5 Reasons Your IT Organization Went Over Budget

First, the good news: If you work in the IT department at an insurance company, your budget isn't likely to fall this year. Research from analyst firms including Novarica and Strategy Meets Action — not to mention a couple of late-year polls conducted by Insurance & Technology -- indicates that many insurance companies plan to invest more dollars in their technology departments in 2012 than in 2011, and a majority of carriers are at least holding their budgets flat.

The bad news? More money might mean more headaches for insurance IT organizations, as business pressures will require them to stretch every dollar to its limit. "There's a lot of pent-up demand [for new capabilities], but there are also things in the background that have been put off," says Jeff Muscarella, EVP of IT at NPI, an Atlanta-based IT spend management consulting firm. "So even though budgets have gone up, there's pressure for them to go even higher."

Keeping IT spending under control is a constant struggle for CIOs. But it's not an impossible task. Here are some of the most common reasons for budget overruns, along with some potential solutions.

1. Ineffective Communication During the Budgeting Process

A common reason for tension in any group, whether it's a multimillion-dollar company or a family, is an inability to effectively communicate desires and boundaries. True to life, a barrier to clearly delineated goals at insurance companies, according to Greenwich, Conn.-based IT consultant Joel Collamer, is simply language.

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"The tech world uses very different words than businesspeople use," he says. "You can have a sentence that means one thing to technologists and something totally different to the business side."

Jeff Palm, CIO of Minneapolis-based Allianz Life, a subsidiary of global insurer Allianz SE (Munich; US$129.9 billion in annual revenue), says there are some executives within his company who are more tech-savvy than others and who will describe the systems that they want right down to how they want the interface to look and which data elements they want included. But, he adds, he works within a system that facilitates development of solutions described by less technologically inclined peers as well.

"The business should say what they want, and we should say how to deliver it," Palm continues. "You need to try to put a policy in place that winnows business demand into technology strategy."

2. Overconfidence at the Outset of Projects

It's easy to sit at the budgeting table and think you have every contingency figured out in advance, says Bill Garvey, principal of Eastern Shore Consulting (Halifax, Nova Scotia). However, he warns that insurers should be mindful of bumps in the road that they've encountered in the past when preparing budget projections.

"When you are doing your budget, you are not thinking about past experiences," according to Garvey. "Quite often, the IT budget planning process itself is done with rose-colored, or budget-cutting, glasses and does not properly factor the realities of automation projects."

Blue Cross and Blue Shield of Florida (Jacksonville, Fla.) has tackled this problem by dividing up projects into short phases, each with their own individual budget process, according to VP and CTO Connie Pilot. With a shorter delivery time and a fuller view of the project, she notes, budgets don't have as much room to fluctuate. "We moved to phased projections so we have a better understanding of the work that is projected," Pilot explains. "Our experience over the last four years has been quite successful."

3. Scope Creep

Many of us can relate to this situation: You begin a household repair or cleaning project, and after peeling back the initial layer of what needs to be done, you find other unexpected problems as well. The same happens in IT, as projects can go from simple to complex very quickly as idiosyncrasies in systems are discovered or new business requirements come in after work has already begun.

"IT works in an imperfect world in terms of knowing what is going to be done over the next year," says Jim Strebler, senior management consultant for Dallas-based Robert E. Nolan. "When we first come up with the budget for a project, it can be plus or minus 30 percent [by the end]."

Eastern Shore's Garvey says companies with internal IT departments are more likely to want to change projects midstream. "The IT staff can be considered an unlimited workforce because it is not, usually, an external expense. The impression, 'They work here; let's keep giving them stuff,' creates expectations that might not be realistic," he relates. Meanwhile, companies with predominately outsourced IT are wary of getting bigger bills from their vendors.

To combat this, CIOs can't be shy about being perfectly clear about the budgetary and time ramifications of strategy shifts, Garvey adds. "Some CEOs respect the fact that IT work should be budgeted properly and be planned," Garvey says. "Organizations that inject a dose of discipline into these projects and their planning get more of them successfully accomplished."

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio

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