Will You Spend Too Much on Your Transformation Initiative?

Insurers need to reduce the risks associated with transformation initiatives not only with regard to uncertainties surrounding core system selection - as explored here last week in essays by Jim Kerr and Bill Garvey - but also in the costs associated with other modernization initiatives such as infrastructure upgrades and non-core enterprise software procurement. These costs can vary significantly from contract to contract, especially in newer offerings, such as cloud-related delivery of applications, advises Jeff Muscarella of NPI, an Atlanta-based spend management consultancy.

There is plenty of opportunity for operational improvement in terms of both efficiency and service improvement, according to Muscarella. Insurers face challenges selecting the right solutions, he says, but they are in some cases even more challenged to identify the appropriate level of investment. In the case of many leading-edge infrastructure and software offerings, "pricing is all over the map," he asserts.

While both selection and pricing are critical to project success, insurers are often disproportionately focused on the former. "Companies will often spend six months to a year on the selection process, and once they've narrowed it down to one or two options, they're in a hurry to wrap up the selection process in a one or two weeks," Muscarella says. "We find that companies don't often allow adequate time for a thoughtful, deliberate negotiation process."

One of the most common stumbling blocks for modernization projects is an insurer's failure to create a thorough statement of work, defining payment structures, project milestones, SLAs, escalation tracks and other aspects of governance. "They often fail to specify in sufficiently clear detail what the vendor is responsible for, versus the client," Muscarella says.

Muscarella offers the following three "Rs" as a guide to managing the risk of once-in-a-decade transformational IT projects:

Right Solution: Selecting the right solution requires a cross-functional team of business and IT leaders who will clearly define the strategic goals, mediate the legitimate disagreements that will occur about how best to meet those goals, and hold the team and company accountable for executing on the plan.

Right Technology: Many insurers are running on legacy client/server computing architectures and need to modernize their IT infrastructure to keep pace with customer and business demands. Like it or not, the cloud is here to stay - and whether you build or host your new cloud-based infrastructure, the basic architecture and requirements are clear. Pre-built solutions like Cisco, vmWare and EMC's vBlock architecture make it easy to take advantage of the new standards in server and data virtualization technologies as well as the management tools to help build truly flexible, on-demand infrastructure. This goes a long way in reducing risk as environments can change quickly and management costs are dramatically reduced.

Right Price (ROI): Once the solution and technology are clear, people often try to rush the purchase process. Often, this is due to timing or the assumption they will go with a trusted incumbent. However, this can be an expensive luxury, often costing companies as much as 30 percent more than a well-managed sourcing effort. Organizations need to create a level playing field for their top three bidders and they need to carefully benchmark and analyze each of their bids (software, hardware and services). Each of these areas is rife for overspending due to overbuying, bundling, poor discounting, and inadequate scoping. A thorough purchasing process backed by vendor insight and pricing information can reduce both contractual and cost risks significantly.

Insurance & Technology is currently conducting a brief survey about IT spending more generally at insurance carriers. Please take the Insurance & Technology survey, available at this link. We'll be discussing the research at next month's I&T Executive Summit at The Boulders Resort & Spa in Carefree, Ariz. (Nov. 6-9). Post-event we'll report in-depth on how the 2012 IT budgets are shaping up.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio