Passing Inspection

Taking Stock

In the past, Penn National Insurance has gone through five-year strategic plans and a look at the coming year to determine which projects would move forward. This year, the mid-sized carrier added a third level of introspection. Were doing an intermediate-stage plan, says Jane Koppen- heffer, Penn Nationals CIO. We are calling it a three-year infrastructure and applications plan.

Penn National is using Gartners definitions of applications and hardwareutility, core, or frontier applications. Utility applications include such necessary applications as payroll. The core systems are the things from which you are going to try to get improved productivity or efficiency, says Koppenheffer. The frontier is the cutting-edge applications that are going to give you a strategic advantage.

The components are rated on the amount of support needed and how long the IT department feels the applications are going to be around. Then we come up with a recommendation to either replace, upgrade, maintain, or tolerate, says Koppenheffer. We are going to get with the business community and run through our thought process to see if were on the same page.

Turnbull calls The Hartfords process a thoughtful inventory. Traditionally, companies have had to climb down into the bowels of the IT organization and ask the experts every time there was a question [about the systems], he says, adding he has peers looking at The Hartfords IT portfolio from a financial perspective and from a business-function perspective.

For many companies, Turnbull concedes, the energy around such a program is driven by the annual budgeting cycle. At The Hartford, though, with each cycle, we try to improve the quality of data we put into that budgeting process, he says. I think weve reached a point now where we want [the process] to be a continuous, long-lived thing, so we dont just run around a few months before we have to come up with some budget estimates. Were trying to build a base from which we can make investment decisions out of [the budget] cycleat the point of business need, rather than driven by the annual plan.

IT Governance

Carr Phillips, director of product marketing for software developer PeopleSoft, sees portfolio management as an emergence of IT governance among IT departments. Its a process and a tool set carriers are using to manage the operations of their IT organization, he says.

IT departments are working to put three factors in place, Phillips believes. First, they ensure all the IT investment dollarsthe people, the projects they are working onare aligned with the strategic objectives of the company, he says. Second, they are as efficient as possible. Budgets are not expanding, but demands on [the IT departments] time are. The way IT departments are responding is to get more efficient and use new dollars to find new and more interesting projects. The third factor is process control. The trend of IT departments is to become more centralized. They need to put processes in place to manage multiple IT organizations across divisions, departments, and geographies. [IT leaders] need to make sure the processes are in place to ensure they are using a standard methodology for proj- ect management and a business case for developing justification for taking on new investments, so there is a criteria for monitoring and measuring performance and ROI for those IT investments.

Turnbull does not believe The Hart-fords current project falls under the heading of IT governance. It comes down to decision rights [in terms of who makes the decisions], and governance really is a specification of decision rights and responsibility. If you start to get your portfolio analysis and planning process down, you are going to bump into governance pretty quickly when you want to implement, he says. The value proposition in the end is leverage and the horizontal deployment of certain capabilities everyone should be able to leverage. Naturally, thats going to cross some boundaries.

Business Drivers

Self-examination can assist IT departments to determine what applications help IT drive the business, Lynn believes. Theres an extensive amount of prioritization of business drivers and mapping how well an application impacts a particular business driver or set of business drivers, he says. Its a discipline of understanding whats important in terms of your organizations performance and arguing out how each of these applications or sets of applications and services help drive that performance.
Once those drivers are determined, the carrier can decide how much money can go into the maintenance budget, based on priorities and the value of those various applications and projects. The discipline can be used, say, when youve got $40 million worth of requests, but you have only $11 million to spend, says Lynn. Whats going to lose? What are you going to stop doing that already could be in process? These are very difficult things for any organization to do, let alone an IT organization. There is a lot of subjective spending.

One of Lynns clients saw its IT budget rise from $25 million to an incredible $300 million in a matter of five years. Finally, the CEO stepped in and brought the runaway budget under control, slashing the budget by 25 percent, 40 percent, and 65 percent over the next three years. Still, the budget was at $88 million when the budget cuts ended.

There are considerable headaches involved in taking IT budgets in either of those two directions, Lynn points out. The business side understood what projects were frivolous investments and what really drove the business performance, he says.

Many of the concepts being used by IT departments in portfolio management have been around for years, Phillips concedes, but 9/11 created an urgency throughout the enterprise. September 11th was a shake-up day for insurers, he says. They were in a soft market and needed to find out how to become more profitable. The IT organizations had grown quite large, and theyd been decentralized. What [IT departments] have spent the last couple of years doing is becoming more efficient. Theyve had to deal with getting more profitable and all the regulatory and compliance issues.

Extra Benefits

The Hartford can achieve some secondary benefits through the portfolio management process, too, Turnbull believes. We are at a point now of collecting the data in a thoughtful and detailed way that will lead us to [secondary benefits], he says. We have a set of reference architecture for the way we would like to construct an appropriate set of insurance applications. The [architecture] is abstract right now, but if you start to lay it on top of a detailed understanding of what you currently own, you can start to test out some pretty interesting trajectories of how you might evolve your current state and position yourself for some of the more tactical business issues that always are going to come up at the last minute. I think you can position your technology better to make it more responsive.

He does not believe such an inventory will lead The Hartford or any insurance carrier to discover new software functions it was not even aware it owned. What carriers might find out, however, is that some of the older systems might be designed better than the carrier realized.

Dont expect too many surprises, though. In terms of hidden value unlocking business capabilities, that might be too good to be true, says Turnbull.

The Penn National process has been beneficial, according to Koppenheffer. Weve created some things that will help us in other ways, such as saving all of our assessments of the systems on one of our change servers so a new programmer coming in can get an overview of our systems, she says.

Software or Not

There are a number of portfolio management tools available, and a META systems study shows the market is growingfrom just $85 million in 2002 to $180 million in 2003. The market will reach $480 million by 2005, Lynn indicates. In METAs report, he states: Undoubtedly, the core discipline of portfolio management (and the functionality of the tools from this market) will expand to project management and asset management tools as well as practices within enterprises of mostly medium and large enterprises.

The technology used in the portfolio management work at The Hartford, Turnbull says, was developed in-house with a fairly heavy use of Excel and Access. We have purchased an IT operations product that is a suite of tools that will help us primarily with project management and project reporting but also has some portfolio management capability attached to it, he explains. We anticipate perhaps migrating to that tool when we get ourselves robust enough around the portfolio planning process. Were excited and ambitious enough to want to do that.

The broader trend with insurers these days, Phillips asserts, is turning the IT department from a cost center to a value center. With that comes the ability to utilize the assets that have been acquired along with the skills and competencies of the IT staff.
IT organizations are looking for a system to help them manage operations as a business, says Phillips. How do you take your IT shop and turn it into an IT factory? he asks. And how do you automate that factory to get all the efficiencies out of it? How does a CIO help enable the business to achieve its goals?
The issue revolves around operating the IT department in the same manner as the various business units are operated, Lynn maintains. Its applying the disciplines of good business management to the IT organization, he says. Running IT like a business has been a trend our leading clients have been doing for many years. Theres a belief, though, there is a whole suite of software tools needed, and we are going to see ERP [Enterprise Resource Planning] for IT coming out. Im not convinced about that yet.

There is an assumption just because the business side has something like ERP, Lynn adds, IT also should have it. I dont agree, he says. [IT] doesnt need instructions on how to do its daily job. An IT operation probably has the toughest governance requirements [in the enterprise], because it has to make sure all its systems are running every day, but that situation has been in existence since the computer was first turned on.
There are some real nice tools out there, but the core of [portfolio management] is people understanding what you have, how old your systems are, and how everything plays together, says Koppenheffer.

Being Aware

Portfolio management is not a budget-cutting-type initiative, according to Turn- bull. The goal is to spend wisely. We dont think implementations costing $250 million are necessarily the best thing to do anymore, he says. The drive is to be incremental and to be acutely aware of your impact on total cost of ownership. These systems dont go away quickly. You do have to live with them for quite a while. We are talking now about stewarding the asset as opposed to commission the project, spend what you have to, and get it working.