Cash Crunch: Creating Savings Beyond The Spending Freeze

Insurers have slashed new technology investments, but IT is still being asked to further reduce costs. Here's how to create savings while continuing to provide value to the business.

During the current economic slump, insurance carriers have done the obvious cost-cutting measures-postponing IT project spending and trimming operational expenses by reducing staff.

While these practices are effective and are not news to anyone, they are limited in scope and impact. Whether insurance executives like it or not, budgets will have to open up again for new IT spending, since not doing so will put insurance carriers at risk by not taking advantage of the most recent technological advances. Also, other carriers will loosen the purse strings for new technology spending, putting at a strategic disadvantage those carriers that choose not to invest.

But to simply open up IT budgets to managers who have had their hands tied for most of the past two years, without new processes to evaluate spending, is akin to letting a classroom of preschoolers onto the playground for recess after a week spent indoors because of rainy weather. "CIOs and CTOs are beginning to say that the budget-holders have to take the shackles off in order for companies to remain competitive," says Tom Madison, general manager at Inforte (Chicago), a customer and demand management consultancy that focuses on helping companies improve customer interactions, revenue forecasting and profitability.

But setting IT leaders free without proper supervision is not the answer to cost-cutting problems. "There obviously has been a lot of cost cutting, but companies have to put processes in place to monitor costs," says Richard Siemers, director at new York-based Arc Partners, a business and technology solutions provider for the financial services industry. "After costs are cut and when spending is allowed again, usually someone goes out and starts accumulating other types of costs. Many times companies will cut certain costs and then acquire other costs, and in the end the senior managers are left asking, 'Where are the savings?'"

Rigorous Review

And it is those same senior managers who are now pushing IT to find new ways to quantify, evaluate and measure IT spending. "This trend is definitely coming from the senior executives," according to Inforte's Madison. "Middle managers really do not care about it. When you get a group into a room and start talking about having a stronger IT spending forecast, the CEO's and the CFO's eyes light up."

But although involving the CFO and CEO in the IT decision-making process may seem like an unnecessary burden, observes Frederic Veron, managing director, financial services group, at BearingPoint (New York), the IT economy of the past few years may make it easier than many technology leaders realize. "Business leaders understand more about IT concepts now than they ever have before," Veron says. "They understand the capabilities of technology and it helps when buy-in is required."

Still, getting buy-in is not a slam dunk. "Because much of the final approvals have gone back to the CFO for IT spending, there is a much more business-focused approach to IT," according to Mike Adler, partner in business consulting services, financial services practice, at IBM Global Services (Armonk, NY). "To really make sure that IT investments are getting a good rate of return, we see companies rigorously reviewing IT costs and future spending, in terms of both hard and soft costs."

In fact, most review cycles for IT are controlled by business leaders, Adler says. For instance at Employers Reinsurance Corp. (Overland Park, KS, more than $45 billion in assets), "the program review cycle is led by business leaders, not by IT," says Richard Agar, chief information officer. "We will not work on a project without a business leader sponsoring it. Putting in rigor, visibility and accountability for IT projects is the key for success."

Beyond Spending Freezes

While it is sometimes easy for senior managers to approve IT spending stoppages, insurance executives are doing much more to control IT costs and spending. One area that is currently a large focus is reducing the cost of maintaining existing systems-or, as some IT leaders say, "the cost of keeping the lights on." With estimates that insurance companies spend at least 55 percent of budgets on legacy systems maintenance, with some spending upwards of 80 percent, "legacy maintenance is the largest cost for insurers," says Anil Kumar, senior vice president at Satyam Computer Services Ltd. (US main office, Parsippany, NJ), an IT solutions provider. "The companies that manage legacy maintenance costs now will find themselves ahead of competitors in the future."

Currently, admit many CIOs, actually reducing IT maintenance expenses is a tall order since there are many restrictions on IT spending. "There is a cost associated with reducing maintenance costs," according to Michael Aubin, chief operating officer at Metaserver, a New Haven, CT-based business process integration (BPI) services provider. "The fixed cost of maintenance is the hardest thing to reduce, but if you can do that it drives a lot of cost out of the business."

For now, stopping hikes in maintenance spending will have to satisfy."Non-discretionary spending, or our baseline expenses, are not future-oriented," says Christine Modie, executive vice president and CIO at MassMutual (Springfield, MA, $220 billion in assets). "The programs that we have in place are aimed right now at keeping baseline spending flat. This is important because, as we grow and add capability, we do not want our costs to grow." Current baseline spending at MassMutual is 55 to 60 percent of the total IT budget.

To help achieve this goal, Modie began a plan at the beginning of 2002 called RITE, Redirecting IT Energy. "We looked to the IT organization for ideas on how we can increase productivity and reduce costs," she says. "We set a goal to come up with one idea per person," meaning MassMutual's staff totals about 1,800 ideas.

"I didn't want feasibility, I just wanted ideas," Modie continues. "We would worry about the feasibility later. We were looking at ideas that would help us pull cost out of the operations so we could focus spending on high-value areas and growth-oriented activities."

Home-Grown Ideas

Among the ideas offered by IT staffers was to eliminate multiple-redundant reviews of projects to save time and increase employee efficiency; streamline the policy- and bill-printing operation (resulting in annual savings of millions of dollars); and consolidating server farms. "By consolidating server farms, we reduced costs without reducing business capabilities," Modie says. "We freed-up some capacity that was dedicated to baseline activity and made it available to other areas."

Keeping baseline spending flat is also important for smaller companies that are looking to grow. RLI Insurance Co. (Peoria, IL, 2001 $512 million in premiums) expects to grow written premiums to close to $700 million this year. "When you grow at that pace, our expenses have to decrease or remain flat," says Piyush Singh, vice president, information technology. "We are trying to eliminate redundant work across the company. We have the philosophy that we can try to find smarter ways to spend money."

RLI makes sure it is spending money the right way with its newly formed project management office (PMO). "We have started to set up the PMO and all projects have to follow the project management methodology," Singh says. 'The PMO governs projects from start to finish and that is how we ensure ROI." Each project is reviewed down to the smallest detail and is monitored throughout development, giving senior executives a fairly accurate picture of the end result in advance, according to Singh.

"The key is better project management," continues Singh. "We have to bring the discipline that is found in engineering into our information technology area. And by working with the users, the users will understand the benefits" of IT initiatives. "This is a constant journey that will only expand as we get more comfortable with project management."

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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