Optimize IT Investments in 2003

By: James K. Watson, Jr., Geoff Blanco, and Linda Andrews, Doculabs

For many insurance organizations, the 1990s were a time of unchecked technology spending. The land-grab for pursuing Web-based business, along with largely decentralized IT operations, meant that many companies spent a lot of money on new technology for point solutions—without focusing on the organization as a whole.

Most insurance organizations are now moving to centralize their IT operations to get a better handle on the technology spending and reduce the number of redundant products deployed to solve similar business problems. Moreover, cost-cutting pressures are motivating many organizations to seek ways to consolidate or reduce the number of systems they maintain. But IT organizations still need to react—or, better yet, be proactive—to dynamic business changes. In fact, in the highly competitive insurance industry, the need to be innovative and get products to market faster has never been more intense, as new federal regulations both open the door of opportunity and increase competition in one fell swoop.

Moving into 2003, many of Doculabs' insurance clients are committing resources to getting their IT shops in order and optimizing the systems and resources in which they've already invested. The process can be both resource-intensive and time-consuming, but the payoffs can be huge. Many companies have at least one system that will never achieve critical mass to become an enterprise standard, or one for which support costs have become astronomical. In either case, the sooner you shift investment away from such systems, the more likely you'll be able to control their costs in the future.

Buy/Hold/Sell

We recommend that insurance organizations conduct a detailed "buy/ hold/sell" analysis of their existing systems. Not unlike a financial investment approach, a buy/hold/sell allows you to assess your current holdings, with the ultimate goal of streamlining and focusing IT operations. Paradoxically, this type of technology reduction effort bears a strong resemblance to the technology acquisition efforts of the 1990s, with requirements—gathering exercises and vendor assessments as core components of the analysis—but this time the goal is to get rid of applications, rather than acquire them.

Determining where the available IT dollars should be spent requires taking an objective look at existing investments. Doculabs recommends an optimization strategy that takes a buy/hold/sell position on technology, in the context of its value to the business. Such a strategy will:

-- Provide opportunities for investment in just those applications you identify as high-yield.

-- Create a roadmap for managing the lifecycle of technology implementation, from acquisition to retirement.

-- Reduce the cost of managing ineffective systems.

-- Increase leverage with existing providers for lower licensing and maintenance fees.

Developing a buy/hold/sell strategy provides a process for evaluating the business value, over time, of technology investments. It differs from a cost/benefit analysis (CBA) in that a CBA looks at investments in isolation, not in comparison to other investment alternatives. The same is true of ROI hurdle rates.

Practice What You Preach

For example, consider an insurance company call center, using antiquated customer service software and predictive dialing technology. The company could cut costs and improve service levels or contact rates by acquiring newertechnology-an initiative that would score high in a CBA. However, factors such as limited internal resources, current economic conditions, merger-and-acquisition activity, and reorganizations all serve to show why a CBA should not be the sole means of determining whether net new investments (buy), maintenance of existing investments (hold), or retiring of some investments (sell) is the best course of action for an organization looking to do more with what it already has.

The fact is, neither a CBA nor an ROI analysis effectively addresses an environment in which investment resources are scarce, and management is trying to preserve capital for other purposes. What's needed is a method of identifying the systems that deliver apparent productivity gains or generate sustainable revenue—the better to channel the money you do have into just those systems.

Four-Step Plan

No optimization initiative will be effective unless you follow a clear process. There are four basic steps insurance executives need to consider while building their firms' strategy:

1. Inventory your applications. First, make an accurate inventory of every system in use and its associated sub-components. Also include its adoption, perhaps by the number of seats in use (which may differ considerably from a count of the number of licenses purchased). Finally, assess the level of activity for each system and user, perhaps in time or transactions. The idea is to map out levels of usage across existing applications. What many organizations find during this inventory is that as much as 80 percent of their activities run on only 20 percent of the applications—but with cost spread evenly, across all applications. It's the familiar bell-curve, as shown in the figure to the right.

2. Analyze your applications in a number of different contexts, and give them each a score. The next step is to rate or rank each system across a number of different criteria, such as cost (development, maintenance), effect on revenue, or impact on productivity. Certain systems may be in place to serve some competitive differentiators, so try to assess a system's strategic value above and beyond cost, revenue, and productivity, if appropriate. A simple scorecard or matrix is the result of this step.

3. Compare the results of your analysis to your long-range IT strategy. Most companies have a long-range strategic plan that provides visibility into a firm's desired state. Take your scorecard and use it to divide your applications into three groups: those critical to the long-range strategy, those less important, and those that do not affect your vision. Force yourself to "bucket" your systems into three groups of approximately the same size. This exercise alone will shed enormous light on the strategic relevance of each application.

The resulting groups are those that your organization wants to "buy" (invest more money in), those that you will "hold" (maintain but limit further investment in), and those you want to "sell" (minimize or eliminate continued investment). Of course, you may need to move some systems from one group to another, resulting in an imbalance, but ideally, the fewer "buy" applications, the more focused you will be.

4. Build your transition plan. Based on the comparative analysis, build a detailed transition plan for each system. This step is critical—and it's also the point in the process where political landmines abound, as armies of IT staff perceive their future livelihoods tied to the ongoing success of particular systems. Obstacle upon obstacle will present itself, offering justification as to why a system cannot be expired. Our advice: Get an independent, objective third party involved if things get hot or progress bogs down. And counsel IT staff that the intention is to focus technology spending on high-priority investments, and that becoming associated with the effort, while potentially requiring a skills refresh, offers a far more stable future and could be quite interesting from a development perspective.

Overcoming Challenges

Aside from the perennial need to make business run more efficiently, there are significant pressures and influences, both external and internal, that can affect buy/hold/sell decisions. Executive management must look at the business objectively, making sure to be wary of influences such as:

- Vendors pushing upgrades or new products. Their motivations may conflict with their clients' best interests. Ask them to project estimated timelines for their products to reach end-of-life, and hold them to their commitment. A system that becomes antiquated because a vendor chooses not to release upgrades is very different from a system that is no longer meeting its intended purpose.

- Overcoming the fact that it can be just as difficult to get technology out of the organization as it is to get technology into the organization. Many stakeholders need to see a transition plan if they're to be supportive.

- Finding the time, resources and expertise to do it right. In many cases, answering the question, "What happens if this system doesn't meet our expected adoption goals?" can provide the impetus for designing the mechanism to transition a product out of your enterprise.

The fact is that most Fortune 1000 companies, insurance among them, went overboard buying technology in the late 1990s, largely in response to the next big wave of doing business. This doesn't mean that every investment was a poor one, or that every implementation failed, with no success stories to show for it. However, all too many of our clients tell us, "We have one of everything in this company"—a statement that reflects upon the reactionary point solutions deemed necessary at the time to drive customer acquisition or protect bases that you had.

With the change in times, however, we believe that insurance companies that adopt a buy/hold/sell strategy in assessing current technology investments, building the process into new technology acquisitions and managing to it during the technology's lifecycle, are the ones that will take on a leadership position in the industry. The simple fact is that buy/hold/sell is a focusing strategy—one that helps ensure that IT dollars are invested wisely and predictably over time, in those areas that are best for the business.

James K. Watson, Jr., is president, Geoff Blanco is vice president of sales and marketing, and Linda Andrews is a senior editor with Doculabs (www.doculabs.com), a Chicago-based research and consulting firm that helps organizations plan for, select, and optimize technology for their business strategies.