Call to focus: insurers focus on core insurance improvement to operate effectively and become attractive acquisition targets.

Due to competitive pressures and the lackluster economic climate of recent years, insurers have suppressed overall spending on technology. According to recent estimates, spending in the insurance industry declined by 1% in 2003 (based on more than 50% of global insurance information technology budgets). Though the equities market and capital base of many insurers have improved in the past year, growth in insurance IT spending is expected to languish at an annualized 2% to 3% for the next several years compared with the double digit growth of the 1990s.

Under such tight IT budgets, nondiscretionary spending has overshadowed discretionary investment. Insurers have focused on maintenance of legacy core insurance systems and limited their investments to renew the front office to support distribution. In 2004, insurers are estimated to spend more than 50% of all insurance IT spending globally on core applications and 15% on distribution services. Unfortunately, insurers have largely allocated core insurance spending for maintenance, not for enhancement. Moreover, insurers are doing little to shift the limited discretionary spending toward improving core insurance capabilities.

Such continued investment patterns are unsustainable to support improved business and IT alignment and to develop a unique, sustainable advantage. Insurance operations with improved front-office distribution but inflexible, complex legacy core systems are unable to support diverse products and functions. Without investment to improve core insurance systems, many insurers will be unable to operate effectively as a business or even be attractive as acquisition targets.

Most insurers recognize the need to improve their core systems, but face several complicating factors. First, it's difficult to gain executive sponsorship or develop a business case to justify the high cost and risk of a custom build. Second, there are few viable third-party solutions. Finally, implementation is risky, difficult to adapt and impacts time-to-market and competitive advantage.

Though these challenges are significant, select insurers are taking initial steps on a value-driven, holistic, long-term approach. Before an insurer evaluates a core insurance transformation, management should keep in mind several questions: What is the organization's end-state capability vision and how should it be aligned to the strategic intent (scope); what will be the key stages for value delivery (time); and, what will be the mix of internal and external professionals to develop and support improvements (resources).

Among these questions, the scope of improving core insurance is the most critical. It requires joint collaboration between business and IT.

First, the organization can rationalize through narrowing of its technology footprint and portfolio. The system consolidation, network optimization and application rationalization result is the most immediate cost reduction and requires the least change in the organization's fundamental capabilities.

Second, modernization leverages select new components as part of infrastructure simplification and platform virtualization. This change requires converting core capabilities to current/emerging IT, processes and organizational attributes.

Finally, the most radical approach is to fundamentally transform the core processing capabilities to fully align with the insurer's current and emerging strategic intent. The organization must be ready to simultaneously redesign the process, IT and organization.

Where you start depends on your organization's business transformation and technology optimization priorities coupled with available time and resources.

Incremental, phased migration and single step are three timing options for implementation. An incremental implementation is the ongoing refinement toward improved IT capability of point solutions that leverage dissimilar technologies. A phased migration evolves toward enterprise priorities and narrowing technology footprint. Single step is a turnkey-like replacement of existing solutions.

The organization can leverage a variety of resources to implement its scope. It can choose to fully source internally, seek a narrow set of vendor involvement, partner, co-source or transfer responsibilities to a third-party.

Due to corporate lethargy, most insurers require significant time to make a decision on core improvement. While decisions are being made, there are some actions that an insurer can take that include identifying root causes of the legacy problem; planning beyond individual projects to longer-term goals; developing and adopting a component-based capability model and deploying and leveraging middleware capabilities to increase flexibility and ease of implementation for applications and infrastructure.

Bill Pieroni is general manager of IBM's Global Insurance Industry Practice. He can be reached at [e-mail].