Insurers To IT Units: Money Talks

Indeed, chief information officers at insurance companies are being forced to demonstrate that there will definitely be a return on investment, sooner rather than later, before getting a green light on any major tech project, many of the panelists pointed out.

"We're caught up in a tornado of ROI demands the past 18 months," said Robert Cooper, a vice president at ILOG Inc., a multinational business process software firm based in Mountain View, Calif.

Speaking on a panel featuring "First Movers: Leaders In ROI," he added that "the emphasis is on IT projects that can achieve results very quickly. We're being compelled to take on bite-size chunks instead of the bigger, more ambitious projects that were more of the norm two and three years ago."

Some of the panelists spoke nostalgically of the "gee whiz" days when "tech ruled" and major investments for long-term projects were relatively easy to come by, even without any promise of clear, immediate returns.

"During the booming 1990s, CIOs got lazy. All they had to do was say ?e-commerce' or ?Y2K' and you got your funding," said Gary Beach, publisher of CIO magazine in Framingham, Mass., at ACORD's closing CIO panel.

Now, however, with most insurers struggling to get their combined ratio under 100 to offset the loss of investment income, carriers are far more stingy with all their expense decisions, tech included, the panelists agreed.

"The days of insurers throwing logic to the wind and pursuing a new tech project before you have a solid business process justification for it are over," Kimberly Harris, research director at Gartner Group, a research and consulting firm in Stamford, Conn., said during ACORD's opening panel on industry IT trends.

"Carriers are looking to reduce their risks. There's more emphasis on the short-term return of every initiative," added Joel Gelb, CIO of Keene, N.H.-based National Grange Mutual Insurance, during ACORD's opening panel. "We're operating more on a ?pay-as-you-go' basis now. You must demonstrate a definite return because dollars are harder to come by."

Top insurance executives are being much more demanding of their own IT people as well as their vendors, not only due to bottom-line concerns, but because they were too often burned in the past when high-profile tech projects failed to pan out as planned, some panelists noted.

"Seventy to 75 percent, even as high as 90 percent in some companies are ?challenged' projects, meaning they are late, over budget or non-functioning," according to John Thorpe, a consulting fellow at Fujitsu, a multinational IT solution firm based in Tokyo, Japan. "It's no wonder that ROI for IT is getting this kind of attention with that kind of track record and in this kind of economy."

"IT may have an infinite appetite, but insurers have finite resources, so carriers really have to base their decisions on business risks and what needs to be done to solve their business process problems to avoid eroding or losing their franchise," added Steve Wyckoff, a managing director at Marsh Inc. in New York.

It's also harder to railroad insurer executives into approving big-ticket IT projects because senior managers are more educated as tech consumers.

"Carriers are a lot more sophisticated when it comes to tech purchasing decisions now," said Matthew Josefowicz, manager of the insurance group at Celent Communications, a multinational financial services technology research and consulting firm based in Boston.

"They know more about what to ask of their IT people and vendors. And with the economy the way it is, there's a lot more bargaining going on. They know they can get fabulous deals. They're more demanding about what a product can do, when it can be delivered, how much it will cost, how long it will take to get up to speed, and how much ROI it will generate."

One result of the tech budget squeeze is that carriers are extremely reluctant to scrap outdated systems and more interested in modifying them and making do if at all possible, the panelists observed.

"We're seeing most companies taking an extension approach. We're only seeing replacements when the existing system just cannot be salvaged any longer," said Ms. Harris of Gartner.

"Fifteen to 20 percent of companies are looking to replace their systems over the next five years, but most are looking to extend them," added Mr. Josefowicz of Celent.

Mr. Josefowicz said his company is hearing some firms say "that ?we know the legacy system is killing us, but we can't bring ourselves to crack open our chest and take it out.' They say the guys who designed these systems are often retired or dead, and they're afraid to monkey with them because there is so much intellectual capital invested in the database."

Ursuline Foley, CIO of XL Reinsurance, headquartered in Stamford, Conn., said the dwindling number of legacy system experts in itself could force more replacement projects to be initiated, "If carriers no longer have the skill sets to maintain these systems, they'll have to go."