The IT Maintenance Dilemma

For anyone who has ever owned a car, it's an inevitable question: Continue pouring money into the old jalopy, or cut your losses and buy a shiny new model complete with six-cylinder engine, alloy wheels and keyless entry?

Insurers face the same dilemma with their legacy systems: Continue spending between 55% to 75% of their IT budgets to maintain old infrastructure and applications, or pony-up the money to invest in new technology complete with rules engines, component-based design and Web-enablement?

"For legacy systems, the basic management criteria is: All other things being equal, when the cost of maintaining the system outstrips the contribution it makes to the firm in terms of financial viability, that's when you start looking at displacement," says Glen Miller, vice president of technology at GATX Technology, a Tampa, Fla.-based IT leasing firm.

"Normally, there's a threshold," he says. The older a legacy system is, the more you have to patch it. "You've accessorized it to death. At some point, there's the straw that breaks the camel's back. Some line of business comes to IT and says, 'I've got to have this one other feature.' And the IT person says, 'If I make that change, I have to go back and update another 50 changes. Let me take this to the steering committee.'

"The steering committee says, 'We're out of gas here. We're pushing it. We're pulling it. We're towing it. It's time to jump ship.'"

That's essentially what is happening at insurance companies across the country. As the market demands speed of delivery of products and services, insurers' 10- to 30-year-old legacy systems are slowing them down.

"We are growing accustomed to having things immediately, on demand, right now," says Dan Trajman, president of Sapiens Americas, Research Triangle Park, N.C.

"Clients don't want to wait two hours or two weeks for a quote. They want to be at home at 10 p.m. and have access to their account information," he says. And insurers want to respond quickly to the market. They want to configure new products quickly, and they want to respond to customers, agents and regulators immediately.

Benefits of consolidation

The annuities division of The MONY Group Inc., New York, is a case in point: It is implementing a new IT platform to enable it to bring products to market more quickly and increase its channel penetration.

After the company reorganized in January 2002 from functional areas into product-focused business units, management of the annuities division evaluated the company's infrastructure to see if it would support the division's new strategy and business plan, says Carol Macaluso, vice president and CFO of The MONY Group's annuities division.

"With the current infrastructure and some of the systems we had in place, we had some constraints in our ability to bring products to market quickly and cost-effectively," she says. The constraints were caused by the modifications that were required to the company's legacy systems to make some of the feature changes it needed.

At the same time, the division evaluated the benefits of consolidating its four key legacy systems onto one new platform. "We looked at maintenance costs associated with the various platforms, and we basically put together a business case showing the benefits of consolidation," Macaluso says.

Although she declines to discuss the actual costs, the analysis took into account the elimination of maintenance on the older systems and the reduction of long-term maintenance by moving to a single platform.

After evaluating systems that provided flexibility in product design and simplification of back-office workflow for ease of doing business with a variety of distributors, MONY's annuities division selected technology from AdminServer Inc., Malvern, Pa.

"The primary reason we chose AdminServer was because of its design flexibility," she says. "The client controls its own destiny: Business analysts and IT staff are doing the development. And the XML structure and ACORD language are really helping us bring products to market more quickly and cost-effectively," she says.

"So we said, 'This is a platform that is readying us for growth.' "

The MONY Group's situation is not uncommon. "Anytime an insurer recognizes that its business strategy is being impacted by its ability to react to change-that's when the insurer begins thinking about replacing its legacy systems," says Jamie Bisker, director of research in the insurance practice at TowerGroup, a Needham, Mass.-based research and consulting firm specializing in financial services technology.

"A legacy system is basically a system that is not designed to change," Bisker says. "It's not flexible-and that means anything you do with it takes extra effort-integration, upgrading, testing-all that stuff.

Supporting strategy

CUNA Mutual Group needed new technology to support its business strategy, says Jim Lazarz, vice president of field compensation, at CUNA Mutual Group, a Madison, Wis.-based financial services provider to credit unions.

"We follow the very hard and fast philosophy that (producer) compensation never drives company strategy. It supports it," he says.

"So when the company has a strategic direction, we want to design compensation plans that support that strategy-and we need to get ready to administer those plans quickly and efficiently. And we can do that now."

That's because CUNA Mutual earlier this year completed implementation of a new enterprise incentive management system that enables the company to develop compensation plans in hours or days rather than weeks or months. And it can now provide Internet-based compensation reports to sales representatives and credit unions.

Called TrueComp, from San Jose, Calif.-based Callidus Software Inc., the rules-based technology replaced a legacy system that was slow and expensive to operate and maintain.

"We knew we needed new technology because our old technology was a very old legacy system that was not very nimble to 'T-up' new compensation plans," Lazarz says. "It was very expensive. It was a mainframe system that took a lot of mainframe run-time and storage. And we were delivering a lot of paper reports. We wanted to go to Internet-based reporting for our reps and credit unions. And we wanted to reduce our unit costs."

Overall, the new incentive management system will reduce CUNA Mutual's costs by an estimated 25% to 30% from those associated with the previous compensation system. Those savings will be gleaned from reduced labor costs in the compensation administration department, reduced IT support, reduced mainframe run-time and storage, and lower printing, mailing and imaging costs for reports.

Those are just the hard-dollar savings that CUNA Mutual is gaining from the new system, Lazarz explains. The company also will save soft-dollar costs, which weren't factored into the cost-benefits analysis.

For example, the company can prepare new compensation plans quickly and nimbly-and it can provide the Internet reporting required to compete in the current marketplace. "The request to get real-time reporting electronically through the Internet was a very high demand," he says.

The process that CUNA Mutual went through to justify investing in a new system is typical. "Why does any company need a new compensation system?" Lazarz says. "Nobody gets up in the morning and says, 'Well, I'm going to buy a new (enterprise incentive management) solution. It doesn't' happen that way. What happens is someone in the organization is feeling pain-as it relates to paying reps."

Although CUNA Mutual's old legacy compensation system was accurate, according to Lazarz, the pain that many companies feel involves late or erroneous payments. "If you're overpaying your reps by 20%, that's a big pain for finance folks," he says. "Usually, these systems are linked to your general ledger, and if there are accounting errors, that's very painful for the financial people."

Legacy pain

The pain felt at OneBeacon Insurance Group, formerly CGU Corp., became an issue when the company was acquired in June 2001 by White Mountains Insurance Group Ltd., Hamilton, Bermuda. Specifically, Boston-based OneBeacon's legacy systems were weighing it down.

As part of a three-year corporate turnaround plan, OneBeacon management decided to overhaul the company's information technology operation. "IT was too expensive and we weren't delivering," says Mike Natan, CIO. "Our systems were inadequate. So we developed a three-year plan to replace most of our major systems and move to a new platform."

That new platform is based on IBM Corp.'s Websphere and a rules-based policy administration system from Sapiens. In May, OneBeacon rolled out the new policy administration, called Policy INSIGHT, to support its new commercial lines product. Policy INSIGHT replaces seven legacy systems; and by the time OneBeacon completes is IT overhaul, 50 legacy systems will be retired.

"Our objective here was to get IT out of the picture as much as possible, so the users were self-sufficient in terms of updating the rates and rules," Natan says. To that end, the system enables business users to configure new products and make rate and rule revisions in hours rather than weeks or days.

It also enables independent agents to quote, bind, endorse, issue and renew policies in real-time via an agency Web portal. It integrates several internal and third-party systems to gather billing and reporting data, Dun & Bradstreet and Motor Vehicle Registration information, and credit reports.

And, it serves as the framework for additional lines of business, which can be added to platform easily and quickly.

Not writing code

In part, because the IT department doesn't have to write code for the majority of the rule and rate revisions, OneBeacon plans to reduce its production support costs from $130 million in 2001 to $71 million by next year.

The company also will reduce its IT staff from 750 in 2001 to 350 at the end of next year.

"Carriers need to get over the idea that they gain competitive advantage by writing code, says TowerGroup's Bisker.

"There are only so many ways to skin a policy," he says. What makes a carrier's IT systems great is if they're open, adaptable and flexible to changing requirements. "That's the competitive advantage."

Furthermore, he adds, technology has advanced to the point where there are no excuses to keep perpetuating old systems that aren't flexible.

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