Performance Metrics Enable IT To Quantify True Value

Insurance is an information business. As the market becomes more competitive and information processing capabilities become more advanced, insurance company executives universally understand that the effective development and management of information technology is core to their abilities to create value.

However, this growth in the recognition of information technology's core position can be a mixed blessing for insurer IT executives, since they are now expected to measure and communicate their value in concrete business terms.

Novarica's research has described three major classes of IT metrics–cost, performance and, most importantly, value. Unfortunately, most insurers are still stuck using the first two classes. For IT executives who want to be true partners in the business, value metrics are a must.

Cost metrics are generally the easiest to gather and monitor. Simple calculations of budgets against headcount, policy count or premium volume provide a baseline method to communicate IT expenses.

But cost metrics provide only one side of a cost-benefit analysis and are of limited value in managing the technology organization to create business advantage.

Insurer CIOs who use cost metrics as their primary data in communicating with their business peers risk cementing a position for themselves as a cost center rather than as a strategic partner. And, of course, there's only one thing to do with costs–cut them.

Performance metrics measure how effectively IT operates within its own terms. Did it meet its own goals for systems uptime, quality (defects/change ratios) and project management?

Performance metrics are invaluable for the internal management of IT. CIOs need to be able to measure the quality of group, team and individual performance to manage their staffs effectively.

In addition, performance metrics are often viewed as an effective tool for communicating IT's professionalism to the rest of the organization.

Unfortunately, in many cases these kinds of metrics are better at highlighting failures rather than successes. While engineers are used to measuring shortfalls against unachievable perfection goals, business people are used to surpassing their performance targets by a healthy margin.

Anything shy of zero percent defect ratios and 100 percent on-time/on-budget ratios sounds like a measurement of failures, not successes. A 99.99 percent up-time record sounds great to people who manage systems every day, but it is small consolation to an underwriting vice president who missed capturing a major case because the system was unavailable.

Measuring value created is the only effective way for IT to break out of the “cost center” box in which it has traditionally been placed. Without measurements of value, there is no “benefit” in the cost-benefit analyses and no “return” in return on investment.

Isolating technology's contribution to business value, however, is much more complex than tracking cost or internal performance, and many value metrics are really only proxies for understanding the true value created.

The most commonly used value metric is internal customer satisfaction. But there are many other metrics in this class, including business efficiencies created (such as increased speed to market or reduced processing time in underwriting or claims) and percentage of projects that delivered promised return on investment, or total ROI.

Capturing value metrics is complex in many ways, and can be a real challenge for IT groups, which are generally used to thinking like engineers–measuring things such as defect ratios and costs that involve hard, uncontroversial data that requires only analysis, not interpretation.

Unfortunately for IT, business is used to thinking in what some engineers might regard as “soft” metrics like projected sales, market share and mind share. Even worse is the black magic of accounting, with the attribution of costs and revenues to various elements within the organization.

Although it does not play to their core skills, IT must “speak business' language” and measure themselves in similar terms. Unless IT is able to step up and provide measurements of its own value, it will find itself measured by other divisions that may not be interested in sharing credit for business success with the engineers in the back room.

In many cases, this may mean devoting resources to detailed financial analysis and reporting. Many successful CIOs that we know have had their own CFOs who were partially tasked with creating these metrics.

Insurance IT executives must embrace value metrics to clearly communicate their contributions to their business peers and manage their own groups effectively.

Focusing on business results helps both sides. Business understands it has a true partner committed to its goals, while IT is able to focus its priorities to align with enterprise goals.