Strategist: Invest In Next Generation Technology

Acknowledging that the dot-com "boom and bust" was caused by "a misunderstanding of the fundamentals of business," Mr. Downes noted that "now we think the [current] recession will never end." He pointed out, however, that in cycles that repeat over the years, "We always live to regret that when things slow down, we go slower, too."

In the case of aging technology infrastructure and systems, he said, companies may regret not taking the time to replace them. Mr. Downes is author of "The Strategy Machine: Transforming Your Business for a New Industrial Revolution."

"When the going gets tough, it's time to invest and think strategically," Mr. Downes said. In the insurance industry, companies have resorted to "cost cutting and other short-term measures" to bolster shrinking bottom lines, but these efforts do not constitute a strategic plan. "You cannot save your way to success," he said.

"Your biggest enemy," he emphasized, "is inertia."

Mr. Downes reminded conference participants that Moore's Law (which states that every 12 to 18 months computing power will double while pricing remains constant) "has not been repealed." The down economy has had no effect on that trend, he noted, and that kind of growth should last for "at least another 10 to 20 years."

When the economic recovery comes, "information technology will have moved along," and those who don't start updating systems now will find themselves left farther behind," he said.

Mr. Downes then laid out five strategies he said will help insurers get ready for the "inevitable" economic recovery:

? Zero out the Information Technology budget. "All products and services will have an IT component," he pointed out. Sometimes it may be more effective to devote the IT budget to core strategic initiatives in which the company would be involved anyway, rather than having it remain separate.

? Manage technology innovation as a portfolio. Mr. Downes encouraged companies to think of the IT budget as a portfolio that contains long-term, mid-term and short-term investments. Like any good portfolio manager, he explained, companies should try to maintain balance in this portfolio and "never cut the future entirely." Most carriers, he added, have portfolio managers in house. "Ask them for advice and apply it to your IT budgets," he recommended.

? Invest in the next generation of infrastructure technology, especially if you're broke. When things are going badly with a company, this may be an opportunity to get rid of legacy systems and take advantage of newly developed data standards. "Why not do it now?" Mr. Downes asked.

He went on to predict that the industry would soon see a shift in computing architecture that is equivalent to the shift from mainframe environments to current client-server systems. The new architecture will be "based entirely on standards as the underlying way of communications."

According to Mr. Downes, legacy applications are principally what hold insurers back in taking full advantage of evolving standards. "You can't build new business on the back of fragile legacy systems," he stated, adding that current systems are unlikely to be able to support the new architecture he sees on the horizon.

? Get ready for the information supply chain. Mr. Downes said that eventually, every item in commerce, including everyday products purchased at the supermarket, "will have its own Internet address and will be able to send and receive data."

Overall, he said, "we're not ready to deal with that volume of data." In order to do so, we will need a data model that is standardized, allowing better flow of data between all participants in insurance and other industries. This will allow creation of an "information supply chain" that contains data about transactions and post-transaction information. Such a perfect flow of data is going to happen soon, he said. "It's close."

? Deal with privacy and security issues now. As we process more information and more data, "consumers are anxious about who's got it and what they're going to do with it," said Mr. Downes. As a result, insurers will have to deal with a variety of political and business issues that affect security.

"The solution is to engage this problem now via your trade association," he emphasized. He maintained that carriers can head off "bad legislation" by measures such as self-policing and development of specific industry solutions to address privacy concerns.