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Seize the day: with the struggling economy, opportunity is knocking for IT to prove or reconfirm its value to the business side. If the systems side is viewed as a cost center, those in charge can transform it into a key component in the enterprise. Once that step has been achieved, the next one is to turn it into a profit center.


Opportunity usually arises from tough times. With businesses facing economic uncertainty, CIOs face a challenge to help the enterprise survive the difficult days and thrive when the upturn takes place.

To do this, though, IT must establish itself as more than just a cost center for insurance carriers. IT has to demonstrate value as a leader with an eye for operational efficiencies and effectiveness.

The use of technology in the personal lives of many business employees has created a tipping point in the business world, proclaims Bob Zukis, national IT strategy lead for PricewaterhouseCoopers. "We're a lot smarter in our consumer lives than we are in our corporate lives," he says. "The users of technology over the last three to five years have gotten a lot smarter, so their expectations have changed over what IT should deliver."

For years, the business side has had to live with whatever IT put forth, but Zukis explains that dynamic has changed. "It has put pressure on IT and the relationship with business," he says. "Companies are in different stages of their evolution, but as a trend across the insurance industry, that [relationship] is creating significant pressure [on IT]."

Being a company that looks at IT beyond being a cost center often is what attracts better employees to the enterprise. Craig Lowenthal, CIO at NYMAGIC, Inc., points out this was a key reason he joined the carrier two years ago.

"[The company] understands what IT can be and its potential impact on the business," Lowenthal says. "IT is definitely not a cost center here. I'm part of the executive committee. We're doing things strategically with IT, both for operational efficiency and competitive advantage."

Steve Discher, senior vice president at R.E. Nolan Co., draws a comparison between technology and advertising. Just like advertising, "technology is a lever to grow business, serve customers, and operate your business efficiently," he says.

With advertising, Discher continues, insurance companies spend varying amounts, just as they do on technology, and that is how people get the notion of treating IT as a cost center. "It's a service, and you need to make sure that service is operating efficiently," he says.

The average insurance company spends around four percent of written premium on IT, indicates Discher. "With those that spend considerably more, the question is what they are getting out of it. For those that are spending considerably less-say, three percent of premium-they are using independent agents to do a lot more work, or products they offer might be more simple. Your strategy will reflect the difference in spending."


The litmus test for whether IT is a cost center, a part of operations, or a profit center is how quickly revenue will stop flowing to the business if IT is cut off, according to Zukis. For example, when companies use the cost center model for IT, Zukis maintains the impact on the company won't be seen until the longer term.

"If you turn off most IT environments today, revenue will stop flowing quickly, particularly in the insurance industry," says Zukis. "IT has moved from a cost center to an operational expense, but the challenge is to move IT to a profit center. Technology leaders need to change the conversation from cost to value-how is IT contributing to value, revenue, and growth? During the last recession, IT was viewed as part of the problem. Now [IT] has the opportunity to be the solution."

To move IT into an even more favorable light, Zukis point out, IT needs to meet CEOs' expectations of technology to help create and support sources of competitive advantage within their organization. "Delivery of that promise has not yet been realized by most IT groups, but that's where the expectation is," he says.

For IT to enable and drive process innovations --incremental innovations other than major product breakthroughs--IT needs to own the innovation agenda within the enterprise, continues Zukis. "If you own the innovation agenda, you own the source of competitive advantage of the organization moving forward," he says. "Innovation management has to be enabled by technology; it can't be facilitated without technology. That is the opportunity for technology groups to drive growth out of the recession."

For those CIOs working for insurers that don't view IT as an operating expense, Lowenthal has two words of advice: results and execution. "You have to prove [IT's value] first," he says. "You are going to have to execute and show the value."

Lowenthal also has seen instances where companies are fed up with the IT leaders they have in place. "Management gets it and knows how important IT is, but the people they have in place haven't executed," he says. "These companies will replace their IT leaders with those who understand the business strategy and can execute on that strategy."

Such was the case when Lowenthal started with NYMAGIC, he claims. "[Leadership] knew IT should be an operational expense, but it wasn't being executed effectively," he says. "We mutually agreed on the way it would be, and that's what we are working with."

The reporting structure for a company also is a factor, adds Lowenthal. Roughly half of CIOs report to the CFO, who may not understand the value of IT as well as others.

"You have to start with small wins and then bigger wins to show how IT can be a competitive advantage and increase efficiencies," says Lowenthal. "If you are not at the proverbial table and can't get the funding for a key project, you have to find a way to get in front of the CEO and president. Creating a technology task force or an IT executive committee where the CEO participates will help get the company thinking strategically about IT. You don't want your hands to be tied strictly by one person who may or may not get it. If you are not getting funding from the CFO, it can be hard to prove the value [of IT]."

Zukis has noticed significant improvement over the last five years in connecting IT with the business side through steering committees and governance structures. CIOs have gained a seat at the table, but Zukis suggests the big question remains as to what they do with that opportunity and how proactive they are.

"IT groups used to be reactive--being order-takers from the business," says Zukis. "Their opportunity now is to drive the technology agenda, and that's the expectation from the user side because the users are more sophisticated now. They are looking for the corporate world to push IT concepts and innovations out to them. Technology groups don't yet feel comfortable doing that in most of the companies I've seen."


Those insurers looking at IT as a cost center are leveraging the independent agencies substantially by paying extra commission to the agency channel to do a lot of work, Discher contends. On the other end, there are some progressive carriers that are looking at how to make it easier for independent channels in order to attract those agents who are going to write more business or bring higher-quality business to their channel, he adds.

"It's not all or nothing, but certainly the vast majority of the carriers using independent agents are going to look more closely at IT as a cost center as opposed to a direct writer," says Discher.

Most insurers, he asserts, are looking at the operational expense side of IT. In fact, Discher advises clients to put in quality metrics for managing their internal IT spend. "Things such as the costs to provide desktop services, e-mail, and access to the Internet are what I would call utility operational services," he says. "There are good benchmarks out there that say the cost to provide those things is X, and I'm within reason of X. When you talk about tuning the factory, we are talking about utility measures to provide basic IT services."

Discher recommends asking the management team a simple question: Is IT a driver of this strategy, is it an enabler of the strategy, or does it simply support the strategy? Getting the executive management team to agree on an answer to that question is a great first step, he advises. "In terms of getting the management team on board, [that's achieved by] diagnosing when there is alignment and when there isn't," says Discher. "It's about communication and education."

The recession has brought some reductions in IT budgets, but Zukis hasn't observed any dramatic shifts. One reason for this is much of technology spending is a fixed cost rather than a variable.

"Unfortunately, CFOs are having a cost discussion with IT now, and that's not a position of strength for IT," says Zukis. "IT has to change that around so [the discussion is] not about cost but about value and delivering competitive advantage. Companies are cutting costs where they can and hoping the pressure goes away. There still is a lot of fear out there."


The recession has brought cutbacks throughout the industry, and some companies are looking closely at discretionary spending in the IT shop--such as new projects. "Those are taking a beating right now because they often are staffed with contracted resources, which are easier to cut," says Discher.

The downside to such cuts is many of those projects will fuel future growth. "It's a self-fulfilling prophecy," says Discher. "The progressive thinkers are going to come out of this cycle healthier because they didn't take a cost center focus to IT. They look at IT as a business operation."

The companies that understand the value of IT are using the lull in the economy to position themselves for the future when the recovery takes place, Lowenthal maintains, as opposed to others that will start up projects only when the recovery is in plain sight. "As a business, we have a lot of confidence in our insurance core," he says. "We're riding the economic downturn, and we're not losing sight of what we have to do to run our business efficiently and grow our business--not haphazardly but taking good-quality risks. Doing it the right way for long-term growth takes IT investment. It's great to be a part of an organization such as that."

In talking with his peers within the industry, Lowenthal sees more companies staying with investments and refusing to cut projects. "I'm seeing and hearing about cuts but not as much as I would have thought, which is a good sign for the economy overall," he says. "There's not a lot of panic going on."

Lowenthal concedes some companies initially may have thought the economic problems were a blip rather than a fullblown recession, and that led them to try to maintain the status quo. Still, he does see signs of an improved economic landscape, although he admits the industry is not out of the woods yet. "The indicators are starting to look much better, and that will inspire a lot of confidence," he says.


Some bad decisions have been made by people who assume outsourcing is there simply to lower costs, Discher believes. In addition, "there are those companies that will outsource because they want it off their plate," he says. "I wouldn't classify this as making wise decisions."

The enlightened companies, he remarks, will segment what they think is utility and measure themselves by comparing whether they can provide those services as effectively and efficiently as an outsourcer--and if not, then they can pursue outsourcing objectives aggressively.

As for what gets outsourced, most insurers can't afford to operate data centers as efficiently as many of the outsourcing companies, and often those projects will be given to an outside entity. "It allows the midsize carriers to provide business continuity services they couldn't ordinarily be able to provide," says Discher.

Data center outsourcing is one of the easiest decisions these days for midsize insurers, Discher points out. Outsourcing contract development services also is an easy decision for insurers because it allows companies to pursue projects on a variable basis and not have to staff up with fulltime development resources.


There is a huge gap in business understanding IT's perspective and IT understanding the business side's perspective, according to Zukis. "The IT group's business IQ hasn't advanced as quickly as the business side's IT IQ because of what has happened in the consumer world," he says. "That's a constraint, a real limitation; and IT needs to get there."

The governance approach is a big part of the future, continues Zukis, particularly with IT steering committees that include business leaders and technology groups. Zukis also is seeing some IT groups experiment with new technologies by creating idea exchanges and bringing in some of the technology vendors to meet with the business leaders on a recurring basis for innovation brainstorming.

This allows the business side to evaluate what the new technologies are, interpreting the new technologies to fulfill business requirements. These scenarios are in the early stage, though, and Zukis estimates less than five percent of insurers are employing such practices.

"People still are afraid, and they stop experimenting when there is a lot of fear," states Zukis. "It's a once-in-a-career opportunity to change the discussion. Technology was part of the problem in the last recession; this time, it's not. The discussions we are having with our IT clients is seize the day and change the discussion. This is their chance to create IT as the source of value creation within the organization. That message is resonating very well. It is emboldening them and helping them realize they have an opportunity to change things."
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Title Annotation:FEATURE
Author:Hyle, Robert Regis
Publication:Tech Decisions
Date:Jun 1, 2009
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