Significant advances in new core technologies and insurance-specific technology packages and components have provided a lower-risk path to transformation. The industry is beginning to recognize more broadly the full extent of the efficiency and productivity gains these new software solutions can make possible.

Brief History

Historically, transformation initiatives have not fared well in the insurance industry. The number of high-profile projects that went overbudget and dragged on for years seemed to outweigh the number of successes. The industry watched closely as a few early adopters of operations transformations struggled, and the prevailing wisdom was transformation projects were “black holes.” Given this, senior executives often are quick to point to the implementation horror stories when presented with proposals to modernize operations or upgrade systems.

As recently as six to eight years ago, transformation was indeed risky. Even the most confident and forward-looking insurers struggled to optimize core operational systems. But looking deeper, one can see why past projects failed so spectacularly and how those failures might have been avoided. Poor scoping, planning and execution, immature technology solutions, and a lack of strategic alignment between the business and information technology were the primary causes. Many organizations leaped into implementation without sufficient due diligence or internal discovery to understand fully their business requirements, the impact of the new system on their current systems and people, or anticipating their future business needs. Unfortunately, failure to plan properly for a transformation remains a common impediment to successful implementation today.

Why Transform . . . Now?

Today, insurers that seek new or upgraded systems as a means to operational improvement face much lower overall risk and a very attractive value proposition. That goes a long way toward explaining the recent and substantial increase in transformation investments by both global carriers and midsize national and regional players. There is a sense in the industry that transformation's time has come, thanks to the convergence of several market trends and drivers:

o Regulatory changes: New or updated regulations often necessitate changes to systems so insurers can capture and verify relevant customer information, financial data, and process controls. In many cases, insurers must gather and submit required information through a manual effort, a costly and error-prone approach. Eliminating the risk of fines–the amounts of which have been increasing–and streamlining compliance are two tangible components of the transformation business case. Some insurers face a choice of either paying fines or investing in new systems so they can produce the data they need.

o Aging systems: The problem of aging systems reaches beyond regulatory compliance. In fact, at many insurers, key systems have reached the end of their life span. Yet many insurers no longer attempt to change their billing systems because it is too difficult, time-consuming, or expensive.

Part of the challenge comes from fragmented IT portfolios. The links and integration among claims, billing, and CRM systems, for instance, are very tenuous. The lack of a single source of reliable data compounds the problem. When systems can't be modified and data integrated, innovation is inhibited and new-product development becomes much more time-consuming. Similarly, productivity and efficiency go down as staff and processes must work around the limits and gaps in the systems.

o More-demanding customers: The more-empowered customers also are a force for transformation. Accustomed to using sophisticated banking and retail Web sites, and in some cases, using them on their phones, they now expect insurers to deliver similarly streamlined processes, integrated data streams, and personalized information. It wasn't necessary for insurers to be early adopters in e-commerce, but baseline consumer expectations have risen beyond the reach of old patchwork systems.

o Rising broker and agent expectations: Like a more demanding customer base, brokers and agents also expect easier access to data, smoother connectivity to insurers' systems, and a more robust interface with the company. Here again, aging systems often can't meet even the minimum standard. In fact, most enterprise-incentive management system implementations are missing approximately 90 percent of the value that can be derived because they focus only on immediate sales problems.

In return for investments in broker-facing systems, insurers should look beyond tactical benefits and take into account the greater potential strategic value. The desired outcome is an enhanced enterprise-incentive management system that can produce more-accurate sales forecasting, improved channel management, and greater influence over sales behaviors.

o Technology advancements: The insurance-specific software packages have matured considerably in the last few years. Thanks largely to advances in open-source technology, service-oriented architecture, and cloud computing, today's packaged solutions from a wide range of vendors are more robust and rich in features but also less complex and easier to configure than their predecessors. Advanced tools for predictive modeling and leakage analysis in claims, for instance, can be added to a consolidated claims platform.

Today's platforms and applications also are much more cost-effective when compared with yesterday's systems, which often required mass customization and expensive maintenance and support contracts. Still, the onus is on insurers to evaluate and select technology very carefully within the context of their strategic and operational needs.

These market trends and drivers are serving as catalysts for the increased transformation activity in nearly all sectors of the insurance market. Those benefits are measured in competitively critical areas, such as operational cost reductions, lower error rates and reductions in claims leakage, gains in work-force productivity, greater process efficiency, and higher customer satisfaction rates. That's why, for many insurers, the question isn't when or what to transform but rather how to transform.

In the Beginning

In starting a transformation journey, insurers are well served by addressing the all-important “how” question. They should be asking themselves about the specific steps to take as they move forward. As a best practice, those steps include:

o Defining a clear strategic road map that incorporates both near-term milestones and longer-term destinations.

o Building an objective business case and model for return on investment.

o Evaluating current and planned requirements for the future process or system against industry-leading practices.

o Picking the right technology based on specific business goals and optimal processes.

o Shaping an effective implementation methodology.

It's easy to see how this series of steps makes transformation less a leap of faith and more like strategic evolution. Once the steps are in place, the following leading practices can help enact successful transformation initiatives:

o Look before leaping right to requirements. Once the decision has been made to invest in new systems, there often is a sense of urgency to leap straight into the definition of functional requirements. This undue haste is a common cause of project failure. Discovery–and specifically, defining business requirements–must come first. It is absolutely necessary to build an objective business case and establish the long-term goals of transformation.

Long before choosing technology or deciding which area to transform first, insurers should arm themselves with hard data about existing operations and identify gaps as they find them. Further, they should seek reliable benchmarking data for the industry as a whole. This data can be difficult to find, which may be why so few insurers seek it out.

o Sequence strategically: Clients often ask which area or function to transform first when a full operations replacement initiative is being considered. The answer usually is billing or claims because these are, relatively speaking, the most easily addressed and least complex. Further, addressing these areas first can help build momentum and increase organizational appetite for change by delivering quantifiable value in a relatively brief time frame. Payback cycles of less than a year and, in some cases, of six to nine months are reasonable and proven targets.

o Plan to move quickly: Insurance executives may be surprised when first presented with high-level time lines that show new claims or billing systems launching within eight to 10 months. We encourage insurers to identify functions and processes in which transformation can yield tangible benefits within one year, though payback cycles will vary according to project scope (e.g., will the new system support a single line of business or multiple policy types across the enterprise?).

It also is critical to “stick with the script.” Once the project scope is confirmed for the current phase of work, do not allow scope creep to derail the time line. The best-run projects stay within the parameters agreed upon at inception and defer necessary changes to a subsequent phase. Proper diligence into the development of the project/phase scope helps to reduce the risk of scope surprises.

o Integration: One of the key reasons these projects are challenging is the effort associated with integrating the new operations system into the insurer's current technology ecosystem. Insurers should exercise careful thought and planning when defining the integration architecture that is best suited to their enterprise. Upfront integration workshops and proof of technology and proof of concepts of the key parts of the solutions go a long way toward avoiding surprises.

o Data conversion: Perhaps the biggest culprit in project overruns is underestimating the effort to convert legacy data onto the new operations platform. Think before you assume. We are seeing a growing number of insurers undertaking enterprisewide data management initiatives to alleviate problems with data redundancy and data quality issues resulting in high cost of ownership. We also are seeing rising numbers of insurers not converting their legacy data but instead handling new business on the new platform and letting the old business run off on the old system–often a one-year transition period.

Fundamentally, the cost and risks associated with converting legacy data need to be carefully evaluated and aligned with other enterprisewide data initiatives against the costs of maintaining the current system(s) in parallel. Unless your current platform is highly unstable or poorly performing, we suggest letting the legacy data run off on the current platform and then be appropriately archived.

o Don't forget the people: An underappreciated element in successful transformation efforts is change management. Too often dismissed as a soft “nice-to-have,” executive sponsorship, training, knowledge transfer, and documentation can mean the difference between mediocre and
outstanding ROI.

These steps are necessary because transformation can be disruptive to an organization as a whole and to teams and to individuals in particular. Personnel may be attached to the old ways of doing business even if they were inefficient. Consider that at small or midsize insurers, transformation often means replacing spreadsheet-based processes with fully automated workflows. It's easy to see how employees might resist if they don't understand the need for the change.

The good news is change management yields a number of important benefits. By reducing resistance, effective change management can speed end-user adoption and shorten payback cycles. More strategically, a transformation facilitated by these actions can help insurers mitigate the risks they face from lost institutional knowledge and an aging work force.

Recent history demonstrates insurers of all sizes are capable of greatly improving operations with new systems and redesigned processes. Further, the benefits are tangible, significant, and attainable within relatively brief time frames.

While the business case is solid, it's important to recognize the broader strategic benefits that accrue to insurers. Results-driven transformation can enable an organizational shift toward greater agility, cross-functional collaboration, and customer-centricity. These are desirable qualities for any company in any industry and in all types of economic climates. Certainly, they will be the hallmarks of tomorrow's insurance leaders, and that's why the time has come for transformation in the industry.

David Connolly and Raj Sharma are principals in the financial services office of Ernst & Young LLP and are based in Palo Alto, Calif. Connolly can be reached at [email protected] or 650-849-4710. Sharma can be reached at [email protected] or 650-849-4711.

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