Taking the Guesswork Out of Calculating Technology ROI

With economists hinting that the economy is heading towards a recession, insurance company executives are taking an even closer look at budgets and IT investments-searching for any fat that can be cut. Editor's Note: This article was completed just before the attacks on the World Trade Center and the Pentagon.

Now more than ever, executives are being asked to quantify the value of different IT operations to the high-level brass-something that was done with a little more leeway when economic times were good. Many times, technology leaders are being asked to provide financial details about the value of an IT project or, more specifically, what the return on investment (ROI) will be for the many IT initiatives that the insurer has under way.

"As IT budgets become tighter, it becomes even more important to deploy resources to the projects with the best ROI," says Cecilia Claudio, senior vice president and CIO at Los Angeles-based Farmers Group ($12.8 billion in assets). "One of the by-products of the economic slowdown is the entire business is becoming much more engaged with IT to understand technology specifics and benefits."

In fact, many companies have always done IT ROI analysis, but lately have been more stringent. "ROI is not something new," says Jean Delaney Nelson, vice president of information systems, Minnesota Life (St. Paul, $21.2 billion in assets). "Even when the good times were rolling we were doing ROI analysis, but the criteria are shorter. Many of our projects now have a ROI in three years or less."

Richard Agar, global CIO for Overland Park, KS-based Employers Reinsurance Corp., a GE company (ERC, $8 billion in net premium), concurs. "If you look at the business leadership from four years ago, they were looking at a longer time frame for return on investment," Agar says. "Today, we are looking for an 18-month payback. We are doing a lot of smaller projects, rather than one large project."

Hard To Calculate

Unfortunately, just as ROI has become more important for planning, it has also become much harder to calculate. Since projects such as data warehousing, systems integration and e-commerce usually involve many systems and small projects encompassing both new and old systems, determining the actual ROI for an operation is sometimes difficult.

"Sometimes ROI is very hard to measure," says Peter Van Dyk, vice president and CIO of Fargo, ND-based Clarica Life Insurance, a subsidiary of Clarica Insurance (Waterloo, ON, $46 billion Canadian in assets). "It is especially hard when changes are made to the project's goals," or when measuring ROI requires evaluating a number of different projects.

One reason why ROI is hard to determine for IT projects, says Chuck Johnston, vice president and director, insurance information strategies, MetaGroup (Hartford), is technology is rarely stand-alone. "Most technology enhances other existing application and gets 'smushed' into existing projects," Johnston says. "E-business, CRM, and becoming a customer-centric organization are the things that companies are focusing on. Measuring that is difficult."

And when projects involve new technologies, such as the Internet, evaluating technology ROI becomes very difficult. "We do not have a long history on the Web," says Jack Ross, president of Northbrook, IL-based Hubbard Ross, LLC, an IT metrics consulting company. "If you don't have the history, it is difficult to get metrics. Many companies are flying blind when it comes to making investments in the new economy. More than ever it is fundamentally important to evaluate technology ROI."

Clarica's Van Dyk agrees. "It is a very difficult to assess the impact that an IT application will have on ROI," he says. "Putting dollar figures around an Internet project is like pulling numbers out of the air."

Evaluating the Internet for value is difficult, says Dr. Howard A. Rubin, executive vice president of research at MetaGroup. "You have to evaluate the Internet very carefully because there are so many reasons why companies are on the Web," Rubin says. "Companies get on the Internet to enhance profits, reduce costs, face the customer-many things."

With the complexities of technology ROI facing insurance companies, some firms are doing more than others to evaluate technology payback. "There is a big difference between hoping for ROI and actually understanding and planning for ROI," says Bill Pieroni, general manager for Armonk, NY-based IBM's Global Insurance Industry. "Many companies are launching projects and hoping a return will materialize."

While the scope of technology ROI is growing, the methods of evaluating technology are becoming more scientific. Until recently, companies used "guess-timates" for evaluating technology, especially when it came to hot trends such as CRM and the Internet. "CRM is valuable, but it really isn't looked at in the most disciplined way," Pieroni adds. "If insurers don't understand 'customer lifetime value,' they can't link 'customer lifetime value' to IT expenditures. If they can't do that, they don't understand the value of CRM.

"Many companies think they absolutely have to 'do CRM' because their competitors are doing it," Pieroni adds. "When a company takes that approach, it is hoping for value from CRM, not planning for it."

In order to properly plan for technology ROI, insurance companies must "get back to basics," says Steve Landberg, director, insurance group at Miami-based Answerthink, a provider of technology-enabled business transformation solutions. "There are tried- and-true methods for evaluating ROI," Landberg says. "Companies have to get back to using, and sticking to, core business plans."

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

1 of 2