Creative solutions: alternative resources can help companies deal with obsolete technology manage costs and achieve growth. (Technology: Technology Insight).

Today's competitive environment is haunting carriers saddled with outdated core transaction processing systems. Creative new tools, however, are coming to the rescue by allowing insurers to free up information technology budgets to reinvest in value-generating activities.

Much of the industry's distribution, product and claims infrastructure was created more than 15 years ago to support transactions for simpler business models, such as a dominant distribution channel, a focused set of producers and a few relatively homogenous products. Over time, however, carriers expanded their product portfolio and developed new channels, such as customer relationship management, self-service support and other capabilities. They responded to the enormous technology demands imposed by these changes by incrementally extending and scaling their increasingly antiquated legacy systems.

The response, however, came at a high prince. The systems' inflexibility, inefficiency and high maintenance costs effectively stifle innovation and inhibit growth. Many life insurance and property/casualty carriers fail to exploit product advantages in the market because of the amount of time it takes to introduce and customize products. Introducing a simple product change, for example, becomes an unnecessarily complex undertaking when routed through six different systems--each with its own data model.

As a result, carriers feel trapped in a vicious cycle. On the one hand, they know that their aging core technology infrastructure impedes organizational agility and cost effectiveness. System rigidity, in turn, fuels ongoing maintenance costs as more products and channels are added. On the other hand, carriers fear that replacement of systems is too expensive, risky and prolonged.

In the current unsteady economic climate, information technology budgets are flat, yet ever-rising legacy maintenance costs, licensing fees, salaries, data center costs and other nondiscretionary spending continue to consume a greater share of the overall technology budget, effectively paralyzing information technology capabilities. Few resources remain for strategic initiatives that create shareholder value.

Leading insurers, however, can break free of this vicious cycle by creatively using alternative service delivery models, such as outsourcing and offshore resources and new technology. These solutions are intended not only to lower ongoing technology costs but also to increase revenue.

The decision by carriers to use alternative approaches to sourcing was traditionally driven by cost as a point solution for a problem. However, forward-thinking companies are now using outsourcing as a strategic tool for delivering broader change and achieving goals, such as enhanced business performance, cost management and growth.

Outsourcing infrastructure and using offshore information technology resources can help insurers maintain predictable--not just lower--costs, and allow them to keep pace with cutting-edge technology without hiring additional skilled personnel. For example, a carrier employing 1,000 people to maintain its core policy administration systems outsources the function to a vendor who manages the system with 600 workers, 400 of whom are offshore. By generating a 55% cost savings and freeing up employees from system maintenance, the carrier is able to invest in a new policy administration system, develop new products and distribution systems, and engage in value-generating activities and the build-out of newer and more flexible infrastructure.

With the money saved from alternative delivery models, insurers must be careful to avoid recreating the same types of inflexible infrastructure problems they now experience. New technology such as Web services, which deliver more standardized software solutions, can help insurers develop multiproduct and multichannel capabilities at a lower cost while retaining flexibility to modify systems in the future.

Many carriers now use dozens of applications that suffer from redundant functionality For example, a multiline carrier may be unable to share basic applicant information across its life and property/casualty businesses because the two operations use different and incompatible systems to capture the data. Economies of scale are achieved by using Web services software to capture applicant data consistently across the enterprise since only one team of employees is needed to support this function. Web services' inherent flexibility permits applications to be built more quickly than today's legacy systems.

Despite the uncertain information technology spending outlook, carriers can still pursue an aggressive technology agenda with alternative service delivery models and tools to take advantage of market opportunities.

Michael J. Bernaski, left, is the partner responsible for Accenture's North American Insurance industry Group, and Richard A. Chang is the partner responsible for Accenture's IT Effectiveness offerings for financial services. They can be reached at [e-mail].