Insurers Can’t Live on ROI Alone

With insurance companies trimming down and cutting fat from all portions of their operations, chief information officers have been pounded at every turn with demands from the business to demonstrate strong return on investment for all IT projects. But while ROI is important, an even better measurement of an IT project's value may be one that measures the up-front and ongoing costs associated with a project, rather than just measuring ROI on the back-end.

Increasingly, insurance IT leaders are turning to total cost of ownership (TCO) models to determine the real cost of IT projects. However, depending on the organization, TCO definitions vary. "Total cost of ownership isn't a strong or formalized discipline," such as Six Sigma, says Willard Woods, vice president, financial services consulting group, Cap Gemini Ernst & Young (CGE&Y, New York). "So each company has gone out and developed their own method of measuring it."

Most commonly, according to Jim Gahagan, vice president, financial services industry strategy, PeopleSoft (Pleasanton, CA), TCO is the measurement of costs for a specific application or project, including initial purchase or licensing price, ongoing support costs, maintenance, staffing, hardware, software and costs to the user. In most cases, TCO is measured over a number of years, rather than a shorter period of time. For instance, a TCO analysis may find that although an application may have a greater up-front cost (purchase price) than other options, the ongoing (maintenance and support) costs would be less than for an application that may have a low up-front cost (but higher support costs), resulting in a better TCO over time.

TCO Opens Doors

"TCO provides great value to companies that do it well," Gahagan adds. "Total cost of ownership opens a door for a CIO to look inside a project. The CIO can see everything: what it takes to build the project and what it will take to keep it running."

However, measuring costs prior to implementation is not generally a strong discipline in the insurance industry, according to Ric Young, chief marketing officer, Adminserver (Malvern, PA). "Banks can tell you what an ATM transaction costs and securities companies can tell you what a trade costs," Young says. "Insurance companies have never measured costs precisely, but now they are being asked to measure and they don't know how. It is very hard to measure TCO if you don't know how tomeasure any of your business costs. For the first time, insurance companies are being asked to measure all of their costs because their investment portfolios are not doing well.

"And even if they figure out how to measure costs, they have nothing to benchmark it off of," Young adds, because the industry traditionally has never benchmarked most of its operational costs.

Despite having difficulty with measuring certain costs, insurance companies are beginning to focus more on TCO, as senior executives focus on every expenditure. "In general, there is not a lot of TCO measurement in the insurance industry," mainly because the metric is hard to calculate and has many variables, says CGE&Y's Woods. "But lately, we have been seeing much more of a scrutiny on TCO."

Blue Cross Blue Shield of Vermont (BCBSVT, Berlin, VT, 180,000 insureds) only recently started to measure the total cost of ownership on projects, says Walter Merrow, chief operating officer. "Our projects used to be consistently late and over budget," Merrow says, before BCBSVT began working with Keane, Inc. (Boston). In 2001, Keane helped the health insurer develop a project management office to better manage IT projects.

Adds BCBSVT's president and chief executive officer, William Milnes Jr., "Our staff of approximately 50 people knew information technology and health insurance, but we did not know project management. We could run a small project, estimate the cost and get it right," he says. "But when we had to run larger projects, we couldn't manage it and the costs were always more than we expected."

Now, BCBSVT has developed its own methodology, called the Corporate Project Management Policy Manual (CPMPM), and is beginning to measure TCO on projects, says Merrow, adding that the TCO measurements are new and are part of the company's new dedication to its CPMPM. "We picked reasonable projects and demonstrated that with the project model, we were able to accurately estimate costs and have the project come in on time," he says. "That went a long way to gaining acceptance for CPMPM in the organization," he adds.

TCO Not a Hurdle

Gaining acceptance in the organization did take a while, reflects Merrow. "Before the end of this year, we will be using the methodology to reinvent project management processes throughout the organization," he says. "When we first started, everyone complained that they never got anything done. Now they realize that it brings a clearer focus on what we have to do, what it will cost and on getting things done right the first time."

In fact, the largest impediment to TCO is not developing the methodology, points out Christine Modie, executive vice president and chief information officer at MassMutual (Springfield, MA., $220 billion in assets). "It was getting the mindset to shift to a different accountability structure and a different way to measure" projects. "Every cost is included in the total cost of ownership equation. In the past we were just concerned with development," she says, citing numerous projects including Siebel, SAP and e-business initiatives that began shortly after Y2K. Unfortunately, ongoing expenses and upkeep for those projects were not measured and are still being paid for today, Modie adds.

Like BCBSVT, MassMutual has also developed a formalized process for project management and TCO, according to Modie. "The TCO for each project is a living document," she says. "We first pull it together for cost, time and scope, but we realize that is a high-level estimate. As we go forward through design and if anything changes," such as technology or the business climate, "we take the project back to the decision makers and adjust it accordingly."

Every project, no matter how small, Modie says, goes through a TCO evaluation, and most have been successful. "I can think of four projects out of 20 that have not passed the TCO" review, she says. Of the four projects, three were postponed for further review and the fourth, after review, was implemented, she says.

TCO & ROI: Perfect Together

However, TCO is not an end-all. Other metrics are required, including the frequently discussed ROI measurement. "Companies are looking for predictable costs, and with that come predictable returns," says PeopleSoft's Gahagan. "ROI is the other side of the TCO equation."

CGE&Y's Woods agrees. "Total cost of ownership focuses on the net outlay" of cash, he says. "ROI is the important metric that tells you what that net outlay will bring you. You can't do TCO or ROI. You need both."

And evaluating both total cost of ownership and return on investment puts IT leaders in a much stronger position than if they just measured one or the other, Wood argues. "For IT professionals in an insurance organization, coming to the table with the business partners with a solution that has TCO and ROI equated gives IT much greater credibility," he says.

For BCBSVT, its project management and TCO processes are helping the company and its IT project move more strategically. "Over the years, we got into the position where we were reacting to market changes instead of planning," says Merrow. "But now that we can better plan activities and costs, we can be more proactive, rather than reactive."

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