(Zachary Gustafson is value consulting manager at Guidewire Software)
In order to make the dream of a new core system a reality, insurers must build a compelling business case that clearly illustrates the system's long-term benefits, value, and ROI. It should be convincing enough (and supported with evidence) so that the executive committee reviewing it revises its question from "Why would we invest this money?" to "Why wouldn't we?"
Consider the following key elements that are critical to the success of your business case. It is worth noting that, although this article is geared specifically to the insurance industry, the underpinning ideas can be applied to any market.
Map the Benefits Back to the Insurer's Strategic Vision
An insurer's strategic vision arguably drives its every move, including investment in new technologies. But this notion is often surprisingly overlooked as insurers build their business case for a new core system. Indeed, many insurers lose sight of the idea that the implementation is a strategic initiative, and requires a business case that reflects its strategic benefits. They instead focus solely on building a number—a collection of financially quantifiable gains.
The number is an important element, but a business case that links to a strategic vision (e.g. growth, profitability or expansion into new markets) will more soundly resonate with the executive team holding the purse strings. Indeed, in this scenario the business case is not simply a financial instrument, but a communication vehicle for the strategic value of the project.
Use Metrics to Build Your Number
Although the number is not the be-all and end-all in the business case, it remains an important element just the same. But how an insurer comes up with the number is just as important as having one. An insurer can spend significant effort building a top-down business case (that is, taking a high-level number like profit or revenue and assuming a percentage improvement of that), but there are risks that come along with this approach. Primarily, it tends to make sweeping assumptions that put the insurer at risk of losing a big percentage of his potential case if any assumptions are changed.
A better approach is to build a business case from the bottom up using specific operational performance metrics that are tracked over time. Without this information at hand, defending the business case to the insurer's board, president or CEO is futile. If the insurer can't measure what he says will be gained, he'll have a hard time convincing the board that the funds are justified.
When building a case from metrics, the case becomes componentized, such that any particular metric or benefit will comprise only a small percentage of the overall case. For example, if a case worth $15 million in annual benefits is built from the top down, it will be difficult to justify where that all came from. Alternately, if it is set up using 25 or 30 metrics, a very granular detailing of how that $15 million was reached will be evident. Armed with this information, the project sponsor can respond confidently to executive skepticism around the number. He can engage in a rational conversation through which some adjustments may be made, but there will likely be no major cuts.
This approach also provides the opportunity to discover how to achieve the business case from a systems perspective. For example, if an insurer projects that the conversion rate on new business submissions will improve by one percent, he can back this up by citing new functionality that will affect how he quotes and pursues business, which will, in turn, improve the conversion rate. It's a compelling, defensible story around a single metric that could have a multimillion-dollar impact on the business.
Incidentally, it is important to look beyond efficiency gains when considering and calculating benefits. A common pitfall is to focus exclusively on the efficiency "bucket," which overlooks the benefit of an employee doing his job not only faster, but better. If simple tasks are automated, an employee will, of course, work more efficiently. But by automating tasks, the employee is also able to focus on higher-level, value-add tasks that can lead to other types of benefits like better cross-sell conversion, improved fraud detection, higher recoveries, and so on.
Project funding is, indeed, the primary driver for developing a compelling business case. But it's not the only one. The business case is also a tool for project governance and managing to the value that the insurer believes the new system will achieve.
At the outset, every technology project wants to track to its business case after implementation. But what often happens at the end of these large, complex, multiyear projects is that the result doesn't necessarily look like the insurer assumed it would when he initially built the business case. Therefore, it's crucial to leverage the business case for project decision-making to ensure that the finish line the insurer is crossing at the end is the same one envisioned and aimed for at the start (e.g. What is and is not in scope? What's in phase I and what's in phase II or III? How do we prioritize efforts when there are resource crunches?).
Track Metrics to Ensure Your Business Case Delivers Post-Implementation
If an insurer has built his business case from metrics and managed to it throughout the project, calculating value achieved is simply a matter of comparing those metrics over time with the baseline. With the data quality and reporting capabilities inherent in modern core systems, tracking to a business case may well be the most straightforward component of the project.
Tracking to the business case post-implementation also allows an insurer to target specific continuous improvements based on areas where the system is not achieving the expected benefits. Perhaps the greatest feature of a modern core system is the flexibility to make changes as business situations warrant. But if the insurer can’t tell where he is underperforming, he won’t know where to allocate continuous improvement resources that will drive the most incremental value.
The Successful Business Case: A Means to an End
In the end, a sound business case is the centerpiece of the core system replacement journey. When properly developed and utilized—mapped to the insurer’s strategic vision, built from metrics, leveraged as a governance tool during the project, and used to track value realized—it provides an anchor to the entire process, ultimately supporting an investment that will help the insurer meet its strategic goals in the years to come.
Zachary Gustafson is value consulting manager at Guidewire Software, a provider of flexible core systems to the property/casualty insurance market. He can be reached at email@example.com.