Cautiously optimistic.
Those two words sum up the outlook for technology spending atinsurers in 2004. It may not sound like much, but after a longstretch of flat budgets, even guarded optimism is reason for somecelebration.

We are starting to see an increased willingness to pursueprojects, says Paul McDonnell, senior vice president and insurancesegment leader at Bearing- Point. Based on the past two to threeyears, there is a bit of pent-up demand, and we believe that 04 isthe year things might start to improve.
Just how big that improvement will be is open to debate (seeCautious Optimism Defined, p. 19), but dont expect a return to theheady days of the 90s any time soon. Instead, count on thebudgetary discipline learned over the past years to havelong-lasting impact.

The biggest part of that impact will be a continued focus on theacronyms TCO and ROI, which are key to perhaps the most importantacronym of all (for stock companies, at least), ROE. Also importantis the desire of managementand stockholdersto achieve a returnquickly.

Similar to what has transpired over the last few years, theres alot of pulling away from large multiyear initiatives with multiyearpayback and more focus on shorter, more measurable projects withpressure to see the results in the same fiscal year, says FrankDanza, health insurance lead analyst at BearingPoint.
Adds Carmi Levy, analyst at Info-Tech Research Group: What we willstart to see is if there is a way to quantify the ROI [of aproject] in 2004, it will get greenlighted. If not, it willsit.

Therefore, as things stand, there still is no room for petprojects in 2004 budgets. The shareholder is king, and theshareholder demands return on equity, says Levy. Insurancecompanies have reoriented themselves to that reality, and thedesire to be leading edge isnt paramount. Technology has to supportROE, and the geeks who used to drive the R&D projects, whowanted to distribute Palm Pilots to the sales force because it wascool, have been relegated to the back room.

Why, however, would an insurer ever approve a tech for techssake project to begin with? After all, management is charged withmaking good business decisions regarding any project or purchase,technological or otherwise.

Insurers always have considered the business criteria for makingtechnology purchases, but those criteria have changed, maintainsPaul Defuria, CTO of CSCs financial services group. A lot of theideas in the go-go period were not around doing things because oftheir perceived strategic advantage but for the perceived strategicdisadvantage of not doing them, he says. Id pick up a [report], andit would say, The organizations that will survive will embracethese things now and capitalize on them, and the rest will be soldfor medical experiment. [Today,] there is better alignment betweenthe projects that are being undertaken with the strategic businessobjective theyre tied to. The period of doing things that would beonly generally aligned as a defensive posture is not subscribed toanymore.

Survival Strategies
The strategic alignment necessary to secure project approval alsohas been reflected in efforts to align business and IT staff moreclosely. Gartner has observed a trend of insurers putting managerswith business, rather than technical, backgrounds in charge of ITwhile at the same time seeing insurer CIOs jockeying for fullmembership on the teams that are part of the decision-makingprocess, according to Susan Cournoyer, principal analyst at theresearch group.

Theyre putting business seminars together for IT staff, buildingresearch teams within their [technology] staff so they have theireyes on the radar screen of whats happening in IT over the next fewyears, she says. In addition, they are reorganizing theirdepartments from line-of-business or application teams to groupsthat instead focus on cross-functional processes, shemaintains.
Danza also sees alignment creating a process-focused approach todecisions on future spending. We see a lot of organizationsreadjusting their budgeting process or literally adjusting the waythey manage the business so there is less of a functional view, hesays. They may have actual process leads, people who manageprocesses across various departments.

Examples of recent initiatives to spur business-IT alignment canbe found at many insurers. At Highmark, a key objective at a10-week strategic planning session completed in late 2003 was toreach out to business, according to Michael Kronenwetter, vicepresident of the Technology Management division of thePittsburgh-based health insurer. This included two-day workshopswith both business and technical staff and an independentbenchmarking study that assessed the engagement of business and ITas well as the effectiveness of Highmarks overall technologyportfolio.

Communication [between business and IT] often was a one-waystreet in the past, Kronenwetter explains. We have opened it up andengaged with [business people] to develop our plans for the futureand to obtain their candid feedback in terms of what they felt wasgood coming out of our IT department and what they felt could bebetter.

Additionally, the benchmarking study not only validated theiralignment efforts, but also helped justify several projects andpotential purchases in 2004 that otherwise might not have hadobvious strategic importance. Two key back-office initiatives atHighmark will be creating an IT asset repository and implementing acomponent repository to help the insurer migrate its applicationsto a service-oriented architecture. Highmarks technology budgetwill remain unchanged in 2004.

The industry as a whole, however, still has a long way to go toachieve true alignment, says Willard Woods, vice president infinancial services consulting at Cap Gemini Ernst & Young. Hebelieves insurers view IT as a service function and CIOs are not onequal budgetary footing with similar-level executives. We areseeing an uptick of IT resources into the business organization tosomehow get more of that alignment, either through a dotted-linearrangement or actually inserting people into the businessorganizations. [However,] thats at the department level vs. theorganizational level. [IT] is still not driving the process; itsbeing driven.

In the budget survival game, sometimes a creative approach worksjust as well as a carefully forged alliance. Levy has seenbeleaguered IT managers looking for white knights in their largeprojects, he says.

For instance, you may want to recode an old VB3 app into VB6,and on its own it wouldnt [be approved]. But if youre meeting on amillion-dollar project, and you want to slip in a $20k project, youcan do so if the functionality fits under the umbrella of thatproject charter, Levy explains. Then it simply becomes one task ina larger project, rather than a project in itself. Its a bit of ashell game, but if youre a line of business in an organization, youneed to compete for resources as much as if you were in the openmarket.

Top Projects in 04
Beyond approving projects and purchases that demonstrate fast,positive ROI and have low TCO, insurers will be interested inspending capital on four key areas of technology in the monthsahead. Primary among these will be policy and claims administrationprojects.

Being able to process new business and perform underwritingactivity faster, both in P&C and life, and [handling] claimsfaster, both in P&C and health, will be key areas, maintainsDavid Cornelius, vice president for financial services andinsurance in FileNets consulting practice. Gartner also seesadministration systems being the main area of insurers focus. (Formore from Gartner, see Inside Track, p. 44.)

Although this holds true for nearly all insurance verticals,most agree ad-ministration system work will be most prevalent inP&C vs. other lines. P&C has the ability to do a systemreplacement that life does not because [P&C] can roll over abook of business within a year [at] renewal, says Defuria, who addshe sees P&C having reached a peak of old systems due forrenovation or replacement.

People want to change their products quicker, and mostcompanies, at least those bigger than $500 million, are dealingwith old legacy systems ill-suited to the task, says Wayne Ratz,CIO of Harleysville Insurance, who reports a three to five percentincrease in the carriers IT spending in 2004. Harleysville recentlycompleted a two-year project to integrate into itsin-house-developed platform the various personal and commerciallines administration, billing, claims, and statistical reportingsystems of two insurers the carrier acquired in the 90s.

To address the budgetary concerns associated with this and othermultiyear projects, the company uses a rolling plan to justify thecost, Ratz explains. We used to put one-year plans together, butyou soon find out you cant have a one-year plan, he says. We try todetermine what the total cost will be and what falls into the firstand subsequent years.

With the consolidation project complete, Harleysville now cantarget rejuvenating its platform in 2004 and beyond, according toRatz. We want to reengineer that system to a more maintainable,reactive capability, he says, adding this effort will probably take70 percent of our new development dollars in 2004.

At The Hartford, speed to market is driving projected work onpolicy administration systems in its P&C division, whichreports a five percent IT budget increase for 2004. One example,according to Bob Lukas, CIO of The Hartfords P&C operations, isa set of initiatives in personal lines [that are] renovations ofour policy administration systems, so that new product offerings,new rate programs, and new discount programs can be implemented inthat system at speeds that are five to 10 times faster than whenthose systems are in their legacy state.
This will include rearchitecting legacy administration systems to aservice-based architecture, using either .NET or J2EE. All newapplications, whether purchased or built in-house, will be builtwith service-based architecture modeling, Lukas says. Our objectiveis to significantly reduce the size of inventory of applications[while providing] the same or more insurance functionality.

Second, insurers will look for ways to squeeze more value out ofexisting technology without increasing their capital outlay in2004. Optimization is a big area of focus, Woods says.

Were actually calling this the year of optimization, says JaneNiederberger, senior vice president and CIO at health insurerAnthem. Just as you use only 10 percent to 20 percent of thefeatures on your desktop [PC] but pay for the whole license, wewant to take the technologies weve already purchased and determinehow we can take them to the next level and extend those systems toproduce more business value.

For instance, Anthem currently uses call center technology fromGenesys Tele-communications Laboratories to support its call centerrepresentatives. It now will be working to expand that system tointegrate with Anthems Web-based customer self-serviceapplications.

Additionally, it will be working to build more EDI connectionswith providers and to optimize its document management system (aconnected platform of applications from Dakota Imaging, FileNet,and IPD) both to reduce costs and facilitate HIPAA compliance.According to Niederberger, EDI-based claims cost Anthem 14 cents toprocess vs. 50 cents for paper-based claims that can be scanned andrecognized successfully via OCR and $2.50 for claims that must bemanually processed.
Niederberger also reports Anthem recently has completed a majorconsolidation project in its claims administration systems. Thecompletion of this work has freed up budget dollars as has theinsurers work to reduce the lights on cost of running its systemsinfrastructure, allowing Anthem to keep a flat IT budget in 2004while still pursuing both optimization work and new technologypurchases.

Third, carriers will be focusing on business process management(BPM) projects, which combine process reengineering, applicationintegration, and workflow automation. Insurers are spending moneyon business process management and rules-based workflow, and thereare a lot of new vendors in the market, says Deborah Smallwood,insurance practice leader at TowerGroup.

EAI has been eclipsed by BPM, Defuria claims. You still needyour systems to work together, but theres better promise in the[integration] glue being process rather than transactiondriven.
One IT initiative in 2004 at disability insurer UnumProvident willbe its ongoing project to improve claims and underwriting processesusing Staffware Process Suite, a BPM tool that allows the insurerto design, test, and implement new business processes and monitorthe results. Using the tool, UnumProvident can create a process mapof both digital information routing and computerized and manualprocess steps, identifying applications to be called and anyprogramming needed by UnumProvidents IT staff to accomplishapplication integrations. After a process is automated,underwriters, adjusters, and other staff log in to Process Suite tomanage work queues, and business management can do so to monitortask loads.

While the system is not a new purchase for UnumProvident, theongoing work represents continued deployment and optimization ofthe system. We have invested heavily in this technology, and wewould like to see our investment maximized, says Randy Robinson,the insurers vice president of information technology.
The fourth key area of technology investment for insurers will bearound portals and other Web-based sales and service tools. Anyfinancial services businesses that arent looking at Web-baseddeployment are fooling themselves, says Levy. Staff, shareholders,brokers, anyone who deals with the company, the expectation istheyll be able to interact with you via the Web. Youll see moretools moved closer to the customer, more investment in Web-basedfront ends that will open up legacy databases, and more securitylayers wrapped around that to ensure the data is secure.

Were seeing emphasis [on portals] in the life and annuitybusiness. [Insurers] are looking at balancing customer service,agent [support], and cost management, managing and directingcustomers to use the right vehicle, says Smallwood.

And in P&C, with the hard market perhaps finally turning,there is interest not only in providing service and support butalso in using Web-based technologies to drive new revenue. Thereare two drivers for expanding market share. One is customercentricity and service. The second is keeping agents or the salesforce top of mind, Smallwood says. Thats continued to expandWeb-based service and the capability to handle policy and claimsprocessing.

At The Hartford, in addition to its administration systemrenovation, a focus of P&C technology in 2004 will be theinsurers e-submission project. This includes working on a varietyof fronts to bring transactions generated by the various agencymanagement systems used by brokers directly into the insurersback-office systems. This means working with both individual systemvendors as well as e-commerce communications infrastructures suchas IVANS Transformation Station. Our [project] focus will be on ourdistribution partnersanything that will enhance the valueproposition of our partners doing business with us, Lukas says.

Lastly, outside the realm of new capital investment,outsourcingoffshore, nearshore, and domesticwill continue to growas a line item in technology budgets at insurers in 2004. At TheHartford, about 20 percent of the companys programming and systemsintegration work was done by alternative sourcing in 2003, andLukas reports that amount is likely to increase in 2004. Offshoreis only one alternative we consider. There also is domesticsourcing, utility computing models, data centersa number ofalternatives to get work done, he says.

Likewise, Ratz reports Harleysville signed a new sourcing dealwith Tata Consultancy Services (TCS) in the fourth quarter of 2003.TCS will help the insurer formulate a repeatable approach toHarleysvilles reengineering of its legacy policy administrationsystems.

Woods sees interest in outsourcing growing, not only forcontract programming and application maintenance but also forfunctions that are closer to the core operations of insurers. Asinsurers become more technology-enabled, theyre more likely toconsider policy administration, bill payment, print services, andother functions, he says.

A final bit of good news for IT budgetscontinued downward pricepressure will impact the cost of technology well into 2004 and,perhaps, beyond. Says Smallwood: Insurance companies still are inthe drivers seat.

Cautious Optimism Defined
BearingPoint, which had projected a flat or declining 2004 a fewmonths ago, is a bit more optimistic now, says the firms PaulMcDonnell, though the group had not quantified that outlook with adollar figure at press time.

Info-Tech Research similarly had no dollar projection butpredicted a small uptick of rational investment, according toInfo-Techs Carmi Levy. Gartner was in the process of updating itsreport on spending at press time.

By line of business, health insurers in general will see thesmallest increase in their IT spending. In fact, whereas earlier in2003 BearingPoints Frank Danza would have predicted slight budgetincreases for 2004, he reports as health insurers went into theirbudget planning process, a lot [were] surprised by the belttightening, and spending will probably be flat.

According to these research firms, life and annuity companieslikely will rank in the middle, and P&C carriers at the top,when it comes to technology spending. In fact, TowerGroup isparticularly optimistic about the latter group. Though projecting a2.5 percent increase across all insurance sectors, TowerGroup seesa 10 percent overall increase in the P&C lines in 2004. InP&C, because of hardened rates creating more of a margin, wereseeing the spending really open up, says the firms DeborahSmallwood.

Last Rites?
Whats the flip side to this issue, i.e., the types of technologiesthat insurers will be cutting back on or eliminating budgets for inthe months ahead?

The steepest drops are in technology hangovers; initiatives thatdidnt live up to their promise, says CSCs Paul Defuria. The twoareas that fit into that are CRM and EAIthe kiss of death of threeinitials.

Based on his experience with insurers that have undertaken theseprojects, he believes CRM was overpromised and overscoped, and EAIprojects seemed to add to the complexity of insurers overalltechnology portfolios.
Paul McDonnell of BearingPoint agrees CRM projects have fallen offbut disagrees they will not see resurgence. People are realizingthey have to fix the core infrastructure issues before CRM packagesor programs are effective things to pursue, he says.

Likewise, Gartners Susan Cournoyer sees a decrease in spendingon EAI technologies but for a different reason than Defuria does.There is less emphasis because EAI was such a big priority over thelast two years, and insurers have made a bulk of the improvementsthere already, she maintains.
However, Willard Woods of Cap Gemini Ernst & Young believes noeasy generalizations can be made regarding declining areas oftechnology spending at insurers. I dont see anything thats beingspent on less, because most carriers are behind in terms oftechnology to begin with. Its just whether they get off the dimeand do something this year.