By Marek Jakubik

The New Insurance CXO

To be competitive in the future, insurers will transform therole of the CIO.

One of my long-standing observations is the insurance businessculture undervalues operations and IT. To be fair, this bias seemspervasive throughout all economic sectors. In all industries,managers and executives overwhelmingly associate corporate glamourwith deal-making, buying, or selling. Mergers, acquisitions, newproduct campaigns, and major restructuring are not only easier toexplain than redesigning customer service or transforming productdevelopment but also offer much quicker gratification. In mostinsurance companies, there seems to be a clear hierarchy: strategyand finance on top, sales and marketing in the middle, operationsand IT at the bottom. Yet it is the ones held in the lowestesteem–operations and IT–that offer the biggest chance of improvingcarriers' fortunes.

The evidence already is visible as some of the mostforward-looking companies in the U.S. and Europe have been marchingquietly toward new standards in operational innovation. Yes, notjust operational excellence but an iterative process of improvementsupported by a new culture capable of steadily generating new waysof streamlining and improving key business processes.

Some, such as the French AXA, are adopting strategies andpractices well tested by manufacturers. In 2002, AXA hired ClaudeBrunet, previously chairman and CEO of Ford France Automobiles,where he successfully implemented a number of improvement programs.As AXA's management board member and chairman of AXA TechnologyServices, Brunet has become responsible for a comprehensive programof process improvement. In the first two years, Brunet says in aninterview with The McKinsey Quarterly, AXA eliminated EUR1.3billion ($1.5 billion) from its expenses; however, cutting costswas only part of the challenge. An equal effort was directed atimproving effectiveness and quality.

Brunet relied on approaches adapted from manufacturing: SixSigma, cost-modeling analysis, and internal benchmarking. Ineffect, AXA was reusing more than 30 years of manufacturingexperience by applying proven tools and methodologies. AXA doesbelieve by targeting the processes of differentiation, improvingthose processes, and managing them for results, it will create asustainable competitive advantage.

Closer to Home

Progressive Insurance has set an early example of usingoperational innovation to create a competitive advantage.Progressive didn't achieve its success through acquisitions, clevermarketing, or a flood of new products. Instead, it fostered a newculture directed toward inventing and deploying new, smarter waysof doing work. In the '80s, Progressive was focused onsegment-based, finely tuned underwriting and pricing. To maintainits competitive position, in the '90s it built a superior claimsservice followed by a capability of competitive quoting. A steadystream of innovative improvements produced a simple result: lowerprices and better service without sacrificing the margins. And, ofcourse, another key point–none of the Progressive pioneeringefforts would have happened without innovative use of IT.

The Progressive story is a prelude. It heralds the arrival ofthe next strategic battleground for insurers: a focus onoperational innovation coupled with IT. This makes sense only ifyou consider the following three points.

One, in most lines, and especially in large volume or regulated,the insurance product has become a mass-market commodity. Insurancecompanies have difficulty with differentiating themselves andconvincing customers it makes sense to deal with them rather thantheir competitor. Opportunities for breakthrough innovation arevery limited.

Two, most insurance processes are not just dependent on IT butdeeply embedded in the information systems (and those that are notwill be). More and more often the only people in your company whoreally understand the working of processes are the systemsanalysts.

Three, information systems are for carriers what factories arefor manufacturers. They are their biggest, most valuable nonhumanassets. They also are their biggest, underused levers.

How to Play the Game

To make their companies newly competitive, CEOs, CFOs, andboards of directors will have to master the game of operationalinnovation. And for that game, they will need a new player: thechief process officer. This new role will be a challenge but alsoan opportunity for many ambitious CIOs.

The executive search firm Egon Zehnder International recentlyreported the results of a survey dedicated to the future role ofthe CIO in the financial services industry. EZI concluded futureCIOs would tend to be change-oriented business drivers who alsowill direct the redesign of organizational structures. The studyprojected the classical interpretation of the CIO role no longerwill exist in a few years' time.

According to the EZI report, “The CIO of the future will be theCEFO, or chief efficiency officer. Along with the IT organization,he will also be responsible for an operational or business unitwithin which IT plays a significant part. To this end, CIOs willhave to actively change both their leadership role and theirtraditional field of responsibility.” (The chief efficiency officeris another name for what I call the CPO.)

The preparation for such a transition already is well under way.EZI outlined three prerequisites for CIO-to-CPO/ CEFOdevelopment:

oCIO at the executive board level,

ocentralized IT, and

ocombining responsibilities for IT with responsibility forbusiness operations.

As an industry, insurance has been relatively aggressive inpromoting CIOs to the executive level. For example, it has anotably higher proportion of management/board-level CIOs today thanbanks.

It also is interesting to note from the ease-of-transitionperspective, midsize carriers have a distinct advantage over theirlarge peers. While centralization still is the principal challengefacing large-carrier CIOs, IT at tier-two insurers already isalmost uniformly centralized.

On the other hand, combining IT and business responsibility ininsurance still is a rare exception.

Two Down, One to Go

So, let's say the first and second prerequisites are beingaddressed and focus on the challenges of taking the final step. AsI see it, two issues will stand out:

oorganizational and cultural barriers, and

othe CIO's readiness.

Cultural barriers stem from the fact very few senior executivesunderstand operations. They tend to focus on strategies, marketing,financials, and regulatory issues while practically ignoringoperations. As author and reengineering consultant Michael Hammerwrote: “An insurance CEO once quipped that managers work hard atoperations so they can be promoted to the executive level, wherethey can stop worrying about operations.” Let me re-quip: Very fewof the insurance executives I've met ever got their hands dirty inoperations. As a consequence, very few of them look to operationsfor competitive advantage.

The other obstacle on the road to operational innovation issimple: Nobody owns it. Occasionally but only implicitly ownershipis assigned to the CIO. Such an occasion always is related to amajor system implementation when an organization has no choice butto tackle the processes that often cross interdepartmentalboundaries.

How do CIOs do in those circumstances? On the whole, and judgingby the popular opinion, rather poorly.

Of course, this should not be surprising. What would you expectfrom a system where responsibility is implicit, accountabilityundefined, capabilities haphazard, and tools mostly nonexistent? Isay give those CIOs who succeeded despite all this a medal!

Seriously, though, what should an insurance executive convincedoperational innovation is worth pursuing do? Two key things are:Choose the right strategy, and find a leader.

Operational innovation is by its nature disruptive for anorganization. The right choices have to be made to focus on thoseprocesses that bring the highest strategic value. It may meanprocesses that increase customer retention, reduce claims expenses,or reduce time to market. No organization can attack them all atonce. It took Progressive about a decade to build its currentmachinery. And it hasn't stopped. Progressive continuously isadding and improving–a very important cultural element common tocompanies that mastered operationally driven innovation.

As to a leader, I've already dropped a hint. First and foremost,insurers should look to their CIOs. Many of them display the keycompetencies required for the CPO job: They demonstrate a highlevel of leadership, they are customer and market oriented, theyhave a firm understanding of processes and technology, they aretenacious, they can think and act outside the box, and they havestrong strategic aptitude. If on top of these traits a CIO showsstrong business acumen and has proven to be result oriented–youhave a winner!

Of course, the risks are high. The individual and organizationaltalents required to transform a company so it thinks and acts inholistic terms across all units and to drive far-reaching changerequires skills, commitment, and full support at the executive andboard level. However, that also means those who succeed will enjoya sustainable advantage for many years. (How many years do youthink it would take your company to emulate Progressive?) Moreover,the operational innovation is based on incremental change, both inan operational and cultural sense. Once a company reaches a newlevel, it also is better prepared to move to the next.

Companies in other industries have practiced the operationalinnovation evolution for more than 20 years. Many have mastered it.Is it time for insurance companies to follow their path?

Speaking with McKinsey, AXA's Brunet thinks so: “If you want toinnovate, you must always do so in a cost-effective, predictableway, and for that you must master your processes. Excellentmanufacturers know how to do this. We will, too.”

Marek Jakubik, a former CIO of Zurich Financial and PitneyBowes, is a co-founder and managing director of the InsuranceTechnology Group (www.insurancetg.com). He can be reached at416-214-3445 or [email protected].