© bostick and associates, llc enabling transformation building a better business case russell...
TRANSCRIPT
© Bostick and Associates, LLC
Enabling Transformation Building a Better Business Case
Russell BostickCreative Disruption: A Core Systems Strategy WorkshopNovember 3, 2011
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BOSTICK & ASSOCIATESspecializes in technology strategies for life, annuity and supplemental health insurance
Areas of focus include: Application portfolio
strategy IT governance Developing and acquiring
human capital
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Topics
Business Case BackgroundThe Role of Financial MeasuresEstablishing the “Do Nothing” ScenarioDefining the Scope and Identifying Key StakeholdersQuestions ?
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Business Case Background
Begin with a Problem or Opportunity !
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Business Case Background
Weaknesses
Declining market shareRegulatory changeHigh (fixed) costsPoor service quality
OpportunitiesDifferentiationRe-engineeringMass customizationLabor specialization
“Houston, we have a problem.”
Actually, it would be easier if we really were sure that we do ….
Determining what or where to attack has the greatest impact on business case outcomes, NOT what you
actually do
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Project ChallengesModernizing insurance technology can be challenging. How much of a challenge
are the following tasks in a legacy modernization project?
29%
10%
13%
8%
6%
8%
56%
65%
56%
42%
43%
38%
15%
25%
32%
49%
51%
54%
0% 20% 40% 60% 80% 100%
Finding the right technology to meet specifc needs.
Finding the right employees/partners with skills todeliver a project
Making a hard dollar business case.
Delivering the transformation project on time, on budget
Creating consensus within the IT and businessorganizations about the best path forward.
Creating the culture change necessary to maximizebenefits of the modernization.
Minor Challenge Modest Challenge Major ChallengeResults polarized from 7-point scale
Source: Reviving the Insurance Core Systems Business Case, September 2011
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SWOT Analysis – Small Life Insurer
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Surround vs. Replacement Addressing Weaknesses and Opportunities
Approach Comparison by Weighted Average Score
3.003.47
3.71 3.89 4.06 4.21
6.25
5.715.97 6.00 5.87 6.06
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Creating newproducts
Maintaining orupdatingexistingproducts
Obtaining real-time insightsinto businessperformance
Generatinghigh-quality data
and reports
Developing newdistributionchannels
Creating andsupporting newservice models
Surround and Contain Modern System Replacement
What level of improvement would you typically expect from these approaches to legacy modernization, if both are done reasonably well?
On seven point scale, where 1 = Minimal Improvement and 7 = Strong Improvement
Source: Reviving the Insurance Core Systems Business Case, September 2011
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It’s really not about the money!
Yeah, sure it isn’t
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The Role of Financial Measures
Internal rate of return (IRR)Return on investment (ROI)Cash payback periodEmbedded value (EVA)
These measures are ‘true’, but often useless. Use these measures to screen out truly bad ideas … and to deal with scope changes
“What’s in YOUR wallet?” The most common measures
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Business Case Views
…Hard Dollar benefits are rock solid/ absolutely
critical.
0%
50%
100%
23% Insurers
68% Vendors
Percentage of respondents who believe…
45% variance
74% Insurers
84% Vendors
…Soft Dollar benefits are rock solid/
absolutely critical.
10% variance
Source: Reviving the Insurance Core Systems Business Case, September 2011
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CBA ToolsThere are many ways to develop a CBA
Be agile - start small and iterate
Focus first on the ‘do nothing’ case – again, do we actually have a problem or opportunity?
Leading firms evolve a consensus regarding the risk of ‘doing nothing’ versus the execution risk of ‘doing something’
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`Would you tell me, please, which way I ought to go from here?'
Alice speaks to the Cheshire Cat
=`That depends a good deal on where you want to get to,' said the Cat.
`I don't much care where--' said Alice.
`Then it doesn't matter which way you go,' said the Cat.
`--so long as I get somewhere,' Alice added as an explanation. `Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'
Copyright 2008 Conseco Services, L.L.C.
13
Starting Points
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Defining the “Do Nothing” Scenario
A modern approach with traditional tools
1. Capture the total operating cost of the current capability -- determine if costs are inflating or deflating.
2. Evaluate the strategic context Is a market window disappearing? Does the current capability create competitive
advantage? Can it sustain parity?3. Value staff and equipment replacement costs4. Secure consensus to a risk-adjusted discount rate
and a planning horizon5. Determine the PV of the current capability under
various scenarios
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Define the Scope:
Building a Modern Business Case for Legacy Systems Conversion
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Legacy Systems Conversion
Stakeholder
1. Actuarial Valuation2. Law, Compliance, Audit3. IT and Customer Service4. Sales5. Executive and Board
The Opportunity
Reduced earnings volatilityReduced expenseMore customer satisfactionFocus on sales, not serviceFocus on core business
Enabling Transformation
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Conversion Background
Conversions have multiple financial opportunities and risks that tend to result in: Unexpected reserve changes Long cash payback Project expense overruns Difficulty meeting allowable expenses post-
conversion
Financial Considerations
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The 5 Conversion “Problems”
1. Conventional industry wisdom holds that conversions have a cash payback of 5 to 7 years or more.
2. Most companies approach conversions as ‘one-off projects’.
3. Vendors provide an array of conversion services but rarely share in carrier risks.
4. Legacy in-force blocks are often underperforming due to automation issues.
5. Staff that understand aging in-force blocks are steadily leaving the workforce.
A Conversion Factory for life, annuity, and supplemental health typically addresses 5 “problems” for insurance organizations:
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The 5 Conversion “Problems”
High external costs Missed dates Inability to commit to savings Changing scope
1. Conventional industry wisdom holds that conversions have a cash payback of 5 to 7 years or more.
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The 5 Conversion “Problems”2. Most companies approach conversions
as one-off projects.
Funding each project rather than an overall program
Lack of expertise Maintains an illusion of more control Keeps funding for discretionary projects
flexible
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The 5 Conversion “Problems”3. Vendors provide an array of customer
services but rarely share in customer risk Lack of fixed labor pricing for larger
projects Excessively large balancing tolerances Frequent staff changes Actuarial advice, but no reliance
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The 5 Conversion “Problems”4. Legacy in-force blocks are often
underperforming due to automation issues Customer service and compliance fix
defects that short-change policyholders Incorrect COI charges Missed riders Incorrect loan interest or crediting rates
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The 5 Conversion “Problems”5. Staff that understand aging in-force
blocks are steadily leaving the work force Source systems such as CFO, Life70, CK4,
Oasys, Vector, LifeComm, and USSI that were written in Assembler, mainframe COBOL or RPG
Skills such as product actuaries, application programmers, and customer service analysts
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So What? The back story is always about whether the goal is worth the risk!
Areas of focus should include: Building competence
incrementally to manage execution risk
Providing for value throughout to manage strategic risk
Determining the true cost of market risk – what happens when you no longer have competitive parity?
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Summary
Insurance industry technology leaders can create a modern business case to effectively enable transformation if they
utilize a combination of business strategy, cost
and risk management perspectives and develop a consensus about addressing
weaknesses and opportunities.
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QUESTIONS ?