if the stakes are higher. Implementing a project with a budget of a half a million dollars or more means multiple vendors, multiple price points, and a lot of moving parts, she says.

"You ultimately will be held accountable for this, so you need to track your project against the cost-benefit analysis and ultimate return on that investment throughout the life of the project," Smallwood says. "We often see the person responsible for approving dollars using an Excel spreadsheet, but it's really more about governance and good project management - the utility of spend management software is then worth it."

IT'S ALL IN THE PLANNING

The ability for an insurance executive to respond versus react to economic pressures is something of an art, notes Tom Pettibone, founder and managing partner at Transition Partners, a Reston, Va., IT management consulting company. "The smart ones are taking a look at the IT area and reprioritizing every couple of months," he says. "Success is in evaluating existing projects and putting a plan together that estimates all possible outcomes."

Such is the path chosen by Rick Roy, SVP and CIO at Madison, Wis.,-based CUNA Mutual Group. Roy and his team began the year conducting a "what if" scenario-based plan, which set as its baseline the company's plan of record. With future restrictions in mind, the team created different scenarios of reduced spend, and developed action plans behind them.

"In Q1, we looked at reductions of 3%, 5% and 10%, but we had no idea what the right number was," he says, "but we knew to start thinking about it earlier than later."

Facing growing economic challenges, the company's CEO in April issued an "expense challenge" enterprisewide, which translated to a 7% reduction in the IT department, due for completion in October.

"The good news was that we had some time to implement the "what if" plans we put in place earlier in the year," says Roy. "We then melded our plans and re-evaluated several projects. With an eye toward two things - a successful second half of 2009, and what run-rate we carry into 2010 - we went through our entire project portfolio, looked at scope for each, and asked: can we adjust the scope? On a case by case basis, we've stopped some projects - maintained some of the large projects already funded, and will adjust further down the road."

A Typical Insurance IT Budget:

-Salaries -Overtime

-Medical Benefits

-Other Benefits -Bonus & Incentives

-Severance

-Temporary Employees

-Recruiting

-Training

-Travel

-Consulting

-Capitalization of Software (all application and other software)

-Bank Fees

-EDP Expenses

-Rent and Facility

-Furniture & Equipment Rental

-Insurance Non-Real -Estate

-Medical Fees

-Legal Fees

-Depreciation Expenses (hardware and servers, computers, etc.)

-Telephones

-Printing & Office Supplies

-Postage & Shipping

-Marketing & Advertising Expenses

-Books/Licenses/Dues

-Sundry/Miscellaneous

-Legal Contingency Settlements

-Conferences

-HO Reimbursements

-Transfer Funding

Source: SMA, Boston, Mass

 

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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