Hard as it is to believe, the concept of return on investment (ROI) has been around for a while. Yes, its had different namessuch as business justificationbut even in the good old days companies were reluctant to spend money without some idea of how the investment would be recouped. Today, though, the acronym ROI is on the lips of every technology and business leader. But what is ROI? The term seems simple enough, yet those who work to determine the benefits of a major project know there is nothing simple about it. Different companies have different ways of evaluating potential investments, says Jack Tyniec, managing director of TCi Consulting & Research. Those criteria may not be the same for an investment like, for example, an acquisition of another company vs. the acquisition of a new technology or an improvement in a process internally.

Bill Taylor, vice president of operations for AXA Re P&C, has been in the insurance industry for over two decades, so he is used to pushing through projects without the benefit of any ROI methodologies. He has seen the value of such a program, though, and understands why insurers are buying into such methods.

It depends on what hat youre wearing as to what kind of value you see in these things, he says. As these methodologies and models are refined, it does make business users think about things that perhaps they hadnt thought of before.

The metrics for ROI change from company to company, asserts Julie Dorey, vice president insurance and financial services for consulting group Xerox Global Services. There is more data for companies to work with today, she says. Its not just a form to be filled out with a purchase requisition. Its a complicated process that not only includes facts and figures, but work process improvements in many cases. The metrics today are changing as more data is available and as we are measuring different things.

How to Do It
In 2001, the insurance and financial services company AXA developed a methodology for ROI that calculated and required certain tasks to be completed if projects are of a certain size, according to Taylor. AXA has four levels of investment categories: low (a project costing $25,000 or less); low to medium (less than $200,000); medium to high (less than $2 million); and high (more than $2 million). The first level does not require calculating ROI, but rather an executive summary of the project. The second level involves a simplified business plan, which basically is a scaled-down version of what takes place at the third and fourth levels. The top two levels require what AXA calls Risk Adjusted Valuation of Investment (RAVI), according to Taylor.

This ultimately feeds into what [AXA] calls a business-case application, says Taylor. It is a series of sophisticated spreadsheets that drive a process. It makes you think about things you probably wouldnt have thought about [previously] or put down [on paper].

The RAVI system begins with an outline of the project definition, according to Taylor. Within that outline, subjects are addressed such as why change is needed, the objectives of change, the scope of change, whether or not there are alternative solutions, and limits or constraints to the change. [The outline] also asks for other considerations, says Taylor, such as what kind of revenue the project will generate. They want to know specifically if there is an increase by premium, a decrease in loss ratio, a decrease in general expense, or if it is mixed. They also want to know if its a regulatory-related project or compliance-related initiative.

Some Things Dont Pay
There is nothing that destroys ROI more than regulatory changes or, in some cases, strategic changes. Taylor says such factors as fines for noncompliance can be factored into ROI, but regulatory and strategic issues often go beyond ROI. Chris Haines, manager of technology operations for the Buckeye Insurance Group, says, I cant put a monetary value on stat reporting. Now, if were getting fined, I guess we can.

The compliance area falls under the risk column for insurers, says Dorey. Sometimes you cant measure ROI because the risk of noncompliance is so high its not pertinent to measure. If you dont conform to regulatory compliance, theres no point in doing an ROI on it, she says.

She points to the Sarbanes-Oxley reforms that focus on corporate accountability as a good example. Everybody is rushing to meet deadlines there, so Id say [insurers] still are looking to determine an ROI for pieces of that [legislation], especially the technology piece, she says. Yes, insurers are seeking ROI, but intuitively they know they have to comply.
Technology has that effect on insurers, she believes. When technology becomes involved, you see the ROI come up right away. If [a project is] more process innovation or behavioral change, youll see fewer ROI requirements.

Projects that might save a carrier money or lower expenses sometimes have to be delayed to meet these issues.

[Compliance] is an expense. You have to bear it, and it may affect the amount of money you have available for discretionary projects because its a have to do kind of issue, says Tyniec. In the areas of compliance, companies have had to make a lot of changes, have had to invest a lot of money in both business processes and technology to make sure they are writing quality business and protecting the customer. These require substantial investments, and they arent typically justified on the basis of any kind of ROI. They are issues where you just have to do it.

Keeping Up With the Joneses
Another worrisome area for those hoping for a good ROI involves the competitive pressures that insurers deal with. A company is offering a particular kind of capability on its Web site or access to its portal, and you need to match that, says Tyniec. Its not a question of do I or dont I do it, because if you did the calculations, you would find yourself losing revenue if you didnt implement some of these things. Thats a qualitative assessment. Some companies will carry that out to a quantitative analysis, but in many cases, senior marketing people and senior executives of the company simply are saying, We dont have a choice. Thats the direction the industry is going. We need to at least match the capabilities our competition or peer companies are providing, and therefore we need to do [the project]. You could decide, if you want your company to go to hell in a handbasket, to do without [certain capabilities], but typically companies are a lot smarter than that.

As an example, Dorey mentions currently working with a client on a project that is strictly strategic in nature. You cant put an ROI around having a strategy, she says. The VP doesnt want to have any conversation from anyone on the team [about ROI]. Thats more of a rarity.

Strategic Information
Devising a corporate strategy may go beyond the justification of a straightforward financial return, but AXA believes its own strategic information has to be contained in parts of its RAVI report. Such data is broken down by client information, distribution information, employee information, technology information, and the manufacturing and processes, according to Taylor. You go through a whole series of questions, he says. In the case of the client assessment, you have to list various client values as well as client risks. You come up with a score and risks for all five parameters.

AXA then examines the tangible benefits of the project. These are broken down into three main componentseffort savings, cost savings, and the business benefits, according to Taylor. Listing these areas can be a daunting task, but Taylor says the company has identified certain areas the ROI team can select from. For instance, in the effort-saving area, there are [multiple] major areas you can choose from to put in actual dollar values for year one through year five, he says. One of the examples under effort savings would be the reduction of task-processing costor the improvement of productivity. Numbers for reduction of efforts, current average efforts, and annual occurrences would be included in this area. There are eight different areas you can choose from in the effort-savings part, says Taylor. [For] a typical project youd probably choose only one or two things in each of the three components, but these quantify tangible benefits.

The financial information doesnt come into play until the fourth area of the report, says Taylor. This involves financial data from the enterprise or entity as far as revenues, salaries, and expenses. There is some interpolation as to the cost and savings for the project at the financial level, he says.
The final piece of the AXA puzzle is called Advice for Tracking of Risks and Benefits. You have to demonstrate how you are going to reduce risks of things youve identified in the strategic information gathering, says Taylor.

Lets All Do It
Many smaller companies would drown in work if they attempted a production similar to the AXA effort, Buckeyes Haines says. His company is not alone in this regard. A lot of companies in our peer group that we interact with arent doing [complicated ROI formulas], eitheras far as a drawn-out mathematical theory that is used to come up with a number. He claims smaller insurers instead have to focus on hard deliverables and milestones to justify expenses. In the last five years, weve been able to grow substantially as well as become more profitable with a decrease in staff, he says. We gauge things by those types of results rather than an actual monetary value.

Buckeye is getting ready to start a new project that will involve online rating, quoting, and endorsing for the independent agencies that sell the insurers property/casualty products. The things we look at as ROI for us, Haines says, are whether we will be able to eliminate X number of staff as well as grow by a certain amount without reaching a breaking point.

While he knows he could quantify those working hours saved by new technology or processes, he believes some of those figures fall into a gray area. As much as I would want to show that in an ROI for technology, somebody else might want to show [those savings] for something else.

Hard vs. Soft
Some benefits are determined more easily through the ROI process than others. Finding the hard-dollar savings from a technology project is one of them. But technology itself has helped insurers find soft-dollar savings, too. Stretching those numbers to make for a more attractive ROI can be a dangerous practice, though. I think people are tougher now, says Dorey about scrutinizing financial projections. She believes managers are going to challenge numbers that cant be easily substantiated.

They are more personally accountable, especially in this industry, she says. The insurance industry is based on peoples trust levels. So on one side I believe people are tougher and more careful about what they put in their ROI, but on the other side there is a lot more data available to help bridge things into the equation that would have been considered soft dollars in the past.

Technology has enabled insurers to capture information around virtually everything within the company, Dorey believes. You can create an ROI today that includes information that in the past you could never include, she says. Its all contained in databases that are accessible and real time. The content management and document management systems that are out there are enabling people to create ROI for projects or work processes. Yes, people are able to create an ROI that includes things they never could include in the past, but on the other side they are very cautious about what they put in there.

Numbers are funny, Taylor points out. You can make them fit.
Insurers have the ability today to turn qualitative analysis into quantitative numbers, Tyniec remarks. On a technology project, for example, say you are looking to implement something that is going to allow you to sell more products, he says. You need to crank in what the benefits are of a revenue expansion. On a cost-oriented IT project, its difficult to translate revenue impact into a projects cash flow based upon expenses because the revenue piece may have little impact on the expense and what you are looking at is a large expense with no expense savings impact.

Tyniec believes insurers need to focus on the very top line of the company where a project is going to have an impact on company revenue and ultimately find its way into the bottom line and improve earnings. If the project is successful and product sales increase, the expense required to process and administer those products likely will increase. But thats a good thing, says Tyniec. Companies thinking creatively and analytically about this recognize there needs to be some way of acknowledging and including these soft dollars or nonquantifiable aspects into an evaluation of an IT projects overall viability.

Making It Work
Taylor is impressed with the sophistication of the AXA system. It allows the company to compare return over risk for each of the five strategic values it has identified and come up with an overall score. AXA believes in sharing information rather than reinventing the wheel for each project, so project managers can reuse information already compiled for a separate project. Theres also the issue of reuse of business technology, he says. AXA has its own Global Information Technology Organization (GITO) that is a standards and guidelines body for all the AXA entities. By publishing the RAVI information within AXA, the GITO is alerted to how the business side is going to use new technology and can offer suggestions how the technology can be used in other ways that will further reduce expenses. So theres a method to the madness as far as being an ROI methodology, he says. It helps a large organization police itself, as well.

While appreciating the methodology, Taylor says he is glad the data warehouse project he completed in 2000 was done without the benefit of a detailed ROI. When we did our data warehouse initiative, we didnt have any formalized process, he says. We were a relatively small entity within the confines of this large organization. If we had done this [data warehouse] project a year later, I would have been under more rigid guidelines as far as what needed to be done within the AXA organization.

Flying without the ROI net really didnt bother Taylor, though. As a person doing this for a number of years, Im not sure how valuable it is, he says. I was pretty self-confident in what I felt I needed to do and how to attack it and didnt want something of this nature to get in the way. On the flip side, if I were the controller, I would want this type of [ROI] project done.

IT for ITs Sake
Insurers have to look at multiple savings when an ROI is conducted for an IT project that has more of a business impact, Tyniec believes. IT often proposes projects that have to do only with IT and have only IT benefits, he says. These are relatively difficult to justify unless they actually reduce costssuch as a new technology that is more efficient and cheaper.

He adds ROI comes into its own, though, when the project involves technology that has more of a business impact and affects the effectiveness and expense structure of the business that is being supported. In most cases, when you do an IT project, there ought to be a business benefit, and that business benefit ought to be quantifiable, says Tyniec. The easiest case is where you propose a new system that has improved processes and technology and is going to reduce costsreduce costs in the business area.

Tyniec runs across businesses that dont always consider the business impact of a particular technology, he says. The analysis of the ROI is confined to what it is doing within IT, and thats not the end of the story, he says. The impact, to the extent that it exists in the business community, really can have a magnitude that dwarfs the benefits inside IT. If you can quantify it that way, you really have a powerful tool.

And that tool will make the next project down the line that much easier to get accomplished.