Crunch Time

Technology departments have staked their claim on strategic development within the insurance industry, but backing for those programs isn't limited to line-of-business units. Those on the financial side of the enterprise are equally strong advocates of strategic spending as those in underwriting or claims. However, how the money is spent causes the financial side more worries than others.

Ron Schoen, executive vice president and CFO of Accident Fund Insurance Company of America, has IT leaders reporting to him, but even though he admits to not being a technologist, Schoen encourages those under him to think both strategically and financially. "There certainly is an evolution [in the way IT is judged]," he says. "In the past, people tended to work more in silos. What I'm trying is to get people to evolve into not thinking of themselves as technologists but as partners in the business. I think it's been successful, but there's always room to improve."

Jim Keal, vice president of finance at United Heartland, doesn't have technology leaders reporting to him but believes strongly in having a relationship with IT leaders. "[Good relationships] with IT are important when the business side strives for efficiencies," he says. "By establishing a relationship and understanding the value that can be gained from technology, financial leaders support making smart investments."

VARIED STRUCTURES

The structures of most insurance carriers vary as to where IT reports, points out Greg Galeaz, a partner with PricewaterhouseCoopers. In a lot of companies it depends on how many direct reports the CEO wants to deal with, he explains, while other carriers have IT under operations and reporting to the COO and those such as at Accident Fund reporting under administration to the CFO. There are no numbers available, however, on which is the predominant reporting model among insurance carriers.

Whatever way it is handled, though, Galeaz believes technology must be an enabler and the decisions or responsibility for determining how to use technology should rest with the business units. "If the CFO understands and owns IT, he has the responsibility to turn the lights on and off--to keep the day-to-day operations going," says Galeaz. "But the CFO also needs to help enable the businesses to determine how they want to get product to market and how they want to operate."

The negative issues involved with having the CFO running the IT shop, according to Galeaz, result from IT not being close enough to the business units it serves. "If I would have the model, development really needs to rest with the businesses and turning the lights on needs to be part of the infrastructure and operations," he says. "From the standpoint of cost and how to use technology through the enterprise, I think it's fine if the CFO has responsibility, but in the end, technology decisions need to be owned by the businesses they affect."

Finance technology should stay with the CFO in terms of ledgers, planning and budgeting, forecasting, and management reporting, adds Galeaz. But in terms of underwriting, claims, and some of the core systems, he believes the responsibility for those areas ought to reside within the business units. "I'm a big proponent of businesses driving their IT needs," he says. "The businesses need to own their own processes and the technology and be responsible for the implementation and putting in the functionality they need."

Having the day-to-day operations of IT report to the financial side has benefits because some of that work must be challenged in terms of what should be done and what the controls and philosophies are, continues Galeaz. "Infrastructure costs are getting so high, and these costs ultimately get allocated to the business units," he says. "So, the business units want to know what they are paying for. CFOs are in a position to understand what's in the numbers and drive costs out to make [the numbers] as transparent as possible for the individual businesses."

Schoen has been with more than one company and has seen IT report to different areas. He asserts the model used by Accident Fund works well but concedes it makes his job harder. "I'm not a technology expert, but I remember something from an MBA course I took decades ago," he says. "What they told us was if you ever find yourself managing an IT area, you don't have to know all the details but you have to know enough that you don't get the wool pulled over your eyes."

How has he accomplished that goal? "You have to make sure you have good people, you can trust them, and you have an open dialogue with them," Schoen says.

IT AS EXPENSE

Schoen agrees it's easy for business unit leaders to think of IT simply as an expense. "In most companies, IT is a very big and a very visible [expense]," he says. Employees don't always understand what's driving those costs, he adds, so they believe it is too big of an expense and get frustrated with it.

That leads to the issue of communication. "Some IT people know their world really well but don't know the business side very well," says Schoen. But he points out the same can be true on the other side: Business people know the business world but may not understand the implications of what IT can do for them.

"There is always a translation that has to happen that may not happen effectively," says Schoen. "Also, IT is involved with lots of projects, and sometimes those projects don't go well because they weren't planned well or managed well during implementation. That can contribute to [a negative] attitude."

At Accident Fund, regular meetings are held between IT and business units. In addition, a separate group outside of IT--the project management office--manages initiatives and some of the interface between business users and technology people. "In general, we try hard to communicate the business to all employees--no matter where they are in the company--through various internal documents," says Schoen. "If people take the time to read those things, they can learn about the business."

In Schoen's opinion, communication always is an issue, and for the IT department, that means IT people have to make sure business users understand the value IT brings to the company. "Some things are really visible--such as the systems business units use," he says. But areas of IT, such as the infrastructure, aren't as visible to others in the company. "Sometimes there's a lack of understanding why all the infrastructure--security, networks--is needed," he adds.

FINANCIAL SOFTWARE

Technology tools for the financial/accounting groups have been generally ignored for years, according to Galeaz, because they don't generate revenue. But coming after the Sarbanes-Oxley Act, carriers began to see the benefit of good information, good systems, and good controls, he remarks. "[Insurers] saw what the total cost of finance was in an organization," he says. "Because of bad information, bad systems, and antiquated processes, they found there is a huge cost of finance within an organization, not just within the finance department but within the business units that put together their own financial arms necessary to put the information together to make good decisions," he says.

Over the last year, and continuing for the next five years, Galeaz believes companies will look to modernize their finance infrastructure--whether it is modernization or optimization or their future finance vision. Companies are looking to establish standards and possibly even planning tools, depending on the platforms and their needs, he indicates.

"I'm now seeing organizations ranging from the largest to the regional players taking a hard look at their infrastructure and their cost of finance and how to reduce costs and reduce unnecessary spending within an organization [from producing] data that is either unused or not relevant," says Galeaz.

One of the key terminologies Galeaz has heard since the SOX regulations came in force is the concept of one source of the truth--for external reporting, internal reporting, planning and budgeting, and forecasting.

"In the past, these numbers came from different sources and CFOs were forever trying to reconcile where the numbers came from and what was the truth," he says. "Now, people want to rely on that information, and if you are able to get one source of the truth where information is classified the same way and the key performance indices are determined the same way, it's a lot easier to manage your business."

If carriers can trust that information, they need fewer people to manipulate the data and pull it together to create their own reports, explains Galeaz. "Companies are seeing that the organization built up a lot of costs over time that were unnecessary," he says. "Do it right the first time, and at the same time, you will be able to provide data the businesses want faster and on a more consistent basis they can rely on for both internal and external and planning."

Keal looks at the value that can be added to the organization by having tools on the front end of the operational side--claims or underwriting. The difference usually is quite large in what carriers are able to do on the underwriting side in terms of adding value in comparison with what can be done on the financial side. "There are many of what I call overhead-type operations and some of them are in the finance area. Technology has allowed us to become more efficient," he says. It comes down to trading dollars from the amount the company might save in managing expenses compared with improving loss ratio by one or two points. "You probably don't have one or two points on your expense ratio side by making those changes," he comments.

GOOD RELATIONSHIPS

Most financial people with whom Keal deals have good relationships with IT, but he jokes, "When it comes to September or October, would I say that relationships are strained while formulating the budget or profit plan for the next year? You always have that type of challenge, but working together to resolve what's best for the organization is what it's all about."

Those relationships help maximize the investments that will make a difference for the enterprise, adds Keal. "The landscape is littered with decisions from all sorts of insurance companies--multiline, large, small--that have made significant investments in technology and seen no value," he says. "To me, it's important to have a good working relationship with your IT partners because it helps minimize bad decisions and maximize the return on investment."

Keal knows a great deal of time and effort is put into creating models to analyze the costs and benefits of particular IT projects. On a personal level, he works closely with IT to develop costs and estimate where savings can be achieved. He also believes some work remains in regard to establishing cost benefits. "Where I think we have done a particularly bad job as an industry is on the back end," says Keal. "How often do we go back and say, 'This is the value that was derived from the project'? Did we actually push that value through? Was there potential value that wasn't realized? If so, what could we have done better as an organization to push through the benefits we thought we'd have on the front end? Do we need to adjust what we've done on a cost benefit?"

Keal recently spoke at a meeting of insurance leaders organized by IASA and asked the audience how many conduct cost-benefit analyses on IT projects. He reported the response was unanimous as hands flew up.

He then asked whether their organization received the value it anticipated from the project and whether it actually was driven throughout the organization. One person raised his hand, he reported. "I believe many entities look at a project and say, 'We went through the analysis; we expect this to happen when it's put into place.' Unless you have someone proactively making sure that happens, you may or may not realize [any value]," he says.

IT UNDERSTANDING FINANCE

Understanding the numbers allows IT to add to the value proposition of an organization, Keal notes. A problem carriers have to face, though, is many IT workers are no longer generalists. However, at United Heartland, Keal can go out to the individuals in IT and they will understand what the business units do. So, if underwriting says it needs to do X project, IT personnel understand it in the context of the business, not just the technical side.

A good IT department not only understands the request but is able to offer options because it understands how business is done. "When your organization reaches a certain size, being a generalist becomes more difficult," he says. Then you have to weigh operational efficiencies of having somebody with a specific skill set or a group of specific skill sets to focus on X. You try to drive down costs [with specific skill sets], but I think you lose a value-added component."

IT leaders need strong communication skills, Keal contends, but he looks at communication as just one piece of the puzzle. "I look at individuals within IT much like I look at things from a financial perspective," he says. "I like to have a well-diversified investment portfolio to minimize risk and increase value. You need that same type of diversification with IT. You need people who understand the business process, understand technology, look at new technology, and apply that to the business process. All those components have to be balanced to get the best results."

SIMPLIFY THINGS

Simplification and standardization are going to be paramount in the insurance space, reports Galeaz. "Companies are going to look at the true cost of finance, not just within the corporate finance group but within the business units," he says. "They will be looking at how they accumulate and use data and determine what data is needed to run a business and try to eliminate everything else."

Galeaz believes it is a new day for insurers. "It's certainly a time I've never seen in the finance areas where they are really getting some dollars to spend to bring their systems up to snuff with the businesses," he says. "I think they are all doing it under the auspices of cost control, cost reduction, and speed to market in terms of getting information out to the businesses. That's a positive step and allows the company to use its data and information. It's very long overdue." TD