Everything courts: insurers may find that a holistic, collaborative approach to business helps ensure that all parts are working in harmony. (Industry Strategies: Management).

Whether a company manufactures automobiles or insurance products, working toward a common goal is the linchpin to optimum product manufacturing, delivery and service.

Successful management of an insurer's product portfolio establishes the foundation on which to build the business for the future. Success will come by taking a holistic, pragmatic and collaborative approach to portfolio management and by creating an efficient operation that will endure. Many have tried and failed by relying on technology promises, while lacking corporate focus and often biting off more than they could chew.

Portfolio management is more than having a good suite of products and a means to administer them. Effective portfolio management is based on sound business decisions, taking all factors into consideration. What products have the greatest return-on-investment potential? How can products be manufactured efficiently? Which markets are appropriate? What product features or characteristics need to change depending upon distribution channel or market? What are the most effective methods of product promotion? Isn't good service a critical element of a successful product?

The Big Picture

Product portfolio management is the optimal creation and management of business, technology; and support processes to achieve an insurance company's short- and long-term objectives relative to products and profitability. Sounds straightforward enough, yet few insurance companies have achieved this ideal environment. It's certainly not for lack of trying, but perhaps due to the lack of a holistic and pragmatic approach--one with the entire organization in lockstep and focused on a common goal. For a business whose lifeblood is information, there is an overwhelming amount of duplicate and inconsistent information strewn across a variety of systems throughout the enterprise. Add silos of operation found in a typical insurance company and it's a wonder that some insurance companies function at all.

To understand the complexity of the issue, take a quick tally of what can be done better in the insurance operation. The results will vary depending upon who is asked-a bit like asking blind men to describe this operational elephant. It all depends on the perspective.

Despite the differing perspectives, the opportunities for improvement are endless. But, where to begin-trunk, tail, or somewhere in the middle? The answer is none of the above, as the path to success is to view the whole elephant and take it one well-thought-out step at a time-the holistic, pragmatic and collaborative approach.

The Current Situation

Mergers and acquisitions, stovepipe operations, layers of bureaucracy and the ineffective use of technology have left many of today's insurance providers in a state of disarray. If it weren't for those few employees who have mastered the process quirks and are proficient at navigating the systems to get things done, many companies would break under the strain of their operational mess.

Typically, the insurance industry includes the following conditions: Diverse platforms and processes:

The data- and transaction-intensive insurance industry was at the forefront of investing in technology, primarily mainframes, to automate back-office functions of policy administration, claims and accounting. Many of these systems, known as legacy systems, are still in use after more than 20 years, yet they have been unable to stay current with the pace of industry change. Despite the valiant efforts of information technology departments to extend the legacy usefulness, many of these systems are nearly useless due to inflexibility, coupled with diverse and disjointed platforms and business processes found in the typical insurance organization. The technology crazy quilt has often become too complex and costly to manage effectively.

Multifaceted relationships: Efficiency of the ideal insurance process often is hindered given the variety of players typically involved: retail agents, wholesalers, managing general agencies, carriers, reinsurers, third-party administrators, bureaus, service providers and consultants. Different personal priorities add another wrinkle to the relationship equation with some striving for premium growth while others are focused on regulatory compliance or customer satisfaction. Moreover, the rate of mergers and acquisitions has produced nontraditional reporting relationships, layers of bureaucracy, and cultural incompatibilities that add to the organizational disarray, choking the potential for success of enterpriselevel initiatives.

Not-so-captive client base: The traditional insurance market is shrinking as premium is shifting to the alternative risk market. As more profitable risks migrate from the traditional market, the traditional market is more difficult to sustain, much less demonstrate healthy premium growth. Maintaining profitability, while investing in ambitious enterprise portfolio management, is challenging when the client base and revenue stream are eroding.

Disappointing IT track record:

Today, the industry has better tools and technology but it hasn't been an easy road, considering the trials and tribulations experienced in just the past 10 years with the myriad of technology options:

* Business process re-engineering: The examination and re-engineering of work flow within a company.

* Object-oriented programming: Encapsulating programming logic within independent objects instead of using large, monolithic computer programs.

* Relational databases: Data arranged in a table format so the data can be accessed and reassembled without needing to reorganize the tables.

* Data warehousing: Consolidating data from many disparate sources for analysis.

* Enterprise resource planning: An IT term for the activities that software can perform for business, such as purchasing or keeping inventory.

* Best-of-breed: Assembling the best software products from different vendors.

* Components: Within a larger program, parts that perform a particular function.

* XML Extensible markup language used to create formats to place data on the World Wide Web.

* Customer relationship management: A way to describe the software or methods that help businesses manage relationships with customers.

Unfortunately, the track record in the insurance industry for successful software projects is not a good one. A 2002 Standish Group study reported that 66% of software projects across all industries either failed or were challenged with problems such as being over budget or late or having fewer features and functions than planned.

Through these technology ups-and downs, the industry has learned the tough lesson-there is no easy fix to the operational chaos by simply implementing the latest technology.

Insurance is difficult: While all industries have product research and development suppliers, competitors, employee management, and computing systems, insurance is further challenged by heavy regulatory requirements. The Insurance Services Office and the National Council on Compensation Insurance promulgate standard policy material and file it in all states and jurisdictions, with each state deciding which parts of the standard material to accept and when they go into effect. Each year there are more than 1,000 bureau rate, rule and policy form changes. When states choose not to accept the entire standard material, they create a significant burden for their insurance providers. To complicate the process further, some providers may choose to follow only some or none of the state's recommendations.

Early Attempts, Limited Results

Insurance companies have made a variety of attempts to get their arms around the product portfolio with hopes of achieving a successful enterprise approach.

Some tried the "big-bang approach," investing in expensive enterprise resource planning systems that purported to automate virtually everything. Others bought development tools to build the systems themselves, Some opted to leave the systems alone and reroute the cow paths-in other words, they used business process reengineering or rightsizing. Rapid application development also was trendy for a while, and some insurers even went so far as to bet the farm on the latest technology.

While all these tactics may have worked to some degree, they were primarily viewed as fixes to a specific problem and rarely approached the enterprise and product management as a whole.

Insurance Value Circle

Much like a manufacturing company, insurance companies perform the same basic functions to make, deploy and support products:

Product design: Determines characteristics of the insurance program, such as coverages, limits, underwriting rules, and ancillary services that often vary drastically among insurance providers. Services might include risk analysis, rent-a-captive formation, loss prevention and control, actuarial and loss reserve analysis, or reinsurance placement and handling.

Marketing and distribution: Includes identification of a target market, price, advertising and lead-generation campaigns, and management of multiple distribution-channel partners, such as the direct sales force, broker/dealers, independent producers and the Internet.

Customer support Encompasses the underwriting process and a plethora of policyholder services, including inquiries, policy endorsements and renewals, billing options, and claims handling and administration.

Financial management: Includes risk financing via third parties such as reinsurers and capital markets, asset management and investment management. Financial management also may include agencies' ratings and return on investment related to a business or IT initiative.

Computing systems and people: Comprise the center of the value circle, serving as the foundation on which to build and maintain a business.

Successful product-portfolio management requires a commitment to this continuous value circle, with each element tightly linked to and dependent upon the others. Due to dependencies, a modification to any element of the circle impacts all others. Unfortunately, this point was frequently missed in early attempts at enterprise-level initiatives, resulting in a seldom-anticipated chain reaction. For example, technology may have enabled quick development of a product, but the distribution channels, promotional plan or customer-support structure may not have been properly thought out and adjusted to complement the new product to ensure its success.

When used effectively, the value circle will enable the enterprise to make informed business decisions, ensure a focus on the right products and markets, retreat from unprofitable markets and implement a continuous improvement process.

Using the Value-Circle Approach

Once an insurance organization is able to manufacture and manage its products, the methodology of the value circle should become part of the organizational culture and be used to measure every current and new product or market under consideration.

Implementing a successful value-circle methodology requires the commitment and cooperation of all segments of the enterprise. Just as a clear picture of an elephant cannot be derived from the perspective of one blind man, the complete picture of an insurance product and process cannot be derived from the perspective of one department. For a successful approach, the team should include experienced representation from marketing, customer service, IT, actuarial services, regulatory compliance, underwriting, claims, billing, and even finance--any group that touches a premium, policy, investment, distribution channel or policyholder.

Getting started means starting small and taking a holistic approach to the elephant. Since the collaborative approach with the entire enterprise involved may seem foreign at first, start with one niche program, market, or line-of-business to learn and hone the team's collaborative value-circle skills.

Step 1. Implement a quick hit. Building the perfect value circle and enterprise product portfolio will take time. Test the value circle process and organizational readiness with a single niche program or a narrowly defined market or business line. A small, knowledgeable team from different departments should be assembled to select the quick hit and define requirements that cover each functional area.

Step 2. Define the ideal portfolio-management process. Once the team has experience with the collaborative approach and is able to manufacture and deliver one product, it's time to expand the value-circle methodology throughout the enterprise. High-level requirements of the close-to-ideal enterprise portfolio-management environment are established, again addressing all value-circle segments. Keeping the discussion at a brainstorming level and away from the minutia will provide a vision framework with the flexibility to be modified and refined throughout the process.

Step 3. Assess organizational readiness. Leveraging experience from the quick hit, it is time to determine how prepared each organizational discipline is to develop, deploy and service the ideal portfolio-management process. Where are the gaps in the organization? What requires improvement to deliver a world-class product with world-class service?

Step 4. Expand for enterprise adoption of the value-circle methodology. Additional programs should be developed and existing ones retooled using the value-circle methodology keeping an eye on the big picture. The ideal vision will evolve as experience is gained. The value circle should be viewed as an iterative process, with byproducts being continuous product and process improvements. The team and results will improve over time with team experience and lessons learned along the way.

With today's technology and communication options and a team committed to a collaborative approach and continuous improvement, effective enterprise product portfolio management is possible, but not necessarily easy. The toughest part is balancing the needs of individual initiatives with the big picture. Everyone in the enterprise will need to compromise and be willing to give a little more than they get along the way. Using a holistic approach, encouraging close collaboration, and starting with a well-defined and pragmatic quick hit will provide the enterprise the skills and methodology needed.

Pat Walsh is vice president of Instec, a software and services firm specializing in policy rating and issuance solutions for the property/casualty industry