Lessons from Japanese auto makers: product architecture offers a solution for the insurance industry's poor productivity gains. (Life/Health: Selling Insight).

Over the past 30 years, manufacturing productivity in North America has increased 2.5 fold. It is an understatement to say the insurance industry has lagged behind. Today there is a productivity gap of more than 60% between the two sectors, but insurers can take steps to narrow it.

The productivity profile of the 2002 insurance industry bears a remarkable resemblance to the U.S. auto industry of 1970. One offers protection and wealth accumulation products while the other turns out hard goods, but both industries design, manufacture, distribute and service their products. Like today's North American insurers, the auto industry of the 1970s offered a wide choice of products customized to a variety of customer needs, but those products were expensive in terms of development costs, time to market and ongoing customer service. At the same time, the industry faced growing competition from Japanese counterparts. Just like insurers today, U.S. manufacturers hadn't figured out how to improve innovation, speed to market and productivity in order to successfully engineer scale into better economics. During that turbulent decade, they learned to simplify their business model through a product architecture, a blueprint for insurers looking to manage complexity and reduce costs without limiting cust omer choice.

In the late 1970s and '80s, the Japanese auto industry offered the benchmark for manufacturing efficiency and effectiveness. Proliferation of product variants was a major issue for U.S. auto makers: the average Buick automobile had two million variants. The nature of complexity costs meant rationalizing variants alone was not the answer. Further, the debate between marketing and operations over the value of variety against the cost of complexity was unfruitful. Comparisons with the Japanese were at first unhelpful--the average Nissan had 1.5 million variants.

Clearly there was another factor at work. Japanese auto makers had learned to structure their thinking around platforms, modules and options, with manufacturing aligned to those structures. In essence, they had formalized product architectures. Over the intervening quarter of a century, these product architecture philosophies in automotive and electronics brought further breakthroughs. Productivity and speed to market increased significantly and costs dropped. Yet, mass customization techniques allowed customers to still perceive that they had infinite variation and choice.

In the last decade, the insurance industry has seen a tremendous proliferation of products in the name of consumer-centric focus. To get products to market quickly, companies have added new product-centered administrative systems and processes, since old processes and systems can be archaic and difficult to modify. Eventually, the cost of adding and maintaining all of these systems and processes and the expense of supporting so much complexity becomes very high. And selling this plethora of products becomes nearly impossible for a producer.

Insurers understand that they have driven too much complexity into their business. Growing economic pressures are making cost cutting a priority. At the same time, insurers have begun to realize that they need to cross-sell products to capture an increased share of their customers' wallets. Complicated, product-aligned systems and processes make it difficult to gain perspective on customers. Finally, and perhaps most fundamental, is pruning products alone does not eliminate complexity--the challenge is to manage complexity. Product architectures provide a mechanism to both manage complexity and simplify business.

Building a product architecture does not mean recreating new products and dumping old ones. Close analysis should help insurers realize that many so-called product variations, while having different names, are actually the same. In fact, our client research indicates that about 80% of existing products require business process changes that have little impact on customers. To go back to the auto-industry example, most insurance products can be built around a small number of common chassis with a limited subset of options.

It's time for insurers to embrace the concept of product architecture as a means to simplify their businesses. A coherent product architecture can bring many benefits, including lower operating costs and higher margins, easier customization of products, easier selling and cross-selling, and the ability to easily and cost-effectively bundle together products or product features to enhance cross-selling potential. Reduced complexity leads to better customer service with fewer errors. Modular product architecture reduces the time and associated cost for new product development. A "chassis and options" architecture offers easier integration of products from acquired businesses and third-party product alliances: modular design enables "plug and play" capability for delivering new products/features through the existing operating model.

Product architecture is about fixing the current portfolio--and preparing for the future.

Gary Ahlquist is a senior vice president in the Chicago office of Booz Allen Hamilton. Gil Irwin is a vice president in Booz Allen's New York office. Narayan Nallicheri is a vice president based in Booz Allen's Los Angeles office.