In a recent meeting with executives at a Top Ten insurer, I posed this question: "If you had your wish, which manual process would you pick to automate first?" The reason for my query was to help identify where the biggest pain points were, from which a prioritized automation roadmap might emerge. The answer I received surprised me."We don't have any manual processes."

My immediate reaction was this: What about the tens of thousands of people you employ? What are they all doing if there are no manual processes left here? What about the cost of burdened labor and human error? How could there be no manual processes when every critical back-office operation is named according to the work people do (subrogation, bill payments, provider management, etc.)?

I was told that all these people had workstations and were accessing a variety of IT systems. Furthermore, over the past two years investments in workflow, customer relationship management (CRM), a rules engine, an improved claims system and a Web portal had dramatically increased the automation tools available to employees.

Yet, interestingly, during this same period of automation frenzy, total headcount had actually increased, staff turnover was up, training costs were rising, morale was down and services levels were at an all-time low. If this were an isolated case, it might be worth a passing glance and a joke or two.

But this story is the rule rather than the exception among insurers. These executives mistakenly believed that because they had invested heavily in automation, manual processes had been eliminated.

Chronic ailment

The insurance industry suffers from a chronic case of "The Emperor's New Clothes" syndrome, which is consuming enterprise value at a staggering rate. Insurance executives are reluctant to admit when automation projects have failed and that the value of the solutions they've bought are mere fantasy.

Despite billions of dollars in IT investment, the insurance industry is as dependent today on people-intensive, back-office operations as it was a decade ago. Clearly, something is missing in the industry's automation arsenal.

When I first observed this phenomenon, I called several insurance CEOs to ask if this was something they worried about. The answer was always the same-yes it is. In one case, 20% of total claims expense was paid out in error every year because of the complexity of the insurer's products, constant business and regulatory change, and lack of effective automation solutions. For this CEO, it translated into more than $200 million of "leakage" every single year.

Enlightening findings

This initial group of insurers founded a research consortium that allowed my team to spend two years looking into the work that people were still doing across various back-office operations.

Specifically, we were trying to model the characteristics of this people-intensive work that have resisted most attempts at automation. Some of the findings of this project are enlightening:

* Most senior executives have no idea what their staff does every day.

* Most core systems were designed on the assumption that people would do the logic processing and decision-intensive work around them.

* The rate of business and regulatory change eclipsed the ability of scarce IT resources to keep systems up to date.

* Most of the easy transactions have been automated with point solutions such as workflow, leaving people to do the more complex, long-duration transactions.

* The whole mindset and traditional process of application development in this environment is doomed to fall short from the outset.

The net result of these issues has been a widening gap between core systems functionality and business needs, which I think of as the "automation gap." This automation gap, currently filled with people, is the largest cost center for insurers.

Our findings through the insurance research consortium led us to define five key attributes of a breakthrough approach to target this automation gap:

* Laser focus: The best solution would apply to only the most pressing problems faced by an insurer-the true pain points. It must focus on those actions performed by people that drive the most cost.

* High impact: It has to deliver significant improvements in accuracy, consistency, speed, service and quality.

* Immediate benefits: Payback must occur within a short time span, yet projects must also show sustainable ROI.

* Leverage existing systems, processes and skills: It cannot require changes to legacy systems; rather, it must leverage existing business processes and staff skills.

* Open standards: Future-proof technology must be used to avoid obsolescence.

The promise of this new approach lies within the emerging business process management (BPM) movement. Early results that we have seen from BPM projects deliver significant improvements in accuracy, consistency, compliance and agility. For example, efficiency gains can approach 40% to 50%, while overall reductions in claims costs can approach $20 million annually, dependent on the scale of deployment.

As the market matures and product functionality becomes richer, we expect to see ROIs that have until now have been unheard of-such as dropping the $200 million back to the bottom line.

John Kendall is founder of Clear Technology Inc., Westminster, Colo.

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