Cash Crunch: Creating Savings Beyond The Spending Freeze
Managing Culture Shock
Getting managers and staffers to think in terms of ROI and project management methodologies every time they approach an initiative does not happen overnight. ""One of the biggest things we have done is create an IT organization that runs itself like a business and focuses on business support,"" says Rick Omartian, second vice president, IT CFO, and chief of staff at Guardian Life Insurance (New York, $32 billion in assets). ""The PMO puts structure around how we manage projects so that everyone uses tools in the same way. The PMO is a cultural challenge and without the senior management behind it, you can't make it happen.""
At Guardian, support comes from the company's CEO and other senior managers. Essentially, Omartian says, project management methodologies appear to staff members as tracking mechanisms that follow their day-to-day activities-not something that people welcome. ""The project management methodologies will make people's jobs easier over time. We have to educate everyone about that,"" Omartian acknowledges.
So far, the PMO at Guardian has helped to reduce IT costs dramatically. ""The IT costs at Guardian at the end of 2000 were $151 million and the budget for 2003 is $116 million,"" Omartian says. ""Clearly, the way we are managing our projects is part of the reduction in expense."" Guardian is using project management technology from Primavera (Bala Cynwyd, PA).
The Challenge of TCO
MassMutual's Modie also says that shifting the mindsets in the IT organization is a challenge. ""We are focusing on total cost of ownership,"" or TCO, she says. ""We use TCO for everything, including maintenance, production and smaller projects. It was easy to convince senior management about the value of TCO because we know we need the information over the long term to make decisions.
""But at first, other people felt that TCO was just another level of bureaucracy,"" Modie adds. ""But once people realize there is value, people quickly jump on board. Since the economic climate has changed, people are naturally more expense-conscious.""
Companies are also managing costs by changing the composition and the focus of the IT organization. While some companies are trimming costs by leveraging the services of outsourcing providers-which are providing development, maintenance and sometimes customer service at a fixed cost-other companies have found it beneficial to bring some previously outsourced operations in house. In short, there is no one answer to the outsourcing-insourcing question, because every company has unique needs.
""Some insurance companies are definitely bringing things in house,"" says Aubin from Metaserver. ""They are cutting contractors and they are putting more stress on the internal staff. As a result, some projects are getting pushed back.""
With a focus by many carriers on insourcing development work, vendors are finding themselves competing against internal IT staffs, as well as other external applications providers. ""Companies seem more likely to use internal resources for projects, so now we are also battling internal departments for business,"" says Inforte's Madison.
MassMutual, although it does do limited outsourcing, does not view it as core to its strategy, says Modie. ""We do outsource some data processing and maintenance activities, but it is not widespread,"" she says. ""One good benefit of outsourcing is it frees up our knowledge workers so they can be involved in more strategic activities."" IT developers prefer to be ""developing"" new systems rather than ""maintaining"" older systems, she adds.
In fact, Judy Johnson, vice president of insurance strategy at Sapiens International Corp. (London), says she has seen a move to insourcing. ""Over the last 12 to 18 months, I have seen more movement to internal development than I have seen in a number of years,"" she says. ""IT leaders are cutting consulting costs and they also are not happy with products that are available in the marketplace.""
Guardian plans to significantly reduce the number of consultants that it works with, according to Omartian. ""We have about 200 consultants, but 160 of those are with our offshore partners,"" he says. ""We are in the process of reducing the number of consultants we have on Guardian's staff from 40 to approximately 20 or 25.""
But at the same time, Guardian is also increasing its use of offshore service providers. ""There was a lot of hesitancy in Guardian to do this, because it had never been done before at this company,"" Omartian says. ""It was seen as very risky to move technology resources offshore."" But Dennis Callahan, Guardian's CIO, is a big proponent of outsourcing, Omartian says.
""The biggest thing with outsourcing is communications and management of the partners,"" he adds. ""It took us one year to get the contracts in place and we set them up so that at certain points we can buy the outsourced business back if we want to. That is key.""
Getting Realistic About Outsourcing
However, as many pioneers in the offshore world found out, the perception that offshoring IT work will save the company lots of cash is not always the case.
""Many companies view offshore outsourcing only as a cost saver,"" says Andrew Mayer, managing director at Arc Partners. ""Any time a company does something solely for cost savings, it does not usually work. Unless a company is in real financial distress, they do not outsource just for finances. The driver is not cost, it is strategic.""
ERC's Agar agrees. ""I do not see outsourcing as a cost play,"" he says. ""It helps you reallocate resources in the right ways to better invest in development and maintenance. We do outsourcing of application development.""
Satyam's Kumar says that any outsourcing arrangement-whether it is IT outsourcing or business process outsourcing-must be reviewed with the same methodologies that companies use to evaluate internal projects to ensure ROI. ""The outsourcing market is exploding, both for IT outsourcing and business process outsourcing,"" according to Kumar. ""But ROI is very important and insurance companies are definitely looking for it.
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Managing Costs with Six Sigma
General Electric (GE) has long been known to be a devout follower of the Six Sigma doctrine, and its reinsurance operation, Employers Reinsurance Corp., is no different.
""We leverage Six Sigma for cost management,"" says Richard Agar, chief information officer, ERC. ""We have a 'tollgate' review process where we review ongoing projects at given intervals.""
Agar says the Six Sigma methodology, which is known more for maintaining quality in manufacturing, also works for IT development. ""For IT development, we are asking for a deliverable-based service,"" he says. ""We see it as process management, and we are trying to manage the information technology development process as a manufacturing plant would.
""Six Sigma is a concept we are driving into the IT company,"" Agar says about the culture change that is happening at ERC. ""We have been on the Six Sigma journey for a year and we have managed larger projects with it. We have put 120 people through Sigma training. Those people have seeded the organization with the toolset and it is pretty successful.""
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State Farm Insources IT Maintenance
Servicing and repairing computers, laptops, PDAs and related equipment for more than 16,000 agents and 79,000 employees sounds like a ""no-brainer"" outsourcing deal for an insurance company. However, one company estimates it saves more than $40 million a year by insourcing it to a unit with only 70 employees.
State Farm Insurance Companies (Bloomington, IL) found that the only way it could ensure a high level of customer service was to do the job itself. In 1988, State Farm formed the Electronics Support Unit (ESU) to support agents and their terminals. ""Back then we were mainly dealing with terminals,"" says Steve Malinowski, superintendent, ESU. ""State Farm was looking for a way to reduce the equipment service expense and turnaround time.
""With vendors, we found there was considerable turnaround time-especially with products under warranty--and that disrupted the business,"" Malinowski adds. ""We do not want to burden the business partners, so they can focus on giving service to policyholders.""
The ESU's Advanced Exchange program aims to replace an employee's or agent's defective computer with a working, identically configured model by the next workday. ""We service about 75 units a day, 1,800 a month,"" he says. ""If we receive a work order by 5:30 p.m., we will have a same or identically configured computer back to them the next day.""
State Farm's $40 million savings estimate, when compared to what other vendors will charge for equal services, is continually evaluated, according to Malinowski. ""If a vendor can do an equal job at less cost, we give them the contract for the particular piece of equipment,"" he says.
The ESU also helps State Farm evaluate equipment before it is bought, helping to weed out technology that may be too costly to maintain. ""We evaluate equipment and can tell the users what the total cost of ownership will be over the lifetime of the equipment,"" Malinowski says.
State Farm's ESU bases its quality standards off of the ISO 9000 Quality System, and technicians are CompTIA (Computing Technology Industry Association, Oakbrook Terrace, IL) A+ certified so the ESU can easily compare its services against an industry benchmark, according to Malinowski.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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