Therefore, as things stand, there still is no room for pet projects in 2004 budgets. The shareholder is king, and the shareholder demands return on equity, says Levy. Insurance companies have reoriented themselves to that reality, and the desire to be leading edge isnt paramount. Technology has to support ROE, and the geeks who used to drive the R&D projects, who wanted to distribute Palm Pilots to the sales force because it was cool, have been relegated to the back room.

Why, however, would an insurer ever approve a tech for techs sake project to begin with? After all, management is charged with making good business decisions regarding any project or purchase, technological or otherwise.

Insurers always have considered the business criteria for making technology purchases, but those criteria have changed, maintains Paul Defuria, CTO of CSCs financial services group. A lot of the ideas in the go-go period were not around doing things because of their perceived strategic advantage but for the perceived strategic disadvantage of not doing them, he says. Id pick up a [report], and it would say, The organizations that will survive will embrace these things now and capitalize on them, and the rest will be sold for medical experiment. [Today,] there is better alignment between the projects that are being undertaken with the strategic business objective theyre tied to. The period of doing things that would be only generally aligned as a defensive posture is not subscribed to anymore.

Survival Strategies
The strategic alignment necessary to secure project approval also has been reflected in efforts to align business and IT staff more closely. Gartner has observed a trend of insurers putting managers with business, rather than technical, backgrounds in charge of IT while at the same time seeing insurer CIOs jockeying for full membership on the teams that are part of the decision-making process, according to Susan Cournoyer, principal analyst at the research group.

Theyre putting business seminars together for IT staff, building research teams within their [technology] staff so they have their eyes on the radar screen of whats happening in IT over the next few years, she says. In addition, they are reorganizing their departments from line-of-business or application teams to groups that instead focus on cross-functional processes, she maintains.
Danza also sees alignment creating a process-focused approach to decisions on future spending. We see a lot of organizations readjusting their budgeting process or literally adjusting the way they manage the business so there is less of a functional view, he says. They may have actual process leads, people who manage processes across various departments.

Examples of recent initiatives to spur business-IT alignment can be found at many insurers. At Highmark, a key objective at a 10-week strategic planning session completed in late 2003 was to reach out to business, according to Michael Kronenwetter, vice president of the Technology Management division of the Pittsburgh-based health insurer. This included two-day workshops with both business and technical staff and an independent benchmarking study that assessed the engagement of business and IT as well as the effectiveness of Highmarks overall technology portfolio.

Communication [between business and IT] often was a one-way street in the past, Kronenwetter explains. We have opened it up and engaged with [business people] to develop our plans for the future and to obtain their candid feedback in terms of what they felt was good coming out of our IT department and what they felt could be better.

Additionally, the benchmarking study not only validated their alignment efforts, but also helped justify several projects and potential purchases in 2004 that otherwise might not have had obvious strategic importance. Two key back-office initiatives at Highmark will be creating an IT asset repository and implementing a component repository to help the insurer migrate its applications to a service-oriented architecture. Highmarks technology budget will remain unchanged in 2004.

The industry as a whole, however, still has a long way to go to achieve true alignment, says Willard Woods, vice president in financial services consulting at Cap Gemini Ernst & Young. He believes insurers view IT as a service function and CIOs are not on equal budgetary footing with similar-level executives. We are seeing an uptick of IT resources into the business organization to somehow get more of that alignment, either through a dotted-line arrangement or actually inserting people into the business organizations. [However,] thats at the department level vs. the organizational level. [IT] is still not driving the process; its being driven.

In the budget survival game, sometimes a creative approach works just as well as a carefully forged alliance. Levy has seen beleaguered IT managers looking for white knights in their large projects, he says.

For instance, you may want to recode an old VB3 app into VB6, and on its own it wouldnt [be approved]. But if youre meeting on a million-dollar project, and you want to slip in a $20k project, you can do so if the functionality fits under the umbrella of that project charter, Levy explains. Then it simply becomes one task in a larger project, rather than a project in itself. Its a bit of a shell game, but if youre a line of business in an organization, you need to compete for resources as much as if you were in the open market.

Top Projects in 04
Beyond approving projects and purchases that demonstrate fast, positive ROI and have low TCO, insurers will be interested in spending capital on four key areas of technology in the months ahead. Primary among these will be policy and claims administration projects.

Being able to process new business and perform underwriting activity faster, both in P&C and life, and [handling] claims faster, both in P&C and health, will be key areas, maintains David Cornelius, vice president for financial services and insurance in FileNets consulting practice. Gartner also sees administration systems being the main area of insurers focus. (For more from Gartner, see Inside Track, p. 44.)

Although this holds true for nearly all insurance verticals, most agree ad-ministration system work will be most prevalent in P&C vs. other lines. P&C has the ability to do a system replacement that life does not because [P&C] can roll over a book of business within a year [at] renewal, says Defuria, who adds he sees P&C having reached a peak of old systems due for renovation or replacement.

People want to change their products quicker, and most companies, at least those bigger than $500 million, are dealing with old legacy systems ill-suited to the task, says Wayne Ratz, CIO of Harleysville Insurance, who reports a three to five percent increase in the carriers IT spending in 2004. Harleysville recently completed a two-year project to integrate into its in-house-developed platform the various personal and commercial lines administration, billing, claims, and statistical reporting systems of two insurers the carrier acquired in the 90s.

To address the budgetary concerns associated with this and other multiyear projects, the company uses a rolling plan to justify the cost, Ratz explains. We used to put one-year plans together, but you soon find out you cant have a one-year plan, he says. We try to determine what the total cost will be and what falls into the first and subsequent years.

With the consolidation project complete, Harleysville now can target rejuvenating its platform in 2004 and beyond, according to Ratz. We want to reengineer that system to a more maintainable, reactive capability, he says, adding this effort will probably take 70 percent of our new development dollars in 2004.

At The Hartford, speed to market is driving projected work on policy administration systems in its P&C division, which reports a five percent IT budget increase for 2004. One example, according to Bob Lukas, CIO of The Hartfords P&C operations, is a set of initiatives in personal lines [that are] renovations of our policy administration systems, so that new product offerings, new rate programs, and new discount programs can be implemented in that system at speeds that are five to 10 times faster than when those systems are in their legacy state.
This will include rearchitecting legacy administration systems to a service-based architecture, using either .NET or J2EE. All new applications, whether purchased or built in-house, will be built with service-based architecture modeling, Lukas says. Our objective is to significantly reduce the size of inventory of applications [while providing] the same or more insurance functionality.

Second, insurers will look for ways to squeeze more value out of existing technology without increasing their capital outlay in 2004. Optimization is a big area of focus, Woods says.

Were actually calling this the year of optimization, says Jane Niederberger, senior vice president and CIO at health insurer Anthem. Just as you use only 10 percent to 20 percent of the features on your desktop [PC] but pay for the whole license, we want to take the technologies weve already purchased and determine how we can take them to the next level and extend those systems to produce more business value.

For instance, Anthem currently uses call center technology from Genesys Tele-communications Laboratories to support its call center representatives. It now will be working to expand that system to integrate with Anthems Web-based customer self-service applications.

Additionally, it will be working to build more EDI connections with providers and to optimize its document management system (a connected platform of applications from Dakota Imaging, FileNet, and IPD) both to reduce costs and facilitate HIPAA compliance. According to Niederberger, EDI-based claims cost Anthem 14 cents to process vs. 50 cents for paper-based claims that can be scanned and recognized successfully via OCR and $2.50 for claims that must be manually processed.
Niederberger also reports Anthem recently has completed a major consolidation project in its claims administration systems. The completion of this work has freed up budget dollars as has the insurers work to reduce the lights on cost of running its systems infrastructure, allowing Anthem to keep a flat IT budget in 2004 while still pursuing both optimization work and new technology purchases.

Third, carriers will be focusing on business process management (BPM) projects, which combine process reengineering, application integration, and workflow automation. Insurers are spending money on business process management and rules-based workflow, and there are a lot of new vendors in the market, says Deborah Smallwood, insurance practice leader at TowerGroup.

EAI has been eclipsed by BPM, Defuria claims. You still need your systems to work together, but theres better promise in the [integration] glue being process rather than transaction driven.
One IT initiative in 2004 at disability insurer UnumProvident will be its ongoing project to improve claims and underwriting processes using Staffware Process Suite, a BPM tool that allows the insurer to design, test, and implement new business processes and monitor the results. Using the tool, UnumProvident can create a process map of both digital information routing and computerized and manual process steps, identifying applications to be called and any programming needed by UnumProvidents IT staff to accomplish application integrations. After a process is automated, underwriters, adjusters, and other staff log in to Process Suite to manage work queues, and business management can do so to monitor task loads.

While the system is not a new purchase for UnumProvident, the ongoing work represents continued deployment and optimization of the system. We have invested heavily in this technology, and we would like to see our investment maximized, says Randy Robinson, the insurers vice president of information technology.
The fourth key area of technology investment for insurers will be around portals and other Web-based sales and service tools. Any financial services businesses that arent looking at Web-based deployment are fooling themselves, says Levy. Staff, shareholders, brokers, anyone who deals with the company, the expectation is theyll be able to interact with you via the Web. Youll see more tools moved closer to the customer, more investment in Web-based front ends that will open up legacy databases, and more security layers wrapped around that to ensure the data is secure.

Were seeing emphasis [on portals] in the life and annuity business. [Insurers] are looking at balancing customer service, agent [support], and cost management, managing and directing customers to use the right vehicle, says Smallwood.

And in P&C, with the hard market perhaps finally turning, there is interest not only in providing service and support but also in using Web-based technologies to drive new revenue. There are two drivers for expanding market share. One is customer centricity and service. The second is keeping agents or the sales force top of mind, Smallwood says. Thats continued to expand Web-based service and the capability to handle policy and claims processing.

At The Hartford, in addition to its administration system renovation, a focus of P&C technology in 2004 will be the insurers e-submission project. This includes working on a variety of fronts to bring transactions generated by the various agency management systems used by brokers directly into the insurers back-office systems. This means working with both individual system vendors as well as e-commerce communications infrastructures such as IVANS Transformation Station. Our [project] focus will be on our distribution partnersanything that will enhance the value proposition of our partners doing business with us, Lukas says.

Lastly, outside the realm of new capital investment, outsourcingoffshore, nearshore, and domesticwill continue to grow as a line item in technology budgets at insurers in 2004. At The Hartford, about 20 percent of the companys programming and systems integration work was done by alternative sourcing in 2003, and Lukas reports that amount is likely to increase in 2004. Offshore is only one alternative we consider. There also is domestic sourcing, utility computing models, data centersa number of alternatives to get work done, he says.

Likewise, Ratz reports Harleysville signed a new sourcing deal with Tata Consultancy Services (TCS) in the fourth quarter of 2003. TCS will help the insurer formulate a repeatable approach to Harleysvilles reengineering of its legacy policy administration systems.

Woods sees interest in outsourcing growing, not only for contract programming and application maintenance but also for functions that are closer to the core operations of insurers. As insurers become more technology-enabled, theyre more likely to consider policy administration, bill payment, print services, and other functions, he says.

A final bit of good news for IT budgetscontinued downward price pressure will impact the cost of technology well into 2004 and, perhaps, beyond. Says Smallwood: Insurance companies still are in the drivers seat.

Cautious Optimism Defined
BearingPoint, which had projected a flat or declining 2004 a few months ago, is a bit more optimistic now, says the firms Paul McDonnell, though the group had not quantified that outlook with a dollar figure at press time.

Info-Tech Research similarly had no dollar projection but predicted a small uptick of rational investment, according to Info-Techs Carmi Levy. Gartner was in the process of updating its report on spending at press time.

By line of business, health insurers in general will see the smallest increase in their IT spending. In fact, whereas earlier in 2003 BearingPoints Frank Danza would have predicted slight budget increases for 2004, he reports as health insurers went into their budget planning process, a lot [were] surprised by the belt tightening, and spending will probably be flat.

According to these research firms, life and annuity companies likely will rank in the middle, and P&C carriers at the top, when it comes to technology spending. In fact, TowerGroup is particularly optimistic about the latter group. Though projecting a 2.5 percent increase across all insurance sectors, TowerGroup sees a 10 percent overall increase in the P&C lines in 2004. In P&C, because of hardened rates creating more of a margin, were seeing the spending really open up, says the firms Deborah Smallwood.

Last Rites?
Whats the flip side to this issue, i.e., the types of technologies that insurers will be cutting back on or eliminating budgets for in the months ahead?

The steepest drops are in technology hangovers; initiatives that didnt live up to their promise, says CSCs Paul Defuria. The two areas that fit into that are CRM and EAIthe kiss of death of three initials.

Based on his experience with insurers that have undertaken these projects, he believes CRM was overpromised and overscoped, and EAI projects seemed to add to the complexity of insurers overall technology portfolios.
Paul McDonnell of BearingPoint agrees CRM projects have fallen off but disagrees they will not see resurgence. People are realizing they have to fix the core infrastructure issues before CRM packages or programs are effective things to pursue, he says.

Likewise, Gartners Susan Cournoyer sees a decrease in spending on EAI technologies but for a different reason than Defuria does. There is less emphasis because EAI was such a big priority over the last two years, and insurers have made a bulk of the improvements there already, she maintains.
However, Willard Woods of Cap Gemini Ernst & Young believes no easy generalizations can be made regarding declining areas of technology spending at insurers. I dont see anything thats being spent on less, because most carriers are behind in terms of technology to begin with. Its just whether they get off the dime and do something this year.