THE EXPERTS: Resource Management
Q: What metrics are best for determining the success of technology investments? Which key performance indicators (KPIs) are the most valuable for insurance IT initiatives?
A: Chuck Johnston, Oracle: Technology investment KPIs should differ depending on an organization or division's stage in the business life cycle. Foundational investments in applications and infrastructure (e.g., new systems for new markets, wireless systems access for agents, etc.) tend to have performance- and date-driven KPIs. Once a system has reached an initial level of maturity, KPIs should shift focus to total cost of business process, including staffing levels, technology cost and operational risk mitigation. When technology and processes are fully mature, KPIs should shift focus to IT maintenance and support costs. It is critical to continually match IT investment KPIs with the business life cycle.
A: Frank Scavo, Computer Economics: Ultimately, IT investments should support the goals and objectives of the business, which are financial in nature. The best measure of financial success would be economic value add (EVA) because it considers the true return to shareholders - although it's not always easy to make the connection between a particular IT investment and its contribution to EVA.
A: Wendy Lauther, Verint Opus Solutions: Insurance technology investments typically are quite difficult to measure because the business environment is rarely static. That's why developing an effective baseline for measuring past and future performance is critical, and the most important metric to establish for the baseline is unit cost. It's calculated by summarizing the fully loaded cost for the team and dividing by the number of transactions. Unit cost is a simple, powerful metric that, if calculated properly, is beyond debate. When the goal of a technology implementation is reducing operational costs, the unit-cost metric accurately and unequivocally represents the impact of change.
A: Norbert Dick, IBM: IT initiatives ultimately need to impact a business value lever - a measure that affects shareholder value. Cost savings through automation are the easiest to measure, but the biggest returns are with more-business-oriented levers: Can your project improve retention rate, loss ratio or underwriting expense? Social science techniques such as control groups can help isolate the effects of a single project in a complex environment. Most important, don't get hung up on a finely detailed ROI case. Get a small pilot project going quickly and apply it to a limited, measurable population. If the results are good, extend; if they aren't, refine.
Q: How do carriers determine IT resource deployment? How have these processes changed in recent years?
A: Johnston, Oracle: Most carriers - after allocating a large portion of their IT resources to infrastructure management, legacy application maintenance and regulatory must-haves - still resort to a laundry list of enterprise initiatives prioritized by business leadership to support strategic business objectives (with input from IT). The list often is influenced by a rigorous business case process that generally is flawed by a lack of realistic ROI data. Recently, there has been a shift away from pure ROI-driven analysis to a more realistic, venture-capital, portfolio approach that takes into account risk/reward scenarios as well as pure ROI.
A: Lauther, Verint Opus Solutions: Deploying IT resources is a balancing act between the demands of the business and the cost of deployment. Deployment decision making has changed in recent years based on the shift to a strict "needs of the business" assessment. This new approach creates a more nimble organization versus one tied down by IT procedures that distracts from generating results.
The most-effective method for measuring the success of IT deployments is tying all outcomes back to a unit-cost measurement. This approach allows the organization to consistently measure the impact of improvements through volume reductions and average processing time improvements. The biggest advantage of this approach is that it forces an organization to think in terms of business impact. Everyone in the organization can relate to dollars and cents, so this method drives good decision making. The key to effective execution is ensuring that an organization has a simple method for counting transactions that reflects the total cost.
A: Dick, IBM: We've seen a definite shift toward shorter-term measurements as insurers move away from enterprisewide, multiyear efforts toward shorter, lower-risk, easier-to-measure projects. The line-of-business executives driving IT decision making also are shifting from cost reduction to revenue growth as insurers reap the benefits of recent emphasis on underwriting discipline. Business flexibility measures - speed-to-market, pricing precision, shifting of fixed costs to variable - will become increasingly important to LOB executives in the coming years.
Q: What tools and processes can help insurers manage IT deployments and performance? What are the success factors of using these techniques?
A: Scavo, Computer Economics: One tool in which we see interest growing is the use of the IT Infrastructure Library (ITIL) as a framework for better managing day-to-day IT operations. Although ITIL is fairly new in the U.S., it has long been popular in Europe and especially the U.K. It represents best practices that large mainframe organizations (of which many are in the insurance sector) have been following for years. The major benefit of ITIL is that it provides a common language and framework for understanding these best practices. The downside, however, is that some companies think all they need to do is to send people for two or three weeks of ITIL training. In reality, each best practice in ITIL needs to be tailored specifically for the organization, and that can take much work. So, IT organizations need to prioritize their efforts to the areas where improvement will do the most good.
A: Dick, IBM: Some insurers spend a lot for very little return, while others lead their industry in IT spend but also lead in shareholder return. The critical differentiators: percent of spend on maintenance versus new capabilities, and alignment of spend with business strategy. Improving IT performance requires three organizational skills: 1) Identify which segments of the insurance value chain are differentiators for your company; 2) Align IT investment toward building market-leading capabilities in those segments; and 3) Control IT costs in other segments through standardization, automation and/or outsourcing.
Q: What challenges do insurers face in implementing IT metrics/benchmarks?
A: Johnston, Oracle: IT departments face two major challenges in deploying realistic IT metrics and KPIs. First, until insurance business operational metrics become accurate and transparent, IT has no accurate ruler to measure the true business impact of technology and is doomed to measure itself against cost metrics without accurate value metrics. Second, IT has traditionally been a means of corporate cost transfer, enabling one line of business to subsidize the expenses of another through cost reallocation. Many of the previous years' financial benchmarks must be reevaluated to show true year-over-year improvement.
A: Scavo, Computer Economics: Benchmarking can only point out where an IT organization's performance is different than the industry norm. The hard part is understanding why performance is different. For example, one IT group may be spending more in network administration than the industry average. But is that because the IT group is inefficient, or are there more-sophisticated network requirements?
A: Lauther, Verint Opus Solutions: Complexity is the greatest challenge to implementing IT benchmarks effectively. If an organization has too many initiatives under way at any given time, it will have a difficult time relating changes back to the impact on unit cost. The best way to combat complexity is a solid methodology for measuring unit cost. The stronger the foundation of operational metrics, the more effective the measurement of the impact on IT will be. This allows the entire organization to measure success in the same way.
THE EXPERTS: Resource Management
Verint Opus Solutions (Hinsdale, Ill.)
Computer Economics (Irvine, Calif.)
Senior Director, Insurance Industry Strategy & Marketing
Oracle (Redwood Shores, Calif.)
General Manager, Global Insurance Industry
IBM (Armonk, N.Y.)
Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio