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Mastering Money Management

Tracking ROI is no longer an elusive goal, as insurers adopt measures and metrics for maximizing return on IT investments.

Good Governance

Leaving less to hazard is a fundamental step in ensuring fewer initiatives go awry. Companies with a strong IT governance structure are not only likely to avoid screw-ups but are likely to reap important efficiency benefits.

Having decided to place a major emphasis on technology, Selective Insurance (Branchville, NJ, $2.7 billion in assets) instituted an enterprise program management office (EPMO) overseen by a vice president of project management to drive all major business initiatives with a technology component. According to Richard Connell, Selective's CIO, the EPMO is chaired by the firm's CEO, Greg Murphy, and reviews all prospective projects, organized into three tiers. Projects valued at $250,000 or greater go through a ""full-blown"" business case procedure; those $50,000 to $250,000 get a ""mini-business-case"" treatment, getting reviewed on the ""same fundamentals but with less detail required in terms of all the moving parts."" Projects worth less than $50,000 are subjected to a cost/benefit analysis outside the IT/business EPMO nexus.

For projects in the top two tiers, ""there's a standard ROI calculation done where we look for three points better than our cost of capital,"" Connell says. ""For infrastructure, long-term kinds of projects we'll allow a longer payback. For things shorter-term in nature, the payback comes in a shorter time frame."" In fact, Connell adds, the process is executed by the same person. ""In that way we ensure consistency in terms of the ROI calculations.""

Business cases are structured through standard project initiation documents that cover definition of the problem to be solved, benefits and measurement criteria, possible alternatives, risks and risk-negation strategies, and a cost benefit statement, according to Connell. Standardization means ""you don't have to relearn it or reinvent it every time,"" he says. ""And the fact that you're running through the same, consistent process every time means that the executive team can do it faster.""

Standardization also fosters learning from successes and failures, according to Connell. ""Once a project is approved, one of the first steps is to look at lessons learned. Those'pluses and minuses' from prior projects are gathered from post-implementation reviews and populated by the EPMO in a database,"" he says.

As valuable as governance and procedures are, Selective also has taken aggressive action to ensure that the people executing the procedures are better trained. ""It's one thing to set up an EMPO, bring in someone to run it and get support from the top, but you also need to have managers throughout the business, both in IT and the business units, trained to do all of this,"" Connell continues.

Gaining the Necessary Skills

Accordingly, Selective Insurance has set up a training cycle to put people with project management duties through a certification program with an ESI International (Arlington, VA) curriculum. Groups of 24 are circulated through the seven-course series, lasting about 18 months. Selective is also running about 200 employees through a two-day ""project management-lite"" class conducted by a consultant, according to Connell.

""It gets us a step down the road in developing a core competency around project management—and if you have competent project managers managing projects successfully, you get the ROI that's in that business case,"" Connell adds. ""If you don't, a project management failure or two will not only waste a lot of time and money as the project fails, but you're not going to get that ROI,"" according to Connell.

Managing external resources is another important discipline in the pursuit of ROI. Outsourcing offers a clear opportunity for many firms, but all too often they fail to maximize their return by not coordinating efforts, according to Kimberly Harris, senior research analyst, Gartner (Stamford, CT). The majority of insurance firms are ""outsourcing based on what I call 'institutional constraints'—it's a lack of resources, it's the limited skill sets of the resources they have,"" she says. ""It's really more those tactical considerations. One of the least important factors is the strategic direction of the company.""

Companies should coordinate outsourcing initiatives across their enterprises and avoid having independent tactical outsourcing agreements based on institutional constraints. ""What you want to do is create a corporate outsourcing vision and strategy that will dictate how to view and proceed with different outsourcing agreements across the company,"" Harris advises. ""That way you're sharing common knowledge and skill sets and you'll get a greater return on investment because the impact will be greater.""


ROI/Project Pitfalls

Mutual of Omaha's Mike Lechtenberger shares his top five reasons why executives can go wrong in calculating ROI:

1. Weak IT/business partnership—IT and business must partner to ensure the right solution.

2. The business case is too high-level—Variables and assumptions might not be correct.

3. Lack of true understanding of risks—Scenario analysis can help identify the critical, sensitive variables.

4. Lack of meaningful data—Accurate operational metrics are needed to develop an operational cost model.

5. Forgetting to include downstream costs—All project and operating expenses must be accounted for.


ROI Robot

If project approval processes are largely sets of threshold criteria, why not build them into an automated process?

Keene, NH-based Main Street America Group (MSA Group, net written premiums of $442 million) has done just that. ""It involves asking the business user to submit answers to questions about the impact of the project,"" to an intranet application running a calculation engine, says Joel Gelb, MSA Group's CIO. All submitted projects are then prioritized according to a numerical score, Gelb adds.

Some projects—such as major infrastructure undertakings—are not likely to originate with business users, but, ""basically, if your project is not in this system, you're not going to get it done,"" Gelb says.

""If you're not happy with the priority assigned to your project, you can appeal to what we call the Change Control Board,"" a body paneled by senior executives, Gelb adds.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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