AS ROYAL & SUNALLIANCE USA RESTRUCTURES, IT ORGANIZATION FACES RESOURCE & STRATEGIC CHALLENGES

When London-based Royal & SunAlliance announced last fall a restructuring of its American operation, Royal & SunAlliance USA (R&SA USA, Charlotte, NC), it upended the latter's ambitious technology plans and forced some dextrous redirection of resources on the part of its CIO and his organization.

While R&SA USA has had its own difficulties, its restructuring is the result of problems across the global enterprise, according to David Nisbet, a London-based Merrill Lynch analyst. "The company is falling short of capital, and rather than ask its shareholders for new capital, it has decided to shrink the business to reduce the capital required to support the premium base," he says.

As a result, R&SA USA's three divisions—consumer, commercial and custom risk—have been consolidated to form two, business insurance and personal insurance. And the insurer has said it will exit other commercial businesses not aligned with its mainstream property and casualty focus. It announced it will sell its RSUI, Artis, affinity programs, financial services and REMi businesses, and will discontinue its world assurance business.

The decision also put the brakes on R&SA USA's technology plans. Last spring CIO Jim Williams had proposed a transformational alignment of technology with business involving a set of capabilities that the firm would need over the next three to five years. Working with the Chicago-based consulting firm DiamondCluster International, Williams developed a plan involving costs estimated at $80 million to $100 million. "When I presented this plan back in April of this year, I got approval to go forward with it, but the approval was based on our capital situation," Williams says. Because capital was short both at home and at the parent company, Williams recounts, the message to IT was, "you're going to have to find ways to redirect spend in IT to pay for this."

The solution was an operational improvement track, which RSA USA's technology organization began work on last summer. "We looked at everything from how we used consultants, to our outsourcing contracts, right down to server consolidations in the field," Williams relates.

But by the time the decision to restructure came down, Williams' transformational project had resulted in the implementation of only the first of six capabilities (which he declines to identify) planned to support the business going forward. But the operational improvement gains would prove an important leg-up on the work the restructuring would require, Williams claims.

As a result of the restructuring, R&SA USA will see a significant reduction in written premium, which is all the more significant because its IT department has tended to spend a higher percent of premium on IT than its competitors, according to Williams. The restructuring thus places a double strain on IT by requiring new work to be done while sapping sources of funding. "I have taken our IT spend down about four to five percent yearly," says Williams. "To do what I have to do to support this restructuring, I've got to take another 17 percent."

There's only so much more operational fat that can be cut. R&SA USA had taken advantage of market conditions over the past two years to renegotiate contracts with some of its most important infrastructure providers. Within that period the firm had, with the help of consulting firm Technology Partners, Inc. (Houston), "renegotiated our mainframe processing contract with ACS (Affiliate Computer Services, Dallas), who does our data center work for us, and outsourced all our desktop support to IBM," Williams says. Within a more recent time frame, contractual triggers have allowed the carrier to revisit its network contract. "With the business downturn we've experienced, we have not met volume projections, and therefore we're going to have to get around the table with AT&T (Basking Ridge, NJ) and say, 'What can we do about this?'" Williams adds. "So far they've been cooperative in working with us to get through that."

When all is said and done, however, infrastructure-related spending only makes up about 35 percent of R&SA USA's technology budget-the rest is labor, according to Williams. "That simply means we have to focus on our labor cost to do our part to support the restructuring," he says. "We have to cut staff, we have to reduce consulting spend to an absolute minimum and we have to reduce travel to a very small amount next year." All spending will take place under stricter governance going forward, and major projects will probably require a decision from the firm's US CEO, Williams adds.

Given the funding challenges and the demands of restructuring work, the IT organization will have a severely limited ability to respond to the needs of the business. "A lot of our focus will have to be on work related to the divestitures and runoff," Williams projects. "Given our legacy environment, particularly around back-end systems, divesting some of our businesses will require as much work from a systems perspective as if we were doing an M&A," he says. "So in the midst of the business refocusing, IT will not—at least in the short term—be able to do a lot for the business in terms of new initiatives or providing future capabilities."

As difficult a challenge as he and his team are facing, Williams stresses that the current austerity measures are temporary and being undertaken to ensure the firm's long-term success and profitability. "I'm absolutely confident that it won't be long till we're back," he says. "What we've done is postponed our strategic development, not canceled it."

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