Service-based architecture: being an on-demand insurer offers greater market effectiveness, lower IT costs and higher earnings.

Many articles and published reports about e-utilities or on-demand solutions suggest that becoming an on-demand insurer is about reducing all "capabilities" to "services," outsourcing everything not completed to core business competencies, and then paying only as much as the competitive Web services market will bear. The popular understanding is to go from fixed costs to variable costs and pay only for what you need, when you need it.

However, there's much more to it. Confusing on-demand priorities with a real information technology strategy or program is a dangerous oversimplification. On-demand is not just about outsourcing or utility computing, but rather, it means thinking about your existing and future business processes and developing a comprehensive IT sourcing approach to support them. This enables the insurer to optimize the mix of internally and externally sourced capabilities for both core and noncore insurance functions.

For insurers, on-demand business benefits cannot be realized without a services-oriented enterprise architecture to enforce and support this way of doing business.

A services-oriented architecture first inventories and defines enterprise IT capabilities based on business need. It then formalizes these capabilities into components--each having a name and being self sufficient in performing its assigned function. Each component has well-defined and public interlaces, published services and known collaborations with other components. During execution, these components are choreographed according to a common solution process model of the core insurance operational process.

On-demand sourcing from a mix of internal and external capabilities implicitly refers to the use of components that have been either custom built, purchased from vendors or obtained on demand from outside the insurer's four walls.

The choice of where to source on-demand IT services depends on decisions about which enterprise capabilities should be reused and invested in, which are better to purchase, which are better to be obtained as e-utilities via the Web, and which can be custom built. The mix will depend on what the insurer deems to be core competencies or points of competitive advantage vs. services that are common utilities or high-cost/low-cash flow systems.

A well thought-out service-oriented architecture has some key on-demand characteristics. With such an architecture, on-demand insurers are better able to:

* Sense and respond to changes and opportunities in a dynamic marketplace through rapid redesign and introduction of new products/services within windows of business opportunity. This in turn requires IT solutions that are easily decomposed into loosely coupled components. Solutions can then be created by changing selected components, rather than rewriting entire tightly coupled vertical solutions and reusing existing product models.

* Develop process flexibility with variable cost structures. This is provided through a mid-tier process model and work-flow engine and an integration capability that supports easy swap in/swap out of components. Variable cost structures are supported through component sourcing decisions. The insurer has a choice over which components to outsource or treat as e-utilities and which to keep for internal competency or competitive advantage.

* Focus on core competencies and product/service differentiators. Operating with a component-based architecture enables outsourcing of utility functions and maintenance of focus on core competencies and faster product development, for greater differentiation in the market.

* Operate with resilience, which means managing changes, a difficult external environment or competitive threats with constant availability, and security. In a service-oriented architecture, access and identity management are delivered as components within the portal domain.

* Be in control of your own future. The on-demand insurer rarely hands control of an entire operational solution over to a single vendor. One of the chief advantages of a services-oriented architecture is its ability to easily integrate multiple vendor offerings and e-utility services, while leaving the insurer in control of component integration and choreography.

Being an on-demand insurer does not imply getting out of the IT business or becoming any less smart about IT. In fact, it puts greater pressure on being smart about IT But once a services-oriented architecture and component sourcing strategy have been designed, more options become avail able and it becomes possible to accomplish far more, much faster and with less labor. Greater market effectiveness, lower cost of IT ownership and fatter earnings flow naturally from this.

Hans Brunner is the worldwide insurance solutions architect for IBM's global insurance industry. He can be reached at [e-mail]