Financing the Future: CFOs and CIOs Look Ahead

There are companies that maintain the old reporting format, but Travers believes it slowly but surely is unwinding through the appointment of CIOs who oversee the IT department. "The trend will continue that way," he says. "[Technology] is enough of its own discipline and is so material to the organization that it needs to stand on its own, but because it's such a big area of spend and because it's the traditional organizational structure, there are a lot of carriers left that still operate [with IT reporting to the CFO]."

Ward Group has conducted analysis of the reporting issue and found about 60 percent of CIOs in the insurance industry report directly to the CEO, according to Leah Hollstegge, a manager for Ward Group.

In the past, Hollstegge maintains, it was more common for CIOs to report to the CFO or the COO, but today Ward sees only about 10 percent of insurance companies having their CIO report to the CFO with the other 30 percent reporting to other positions, most commonly the COO. "That reporting relationship is a big change," says Hollstegge.

One reason for the change, she explains, is the CFO role has expanded with recent adjustments to the industry, such as enterprise risk management (ERM) and regulatory compliance issues imposed by the federal government (SOX) and the NAIC (Model Audit Rules). "CFOs are spending a lot of time on those areas, and that has pulled some of their focus," she says.

Five years ago the finance department was less involved in these non-accounting issues, Hollstegge points out, because expense management wasn't considered a huge priority. "Now, we are seeing a renewed focus on expense management with the CFO and the finance department becoming more involved," she says. "With capital projects, there are questions of how the project first fits into the budget before determining where [the project] fits in the project portfolio. In the past, it was more an issue of prioritization if there was money to spend, but now, it means really looking at the budget."

At United Heartland, the IT structure has been housed within the office of the CFO since Jim Keal was appointed to that position in 2006. Despite his experience, Keal doesn't believe his company's way of doing things is particularly better than others where IT reports directly to the CEO. "I believe the reporting relationship can work well under either structure," he says.

What's important to Keal, though, is having the appropriate IT governance structure in place–the alignment of IT with the operating units–and ensuring the IT strategy mirrors or complements the overall enterprise strategy.

"If you do those basic things rights, the reporting structure becomes less important," says Keal. "The reporting structure can be effective only if you get better alignment."

At the Guaranty Group, the CIO reports to the president of the life insurance company, according to Forrest Mills, CFO of Guaranty. But the carrier does have a network services department, which Mills describes as a shared service for budgetary purposes that gets allocated to other branches of the company.

"We're a little different," says Mills of Guaranty. "We've always run a pretty lean shop, so we haven't had to make many changes because of the recession. If you look at the project funding, we've always been pretty conservative and held to just what we have to do. We haven't had to make any dramatic changes."

The most important reason for IT to report directly to the CEO is the need for IT to be a key contributor to the strategic direction of the organization and provide strategic enablers, notes Travers, adding the position of the CIO has that responsibility. "The expectation is to put that responsibility on the CIO to deliver rather than lay all that on the CFO who has his own obligations to the organization," he says.

Good Governance

The CFO is more involved in IT decisions today, Hollstegge believes, because of the way a carrier's governance model has been set up and because of the finance department's participation in the budget process.

"In most governance models, you see companies improving the process to get better alignment between business and IT," she says. "Finance is a big part of that."

There are four factors, according to Hollstegge, that determine the level of involvement of the CFO: the size of the company, the culture of the company, the level of influence of the CFO, and what types of success IT has had in the past within the company.

"Those four areas really drive the CFO's involvement," she says.

Yet Travers doesn't believe CFOs want to know the intricacies of the technology their company employs, they just want to know the results and the cost benefits.

"That's where the CIO needs to step up," he says. "There are some terrific CIOs out there who are pointing to the business benefit and competitive differentiation and investing money on making changes to systems that can have a tremendous impact on the company. They demonstrate that value to the CFO and others in the management team. That's where a CIO takes a leadership role rather than simply reacting to changes and trying to get approval on spend without demonstrating a benefit."

United Heartland's IT governance process hasn't changed as the carrier has dealt with the effects of the recession in the past two years, indicates Keal. What has changed is the level at which the insurer is analyzing projects and the value those projects will provide the enterprise.

"Are projects undergoing more scrutiny?" asks Keal. "I don't know if I would say it would be more scrutiny–we're still following the overall model–but in terms of the recession, costs now have become a bigger component of the overall approval process. You can't ignore the financial landscape."

United Heartland is a monoline workers' compensation company. "If you look at what has happened to payrolls and what has happened to the overall top-line growth within the workers' comp line for all insurance carriers, it has decreased significantly over the last two years, and based on the initial estimates from A.M. Best and others, it will decrease again this year," says Keal.

Obviously, carriers can't afford to ignore that component, but Keal points out, United Heartland continues to examine whether a project will provide long-term value.

"We are not shying away from making those types of [longer-term] investments because we think it is the right thing to do," he says. "I wouldn't say [projects] are undergoing more scrutiny; it's just we are more aware of this external factor and what it's doing to our business. It becomes another decision point."

What separates his company from other carriers in the relationship between finance and IT, Keal asserts, is United Heartland believes in what he calls a "value-added strategy" that focuses on how IT can assist the organization. Some other carriers rely on a pure expense-management strategy with regards to IT.

"Some companies do a good job of ROI analysis, but how many companies actually go back and put pen to paper to see whether they realized the benefits they thought they would. That's where the linkage with finance is helpful: To be able to provide discipline and go back to do those types of analysis," says Keal.

IT projects often have latent value, Keal contends, but managers haven't been held accountable for making the changes that are required now that new technology has been put in their hands. "When you go back and look at process efficiencies and those types of things, that's an organization committed to realizing those efficiencies," he says.

Pros and Cons

The benefit to having the CFO supervise IT is the CFO offers the financial discipline that is so useful in IT. However, Travers is quick to add there are plenty of organizations that have great financial discipline in IT and do not have a reporting relationship with the CFO.

It comes down to how companies define the management practices within IT. "I think what has benefited insurers is the CFO being involved in spending decisions for IT and offering financial discipline–finite controls on how spending is occurring and tying it back to the organization," says Travers.

Where carriers have a challenge, adds Travers, is CFOs are paid to be skeptics. "They question everything, as they should," he says.

A CIO's DNA, on the other hand, is to be optimistic about technology, continues Travers. "Sometimes there are leaps of faith that have to be taken, and CFOs are not always willing to do that–it's not in their makeup," he says.

The downside for those IT organizations under the CFO, Travers explains, is those carriers may have suffered in terms of innovation and may not see IT as a service but as the traditional black box.

"When you look at old-line organizations where IT was a function within the CFO's chain of command, they are more like a data-process function rather than an information delivery or an information management organization," he says. "That might have stunted the growth of the IT function with those carriers."

Recession Factor

Regardless of the organization, Travers observes, in recent times there has been more attention paid by the CFO to what the IT department is up to because there is less money to spend, and it has to be spent judiciously.

"That's the principle function of CFOs–to help manage that spending–so they definitely have become more involved," says Travers.

Guaranty was fortunate during the recession, Mills comments, in that the carrier didn't need to make budget cuts, although he concedes, "We don't have a lot to cut, anyway."

He ascribes this state of affairs to changes in the company infrastructure that already have been made, particularly within the IT department. "[IT] has to take an overall holistic approach," says Mills. "It has to understand what the company needs and, from its own aspect, to prioritize and work to ensure what is best for the overall goals of the company [is realized]."

The challenge many insurers face with regard to lower revenue, Keal points out, comes from how the enterprise takes current IT resources and works on making them scalable.

"When the market turns, premium goes up, and new business opportunities arise, how can we take advantage of those changes without an increase to the IT cost structure?" he asks. "I think the biggest change we will see is how IT as a department makes changes internally to be able to grow and take care of business opportunities when they occur. And they will occur eventually."

United Heartland never has taken a strict expense-management strategy where the finance area tells IT what their allotted dollars are for the next budget cycle. "We ask [IT] what it will take to support our strategic direction and what we are looking to accomplish, not just in a one-year time frame but in a three- to five-year time frame," says Keal.

Not that long ago, some insurers viewed IT as a cost center where money went into a black box, and no one ever saw anything come back out, recalls Keal. "Things have changed," he says. "If your strategy within IT is aligned with your operational strategy, that is where you are going to derive the most value."

Common Cause

The finance department plays an important role in performing the cost-benefit analysis for IT projects. That said, finance is well-positioned to validate the IT costs and the business benefit for a project, notes Hollstegge.

Ward Group also is seeing more focus on post-project monitoring to ensure the benefits are being realized and the costs are accurate to the projections made in the initial cost-benefit analysis. "Going back and monitoring the original cost-benefit analysis allows learning for future projects," she says.

The relationship between IT and finance is not contentious, maintains Hollstegge. "I think companies are attempting to [realize] the involvement of IT in business and finance continues to improve and alignment continues to increase," she says. "I don't know whether there are large changes coming to that relationship in the future–just further improvement in what they currently are doing."

Those relationships go back to the four factors Hollstegge listed above, the most critical of which being the history of IT success within the company.

"When there has not been that success in the past, there is more likely to be another layer of reporting before reaching the executive management," she says. "In a case where IT is reporting to the CFO and IT doesn't have a seat at the executive table, it reflects on the history of IT success and the level of influence of the current CFO."

Some of the best organizations Travers has worked with over the years have actively sought a better partnership between IT and the CFO. "So it's not just a matter of the CFO showing up at the CIO's doorstep and second-guessing what [the IT department] is spending on," he says. "They have forged a better relationship out of necessity."

Another factor driving these two disparate parts of the organization together is the metamorphosis of the CFO into the role of owner of enterprise risk management. "It takes a lot of technology to manage ERM, so the two sides are being drawn together," notes Travers.

CFOs always have been a part of ERM, but Hollstegge believes the role of ERM has increased within the insurance industry. "A lot of times the CFO is driving the ERM initiatives in order to identify the financial issues," she says. "Given the magnitude of the [IT] expenses, it's natural the CFO would have some increased scrutiny, especially when expense management is such a large focus, as it is right now."

By extension, the increased dependence on predictive analytics is drawing the CIO and CFO together, Travers believes. "There's a great deal of attention and investment being made in analytics, some of which is key to the financial part of the organization–key decision-making on where they will make investments and adjust the risk selection process," says Travers. "Those carriers are going to see the fruits of their partnerships pay big dividends in terms of differentiation with their competitors and in terms of financial results, so I think the close relationship will continue. Maybe it wasn't the path they would have chosen, but circumstances have brought them together because they are so intertwined and there is so much benefit to operating collaboratively. It varies by organization because you have some CIOs who have tremendous respect for financial discipline and so their dependence on the CFO is not as great, but the affinity with finance–their common thinking–is there."