IT in a cost-driven era: insurers are using portfolio management tools to help allocate tight resources. (Technology: Technology Insight).

Insurers' technology organizations clearly are focused on cost reduction and short-term payback during today's challenging times. Some of the excesses of the past needed to be corrected, while low-priority technology spending has generally been eliminated and essential investments are been pursued on a more cost-effective basis. New technology investments are requiring a strong business case. However, a sound overall technology strategy takes a broader portfolio perspective, balancing business impact with implementation risks, as well as capability development, architecture, maintenance and integration objectives.

Balancing multiple, interrelated objectives, especially during a period of severe cost constraints, is complex for insurance chief information officers and chief technology officers. However, the task is required to ensure both short-term and long-term success for the business and its technology capabilities. Program management offices and other information technology project management approaches increasingly are being used but tend largely to provide individual project review, approval and monitoring. These aspects are important but not sufficient to manage the interrelatedness and overall technology resource portfolio. Each technology investment decision should be evaluated on its own merits and as part of the overall portfolio.

Technology portfolio investment evaluations generally examine the overall projected impact and implementation complexity in order to maximize risk/return trade-offs. Return on investment or speed of payback is not sufficient to make a technology investment decision. The difficulty in measuring return is a challenge, and the impact may largely benefit strategic purposes, including supporting other initiatives or capabilities necessary for success.

Judging a technology investment's impact needs to be based upon a customized series of criteria, including such factors as financial ROI, delivered business value (such as quality, service, timeliness improvements), cost of not making the investment at the present time, interrelatedness with other technology efforts, and capability or flexibility improvement.

The complexity or risk to implement a technology investment also needs to be evaluated based upon factors such as fit with current technology platforms, standards and strategies; successful operational experience with the technology internally and externally; proven methodologies and infrastructure for implementation; additional needed capabilities for implementation; and required skills.

Choosing the factors to evaluate a technology investment portfolio is a challenging task. Each insurance organization has unique characteristics and situations that require specific factors to be incorporated; however, the previously mentioned factors provide a base upon which to build a portfolio evaluation framework.

The evaluation of the existing and new portfolio of technology investments provides a basis for resource allocation. Operating businesses need to provide their input on priorities, while the chief financial officer evaluates financial constraints. The technology strategy, however, must be owned by the IT organization to deliver it successfully.

Adopting a technology resource allocation methodology and using portfolio management tools are useful in supporting the investment decision-making process. Technology investments that lack strong impact and are difficult to implement clearly should be eliminated or not pursued, while those with high impact and easy implementation should be pursued immediately as quick hits. Investments with a high or medium impact but difficult implementation and those investments that are easy to implement but have only medium impact are areas in which decisions to halt or postpone adoption become more complex.

The allocation of technology resources over a multiyear perspective is the basis of an insurer's technology strategy. The amount of resources applied to different businesses or functions (for example, maintenance vs. new applications, integration vs. data warehousing, etc.) reflects the actual technology strategy being deployed by an organization to a greater degree than any planning document. In general, the focus has been on reducing the growth or amount of technology spending rather than reallocating resources to areas of highest priority. When priorities have been established via a portfolio-based approach, the challenge then lies in where to draw the line annually on spending.

As many insurers have learned with personal investment strategies, it's the asset or resource allocation that will account for much of the results. Effective investment strategy requires balancing the portfolio based upon potential return, along with risk and an investor's tolerance. Evaluating each investment is important, but managing the overall portfolio will make an even greater impact not only now but also in the future. IT resource allocation is what defines the technology strategy.

Steven Landberg is a managing director and founder of Alpha Financial Services consulting, Greenwich, Conn. He can be reached at [e-mail].