New Maturity and New Focus on Metrics

CIOs are especially cautious of such high-flying talk in the context of the newly energized partnership that exists between business and IT at many insurers. Most senior business executives realize that effectively deploying and managing technology is core to their enterprises' abilities to create advantage and that a true partnership with IT is the key to making that happen.

While this is a positive development for insurer CIOs in general, giving them a seat at the top table and ability to participate in, not just react to, strategic decisions, it also means business expects its IT partners to communicate in the same language business partners use to communicate with each other–financial performance metrics. Novarica has described three common classes of metrics used by insurer IT groups:

o Cost metrics measure spending amounts or ratios and are useful in tracking changes in expenditures over time periods and helping insurers benchmark their spending against that done by peers, but an over-reliance on them risks pigeonholing IT as a cost center.

o Performance metrics measure the internal effectiveness of the IT organization, which provides a useful tool for CIOs to manage their own groups but communicates little to business partners in terms of enterprise impact.

o Value metrics measure value created for the enterprise. Isolating technology's contribution to business value is more complex than tracking cost or internal performance, and many value metrics (such as user satisfaction surveys) are only proxies for understanding the true value created. But more and more, insurers are measuring things such as return on IT investment and the financial impact of productivity enhancements enabled by IT investments.

Many CIOs are struggling to create business value metrics they can use to communicate with their business partners in place of the traditional cost and performance metrics they have always used.Given this environment, things that are classified as broad transformational tools (such as SOA) often are easier to avoid than to evaluate and engage with.

Unfortunately, this blinds many insurers to the potential to create immediate business value by deploying reusable integration points using SOAP/XML over TCP/IP, business value that easily can be tracked and communicated to business partners.

"Ascending Levels of SOA Maturity"

Most discussions of SOA describe three levels of maturity. The terms may vary, but the general categories are:

o Services-based integration–the creation of reusable integration points for data and transaction exchange.

o Application componentization–using services to integrate discrete components into one or more systems that function together as an application.

o Business process architecture–using a highly dynamic infrastructure of data and transactional services to create a responsive architecture that mirrors the way the business process flows.

Generally, these maturity levels are presented as representing an increasing order of sophistication and potential value delivered. Sometimes, anything short of business process architecture is dismissed as "not true SOA."

Another Way to Look at It

However, there is another way to look at these levels. Instead of ranking them against "maturity" and "potential value," insurers could look at them in terms of their risk and predictable value.

In this framework, the discrete projects and predictable returns of deploying services-based integration may look much more attractive than the disruption and potential transformation of business process architecture.

"Real Solutions to Real Problems"

In fact, although they may not be engaged in "true SOA" as the consultants and consortia would define it, many insurers have achieved significant tangible value from services-based integration over the past few years. Some cases that have been reported in Tech Decisions include:

o New York Life reduced time to market by 50 percent for new products by using SOA-based middleware to facilitate integration between legacy core and other systems. (2005)

o Swiss Re reduced deployment time of new front-end systems by 66 percent after creating a reusable integration layer to its legacy core system. (2007)

There are numerous examples of business value delivered through application componentization. In 2006, Tech Decisions reported The Hartford claimed a 15 percent reduction in maintenance costs through componentizing some of its mainframe-based monolithic applications with flexible components integrated via services.

Building the Business Case: Four Main Components

Insurer business executives are, in general, highly skeptical of the transformative potential of SOA. However, they have a real pressing need to operate more efficient and agile enterprises. They need to be able to launch new capabilities and integrate new sources of data faster and more effectively. They need not to be bottlenecked by systems integration times when planning and launching new initiatives. They need to be able to bring new partners and channels online quickly and without spending significant resources.

There are many architectural criteria by which to measure the sophistication and maturity of SOA deployments, but in tracking and communicating the value of SOA to business, there are essentially only four main components:

o Reduced development costs.

o Reduced deployment times.

o Increased capabilities without growing resources.

o New revenue created.

Insurer CIOs should focus on tracking and communicating metrics in these areas.

Tracking the Value

Tracking requires detailed records of both current and past projects so that similar "pre-SOA" projects can be compared with those that leverage the SOA investment. Areas that should be tracked with an eye toward future comparisons include:

o Project costs.

o Project times.

o Resource availability and number of concurrent major projects.

CIOs should devote sufficient resources to recording this type of data. Doing so will project a critical tool for internal project management as well as inter-unit communication. Many insurer CIOs track much of this information but with a focus on internal-to-IT usage rather than presentation to other business units.

Communicating the Value

Communication often poses something of a challenge for IT, since many traditional IT teams lack the skills for effective communication. But internal communication is becoming a critical task for IT, and nowhere more so than in communicating the value of infrastructure-level investments such as SOA.

There is no single prescription for successful internal communication, since what is effective in one organization may not be in another. IT groups must understand how senior business executives are used to receiving operational metrics and match their presentations to that format. Some senior executives may prefer dashboard reports, single-page memos, or full quarterly presentations. They may focus on cash flow or net income or return on equity. In any case, by closely mirroring the structure and terminology of existing reports, IT can help ensure the reports are easily understood and accepted by senior management.

A simple metric in use by some insurers to track value created is "costs avoided." In addition to tracking hard costs for each reporting period, some insurers also track and present the costs not incurred due to their investments in SOA. Maybe a new partner was brought online at a fraction of the usual cost. Maybe maintenance costs for a newly componentized system were reduced by an important percentage.

It may be difficult to train engineers to deal in counterfactual metrics (tracking money and time not spent goes against many engineers' training), but since many efficiencies IT creates are never directly realized in a zero-sum way (e.g., the money is just spent elsewhere, not saved), these types of comparative metrics are important.

Don't Let the Perfect Be the Enemy of the Good

In summary, there are many short-term possibilities for generating business value from SOA investments without achieving the Holy Grail of true business process architecture. Insurers should not miss the opportunity to make incremental improvements because the organizational will to gamble on transformational change is absent.

But CIOs must track and communicate these improvements, both in order to make invisible architectural enhancements visible to their business partners and to build their own track records of creating value. If the call does come for transformational change, a CIO who has documented his ability to realize value will be in a strong position to help lead the charge.

Matthew Josefowicz is the director of insurance at Novarica (www.novarica.com), a research and advisory services firm focused on the intersection of markets, operations, and technology. This piece is adapted from his recent report "Key Metrics for Insurer CIOs" (January 2008) and his February report on capturing and communicating the business value of SOA. He can be reached at [email protected].

The content of "Inside Track" is the responsibility of each column's author. The views and opinions are those of the author and do not necessarily represent those of Tech Decisions.