Weathering the Storm

In regard to the soft market, Ernie Pearson, IT director for applications development at SECURA Insurance Companies, believes the insurance industry has some special challenges today. "One of those [challenges] is to try to get our pricing finely tuned so we are competitive yet profitable," he says. "That in itself creates some work for our underwriting groups, our actuarial groups, and our IT groups."

The soft market will have an effect on the budget process, remarks John Del Santo, managing director of Accenture's North American insurance practice, especially for property/casualty insurers. "In the last 24 months, on average, P&C rates have gone down by 30 percent," he says. "That's extraordinary."

Insurers are not going to be able to make up those losses in the investment climate this year. "There's going to have to be some belt tightening," predicts Del Santo. "Every cost center is going to have to contribute a bit to a belt-tightening program to make up that gap."

For IT, that could mean somehow finding a way to perform maintenance at a lower cost and fewer discretionary projects to work on. Del Santo indicates one option would be a closer examination of the company's entire project portfolio. Companies often have as many as 200 projects in the pipeline, and Del Santo points out some of those can be whittled down. The result might be better performance in those selected projects. "In some respects, it's a good thing to ask IT departments to deliver more with less or more with the same and be more efficient about it," he says. "It's causing IT to focus on things that are really important and things it needs to be competent in."

Gardner agrees it's probably not the best time for insurers to do major IT projects to improve systems, but in the case of Great American, senior management recognized a need for the carrier to become more competitive by enhancing its front-facing applications and increasing operational efficiency in the back-office areas. As a result, the carrier has backed the investment in new developmental measures. But a sharp eye will remain on everything being spent. "Managers are being held more accountable [to their budgets] than they have in the past," says Gardner.

Great American has spent the last few years trying to optimize the percentage of money spent on maintenance to that spent on new projects, Gardner relates. "Piyush [Singh, the carrier's CIO] has a goal to spend 60 percent of the total IT budget and human capital on new projects and 40 percent on maintenance," says Gardner. "In 2008, we are almost to those goals he has set for the organization."

Over the last couple of years, Gardner has witnessed an increase in new initiatives and believes Great American is benefiting from the change. "We are spending a lot more than we have in the past [on new development] because we didn't do a lot of development before," she says. "Management looked at our current technology landscape, the need for us to be competitive in current and future market environments, and the opportunity to enhance our systems during this soft cycle."

Danielson contends no matter what the economy or market is experiencing, insurers should take a critical look every year at the way they spend money. "Our clients all realize their investments may not have been the greatest before, but they recognize they can't stop investing," he says. "The business side is not saying don't do fewer projects."

The business side is much more involved than it's ever been in what it views as technology-related work, points out Danielson, who welcomes that attitude. "When it comes down to it, the budget is in the business [units]," he says. We are seeing the business step up over the last couple of years. That's a great thing. In the past, you heard IT departments ask why they were spending money on X project. Now, the business is part of the conversation."

That doesn't mean insurers aren't remaining cautious. "What I'm hearing is spend it slowly," says Danielson. "The actual decision to spend it is being pushed toward the end of the year. I still see the projects happening. They may be delayed a bit. The projects that have been committed to are not being stopped, which is a great indicator for a lot of us."

An important factor in the budget debate for IT departments is how much will be spent to maintain the current systems being used and how much will be spent on developing new solutions, some of which will be used to retire the older, costlier systems.

SECURA examines its own data to discover how much of its available resources have been allocated to maintenance. "Barring any changes, we might tweak that number a little, but typically we know how much we are spending on maintenance," says Pearson. SECURA also mixes in a percentage of its budget for what Pearson terms production support. "Things break, and somebody's got to fix them," he says. A third area is set aside for ad hoc requests. "We don't know what those requests will be, we just know those kinds of requests will come through," he says.

The remainder, according to Pearson, which adds up to about half of the application development budget, is allocated for new projects or to carry over projects that initially were budgeted the previous year.

Once the numbers are determined, SECURA goes through a planning process to evaluate the demands and try to choose those projects the IT group believes will offer the best benefit to the organization and align with the carrier's annual operating plan. "We probably have at least 50 percent of our time allocated to new development," says Pearson. "You hear numbers that companies are spending 75 percent of their time on maintenance and only 25 percent on development, so we seem to be doing better than that."

If companies are bullish on their future and aggressive in the market, Del Santo asserts they are shifting the mix toward new development. "Those on the road to nowhere are doing the opposite," he says, adding he is unsure whether there's a dominant trend in either direction. However, he observes many of the companies with which he consults are planning to invest as much in new development in 2009 as they did this year.

What separates the two types, according to Del Santo, is business direction and strategy. "When management decides to go after growth and is bullish on its ability to differentiate in the market, it's not tying IT's hands behind its back by saying give me more, and by the way, you are getting less," he says. "The difference is the business direction and realizing carriers have to spend money on new technology to get things done. We all know the technology of most insurance companies is aged and in need of renovation."

SECURA has a mix of home-grown systems and licensed software packages that include a mainframe and some server-based applications, according to Pearson, who finds it a myth that maintaining the older systems is a complete drain on the IT budget. "Just mention mainframes, and people sometimes unfairly associate them with high overhead, high maintenance, and high costs," he says. "That may be accurate for some, but it's not necessarily accurate for everyone."

The issue depends on how well the applications are designed, Pearson notes. "There is no written law that says just by virtue of the fact it's a SQL server, Microsoft Windows application written in .NET, it's less costly or more efficient to maintain than a mainframe COBOL system," he says. "That's wrong thinking. You can't make a blanket statement that's the case."

It is difficult to break out of the maintenance cycle, Pearson acknowledges. Carriers are operating legacy systems that can be as much as 25 years old. "The question becomes do you have the commitment and the wherewithal to rip out and replace one of those systems with a better system, or can you take a more evolutionary and incremental approach to target different parts and improve them?" he asks.

Not surprisingly, Pearson points out there isn't one answer. "Companies have failed at both, and companies have succeeded at both," he says. Often, the answer depends on what part of the system is broken and the carrier's capacity and budget to change dramatically some of those systems. "Whether companies build or whether they buy products, they usually work around the edge of these legacy systems without disturbing the underlying guts of the system," says Pearson. "They may put a new user interface on it or incorporate a new print solution, but oftentimes they leave major parts of the system intact."

Maintenance work sometimes can lead to new development, indicates Pearson. He remembers a situation SECURA was dealing with in the personal lines system where the carrier was having some difficulty implementing rate changes. "The application was restructured to make it more table driven," he says. "The tools we used to define the rating logic were upgraded. So, out of what had been a maintenance burden materialized an opportunity to improve that process dramatically, and now, given the number of states in which we do business and the much more sophisticated pricing and rating algorithms, we are able to accommodate users much better than we would have in the past."

Most insurance companies have dabbled with driving down maintenance costs by doing staff augmentation with offshore service providers, reports Del Santo. "In some cases, that's worked moderately well, but often it hasn't," he says.

The problem is the carriers in these cases haven't reengineered or redesigned how they do development in their own shops, choosing instead simply to move some of that work offshore, explains Del Santo. Insurers need to follow the example of other industries that have used outsourcing to take costs down in a significant way by shifting not only the cost but the burden of the service level to a third party so more money can be redirected into new development. "The insurance industry hasn't been that aggressive in doing that," says Del Santo. "[Insurers] have been more tactical with it. They'll get a cheap rate card with that third party, but they won't necessarily have that third party step up to owning the outcome for their application maintenance work."

Another issue U.S. insurers have to deal with is wage inflation in India. Del Santo points out most global firms have developed alternatives. "India is not the only place that can do extraordinarily high-quality application maintenance at a reasonable cost," he says.

Some of Accenture's bigger clients have a dual-country model, where they have some work done in India and some in places such as the Philippines, South America, or Eastern Europe. This gives the American businesses the skill level and cost savings and mitigates their risk against inflation or any kind of geo-political activity that might pop up, suggests Del Santo. "The challenges become more problematic for insurance companies if they haven't used offshore strategically and instead use it for capacity and staff augmentation," he says. "As [offshore] inflation goes up, their costs go up."

The insurance industry has done a good job of outsourcing maintenance, Danielson believes, but the weakness of the American dollar is putting more stress on the outsourcers. "They've been squeezed so hard, they have little give anymore," he says.

Deloitte's clients also are asking the consultant about other geographies in the world. "Many insurers have a lot going on in India, and they are saying if they can't get what they need out of India in a price point, maybe there is a lower one somewhere else," says Danielson.

Data projects traditionally take more time than most IT-related projects, and that fact scares some insurers. "They understand how big and ugly a lot of those [data] projects are," says Danielson. In the past, companies took the "build it, and they will come" mentality with data warehouses, but Danielson doesn't believe that philosophy will fly anymore. "What we see now is people picking subject areas within the data project," he says. "They are more focused. Subject areas are being identified that allow them to do smaller projects. I like to say: Earn the right to keep going. Too many times the big projects failed."

Danielson believes even with a multiyear commitment, if it doesn't appear the project will provide a benefit, a carrier will stop the project in its tracks. "What I do see is a multiyear commitment to address a broad issue," he says. But instead of making a huge financial commitment, the companies are breaking it down into smaller pieces. "They are more focused on the projects they assign and each year take a critical look at the project," he says. "So, even if the project is long term, they spend in a year cycle or two-year cycle. That way allows them to do more planning and get a better horizon on where they are going to make their strategic investments. If they don't see results in a one-year or two-year window, they will revisit their decisions."

Within Great American, each area in IT has set up a governance committee, which is made up of members of IT, the financial side, and the business unit most affected by the project. "We get a balance among the business sponsors who are driving the project with IT as well as the finance people," Gardner says. "Projects go through an approval process with all business constituents to make sure everyone is on board and it is the appropriate initiative in relation to all the options available for human and financial capital investment. Each side has its opinion and brings its own expertise to the table."

Some of the carrier's projects in the past were lengthier than today's projects, points out Gardner. "Piyush is a believer in smaller but more projects so there are shorter time frames for deliverables and business can start seeing value-added pieces that build on themselves like Lego blocks," she says. "When governance and business/IT alignment take place, they are defining the guidelines for the projects based on value proposition and prioritizing the various phases and components based on business environment."

Some of the areas of investment will be new platforms, new technologies, call centers, policy administration projects, and continuing work in the conversion of claims systems, reports Del Santo. Those types of projects don't exhibit any extraordinary fear of the future, which Del Santo contends is a good sign. "Even though there's a recession and some doom and gloom about the economy, I don't think you'd know it if you walked into an insurance company," he says. "It seems business as usual in a lot of the IT shops."