Service-oriented architecture is a critical tool for insurertechnology teams. However, the high level of hype threatens toerode support for experimentation and the creation of documentablebusiness value. Insurer CIOs should make sure they track andcommunicate the value of their tactical SOA investments in order tohelp their business partners truly understand the value of thistechnology approach.

Still a Hot Topic

SOA has been a hot discussion topic in insurance IT for at leastthe last five years. Many solution providers, consultants, and afew forward-looking enterprise architects and CIOs have articulateda sweeping, transformational vision of SOA that will allow insurersto align not only their IT strategies but their IT systemsthemselves with business goals and strategies.

While this is a worthy and ambitious goal, the heavy focus onthis transformational vision in the industry risks putting SOA intothe category of other "Transformational TLAs" (three-letteracronyms) such as CRM, which over-promised and under-delivered forinsurance-industry CIOs over the past 15 years. Many CIOs, facedwith such soaring rhetoric, assume SOA is a high-risk, high-coststrategy they would do best to avoid for now.

New Maturity and New Focus on Metrics

CIOs are especially cautious of such high-flying talk in thecontext of the newly energized partnership that exists betweenbusiness and IT at many insurers. Most senior business executivesrealize that effectively deploying and managing technology is coreto their enterprises' abilities to create advantage and that a truepartnership with IT is the key to making that happen.

While this is a positive development for insurer CIOs ingeneral, giving them a seat at the top table and ability toparticipate in, not just react to, strategic decisions, it alsomeans business expects its IT partners to communicate in the samelanguage business partners use to communicate with eachother–financial performance metrics. Novarica has described threecommon classes of metrics used by insurer IT groups:

o Cost metrics measure spending amounts or ratios and are usefulin tracking changes in expenditures over time periods and helpinginsurers benchmark their spending against that done by peers, butan over-reliance on them risks pigeonholing IT as a costcenter.

o Performance metrics measure the internal effectiveness of theIT organization, which provides a useful tool for CIOs to managetheir own groups but communicates little to business partners interms of enterprise impact.

o Value metrics measure value created for the enterprise.Isolating technology's contribution to business value is morecomplex than tracking cost or internal performance, and many valuemetrics (such as user satisfaction surveys) are only proxies forunderstanding the true value created. But more and more, insurersare measuring things such as return on IT investment and thefinancial impact of productivity enhancements enabled by ITinvestments.

Many CIOs are struggling to create business value metrics theycan use to communicate with their business partners in place of thetraditional cost and performance metrics they have alwaysused.Given this environment, things that are classified as broadtransformational tools (such as SOA) often are easier to avoid thanto evaluate and engage with.

Unfortunately, this blinds many insurers to the potential tocreate immediate business value by deploying reusable integrationpoints using SOAP/XML over TCP/IP, business value that easily canbe tracked and communicated to business partners.

"Ascending Levels of SOA Maturity"

Most discussions of SOA describe three levels of maturity. Theterms may vary, but the general categories are:

o Services-based integration–the creation of reusableintegration points for data and transaction exchange.

o Application componentization–using services to integratediscrete components into one or more systems that function togetheras an application.

o Business process architecture–using a highly dynamicinfrastructure of data and transactional services to create aresponsive architecture that mirrors the way the business processflows.

Generally, these maturity levels are presented as representingan increasing order of sophistication and potential valuedelivered. Sometimes, anything short of business processarchitecture is dismissed as "not true SOA."

Another Way to Look at It

However, there is another way to look at these levels. Insteadof ranking them against "maturity" and "potential value," insurerscould look at them in terms of their risk and predictablevalue.

In this framework, the discrete projects and predictable returnsof deploying services-based integration may look much moreattractive than the disruption and potential transformation ofbusiness process architecture.

"Real Solutions to Real Problems"

In fact, although they may not be engaged in "true SOA" as theconsultants and consortia would define it, many insurers haveachieved significant tangible value from services-based integrationover the past few years. Some cases that have been reported in TechDecisions include:

o New York Life reduced time to market by 50 percent for newproducts by using SOA-based middleware to facilitate integrationbetween legacy core and other systems. (2005)

o Swiss Re reduced deployment time of new front-end systems by66 percent after creating a reusable integration layer to itslegacy core system. (2007)

There are numerous examples of business value delivered throughapplication componentization. In 2006, Tech Decisions reported TheHartford claimed a 15 percent reduction in maintenance coststhrough componentizing some of its mainframe-based monolithicapplications with flexible components integrated via services.

Building the Business Case: Four Main Components

Insurer business executives are, in general, highly skeptical ofthe transformative potential of SOA. However, they have a realpressing need to operate more efficient and agile enterprises. Theyneed to be able to launch new capabilities and integrate newsources of data faster and more effectively. They need not to bebottlenecked by systems integration times when planning andlaunching new initiatives. They need to be able to bring newpartners and channels online quickly and without spendingsignificant resources.

There are many architectural criteria by which to measure thesophistication and maturity of SOA deployments, but in tracking andcommunicating the value of SOA to business, there are essentiallyonly four main components:

o Reduced development costs.

o Reduced deployment times.

o Increased capabilities without growing resources.

o New revenue created.

Insurer CIOs should focus on tracking and communicating metricsin these areas.

Tracking the Value

Tracking requires detailed records of both current and pastprojects so that similar "pre-SOA" projects can be compared withthose that leverage the SOA investment. Areas that should betracked with an eye toward future comparisons include:

o Project costs.

o Project times.

o Resource availability and number of concurrent majorprojects.

CIOs should devote sufficient resources to recording this typeof data. Doing so will project a critical tool for internal projectmanagement as well as inter-unit communication. Many insurer CIOstrack much of this information but with a focus on internal-to-ITusage rather than presentation to other business units.

Communicating the Value

Communication often poses something of a challenge for IT, sincemany traditional IT teams lack the skills for effectivecommunication. But internal communication is becoming a criticaltask for IT, and nowhere more so than in communicating the value ofinfrastructure-level investments such as SOA.

There is no single prescription for successful internalcommunication, since what is effective in one organization may notbe in another. IT groups must understand how senior businessexecutives are used to receiving operational metrics and matchtheir presentations to that format. Some senior executives mayprefer dashboard reports, single-page memos, or full quarterlypresentations. They may focus on cash flow or net income or returnon equity. In any case, by closely mirroring the structure andterminology of existing reports, IT can help ensure the reports areeasily understood and accepted by senior management.

A simple metric in use by some insurers to track value createdis "costs avoided." In addition to tracking hard costs for eachreporting period, some insurers also track and present the costsnot incurred due to their investments in SOA. Maybe a new partnerwas brought online at a fraction of the usual cost. Maybemaintenance costs for a newly componentized system were reduced byan important percentage.

It may be difficult to train engineers to deal in counterfactualmetrics (tracking money and time not spent goes against manyengineers' training), but since many efficiencies IT creates arenever directly realized in a zero-sum way (e.g., the money is justspent elsewhere, not saved), these types of comparative metrics areimportant.

Don't Let the Perfect Be the Enemy of the Good

In summary, there are many short-term possibilities forgenerating business value from SOA investments without achievingthe Holy Grail of true business process architecture. Insurersshould not miss the opportunity to make incremental improvementsbecause the organizational will to gamble on transformationalchange is absent.

But CIOs must track and communicate these improvements, both inorder to make invisible architectural enhancements visible to theirbusiness partners and to build their own track records of creatingvalue. If the call does come for transformational change, a CIO whohas documented his ability to realize value will be in a strongposition to help lead the charge.

Matthew Josefowicz is the director of insurance at Novarica(www.novarica.com), a research and advisory services firm focusedon the intersection of markets, operations, and technology. Thispiece is adapted from his recent report "Key Metrics for InsurerCIOs" (January 2008) and his February report on capturing andcommunicating the business value of SOA. He can be reached [email protected].

The content of "Inside Track" is the responsibility of eachcolumn's author. The views and opinions are those of the author anddo not necessarily represent those of Tech Decisions.