Show Me The Money, IT Departments Are Being Told

By

Orlando

Insurers, pressed by a tough economy, are examining automation projects with a “show me the money” attitude, insisting that information technology departments quantify and speed up the return on investment, tech industry leaders here warned.

Bottom-line concerns have prompted carriers to cast a much more skeptical eye on initiatives proposed by their IT departments to upgrade or replace any part of their tech infrastructure, speakers on a series of panels noted here during the annual conference of ACORD, the insurance standards organization based in Pearl River, N.Y.

“Were caught up in a tornado of ROI demands the past 18 months,” said Robert Cooper, a vice president at ILOG Inc., a multinational business process software firm in Mountain View, Calif.

Speaking on a panel featuring “First Movers: Leaders In ROI,” he added that “the emphasis is on IT projects that can achieve results very quickly. Were being compelled to take on bite-size chunks instead of the bigger, more ambitious projects that were more of the norm two and three years ago.”

Insurance companies spent $19.7 billion on IT in 2002–down 8% from the year before, “with hardware taking the largest hit,” noted IDC, a market intelligence and advisory firm, in a report released right after the ACORD conference. For the current year, IDC said insurer tech spending is expected to increase by an anemic 1.6%.

“This is an industry that has been troubled with uncertainty for the past year and a half, and it will take time for profits and the market to stabilize, and even longer for significant IT investments to be made,” according to Jessica Goepfert, an IT program manager for the U.S. financial services sector at IDC, which is based in Framingham, Mass.

“However, barring any unforeseeable catastrophes, the groundwork is laid for more favorable IT spending,” she added in an IDC press statement. “We expect the insurance sector to slowly return to normal growth” over the next five years.

IDC said IT projects most likely to gain funding will be those that help the companies run more efficiently (like outsourcing), drive profitability (like improved underwriting capabilities), or help achieve differentiation in a crowded market (like enabling brokers and agents to improve service).

Some panelists at the ACORD conference spoke nostalgically of the “gee whiz” days when “tech ruled” and major investments for long-term projects were relatively easy to secure from insurers.

“During the booming 1990s, CIOs got lazy. All they had to do was say e-commerce or Y2K and you got your funding,” said Gary Beach, publisher of CIO magazine in Framingham, Mass., at ACORDs closing CIO panel.

Now, however, carriers are far more stingy with all their expense decisions–technology included, the panelists agreed.

“The days of insurers throwing logic to the wind and pursuing a new tech project before you have a solid business process justification for it are over,” Kimberly Harris, research director at Gartner Group, a research and consulting firm in Stamford, Conn., said during ACORDs opening panel on industry IT trends.

“Carriers are looking to reduce their risks. Theres more emphasis on the short-term return of every initiative,” added Joel Gelb, chief information officer of National Grange Mutual Insurance in Keene, N.H., during ACORDs opening panel.

“Were operating more on a pay-as-you-go basis now. You must demonstrate a definite return because dollars are harder to come by,” Gelb explained.

Top insurance executives are much more demanding of their own IT people as well as their vendors, not only due to bottom-line concerns, but because they were too often burned in the past when high-profile technology projects failed to pan out, some panelists noted.

“Seventy percent to 75%, and even as high as 90% in some companies, are challenged projects, meaning they are late, over budget or nonfunctioning,” according to John Thorpe, a consulting fellow at Fujitsu, a multinational IT solution firm based in Tokyo, Japan. “Its no wonder that ROI for IT is getting this kind of attention with that kind of track record and in this kind of economy.”

“IT may have an infinite appetite, but insurers have finite resources, so carriers really have to base their decisions on business risks and what needs to be doneto avoid eroding or losing their franchise,” added Steve Wyckoff, a managing director at Marsh Inc. in New York.

Its also harder to railroad insurance company executives into approving big-ticket IT projects because senior managers are more educated as tech consumers, panelists observed.

“Carriers are a lot more sophisticated when it comes to tech purchasing decisions,” said Matthew Josefowicz, manager of the insurance group at Celent Communications, a multinational financial services technology research and consulting firm based in Boston.

“They know more about what to ask of their IT people and vendors,” he added. “And with the economy the way it is, theres a lot more bargaining going on. They know they can get fabulous deals. Theyre more demanding about what a product can do, when it can be delivered, how much it will cost, how long it will take to get up to speed, and how much ROI it will generate.”

One result of the technology budget squeeze is that carriers are extremely reluctant to scrap outdated systems and more interested in modifying them and making do if at all possible, the panelists noted.

“Were seeing most companies taking an extension approach. Were only seeing replacements when the existing system just cannot be salvaged any longer,” said Harris of Gartner.

“Fifteen percent to 20% of companies are looking to replace their systems over the next five years, but most are looking to extend them,” added Josefowicz of Celent. “Were hearing some say that we know the legacy system is killing us, but we cant bring ourselves to crack open our chest and take it out.”

However, the dwindling number of legacy system experts could force more replacement projects to be initiated, according to Ursuline Foley, CIO of XL Reinsurance, headquartered in Stamford, Conn. “If carriers no longer have the skill sets to maintain these systems, theyll have to go,” she said.

is publisher and editor-in-chief of National Underwriters Property & Casualty/Risk & Benefits Management edition.


Reproduced from National Underwriter Edition, June 16, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.