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Enabling Transformation  Building a Better Business Case. Russell Bostick Creative Disruption: A Core Systems Strategy Workshop November 3, 2011. BOSTICK & ASSOCIATES specializes in technology strategies for life, annuity and supplemental health insurance. Areas of focus include:

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enabling transformation building a better business case

Enabling Transformation Building a Better Business Case

Russell Bostick

Creative Disruption: A Core Systems Strategy Workshop

November 3, 2011

slide2
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
topics
Topics

Business Case Background

The Role of Financial Measures

Establishing the “Do Nothing” Scenario

Defining the Scope and Identifying Key Stakeholders

Questions ?

business case background
Business Case Background

Begin with a Problem or Opportunity !

business case background1
Business Case Background

Weaknesses

Opportunities

Differentiation

Re-engineering

Mass customization

Labor specialization

  • “Houston, we have a problem.”
  • Declining market share
  • Regulatory change
  • High (fixed) costs
  • Poor service quality

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

project challenges
Project Challenges

Source: Reviving the Insurance Core Systems Business Case, September 2011

surround vs replacement addressing weaknesses and opportunities
Surround vs. ReplacementAddressing Weaknessesand Opportunities

Source: Reviving the Insurance Core Systems Business Case, September 2011

the role of financial measures
The Role of Financial Measures

“What’s in YOUR wallet?”

The most common measures

Internal rate of return (IRR)

Return on investment (ROI)

Cash payback period

Embedded value (EVA)

These measures are ‘true’, but often useless. Use these measures to screen out truly bad ideas …

and to deal with scope changes

business case views
Business Case Views

Percentage of respondents who believe…

100%

84% Vendors

10% variance

74% Insurers

68% Vendors

45% variance

50%

23% Insurers

0%

…Hard Dollar benefits are rock solid/ absolutely critical.

…Soft Dollar benefits are rock solid/ absolutely critical.

Source: Reviving the Insurance Core Systems Business Case, September 2011

cba tools
CBA Tools

There 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’

starting points
Starting Points

`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.'

defining the do nothing scenario
Defining the “Do Nothing” Scenario
  • A modern approach with
  • traditional tools
  • Capture the total operating cost of the current capability -- determine if costs are inflating or deflating.
  • Evaluate the strategic context
    • Is a market window disappearing?
    • Does the current capability create competitive advantage? Can it sustain parity?
  • Value staff and equipment replacement costs
  • Secure consensus to a risk-adjusted discount rate and a planning horizon
  • Determine the PV of the current capability under various scenarios
legacy systems conversion
Legacy Systems Conversion
  • Enabling Transformation

Stakeholder

The Opportunity

Reduced earnings volatility

Reduced expense

More customer satisfaction

Focus on sales, not service

Focus on core business

  • 1. Actuarial Valuation
  • 2. Law, Compliance, Audit
  • 3. IT and Customer Service
  • 4. Sales
  • 5. Executive and Board
conversion background
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

the 5 conversion problems
The 5 Conversion “Problems”
  • Conventional industry wisdom holds that conversions have a cash payback of 5 to 7 years or more.
  • Most companies approach conversions as ‘one-off projects’.
  • Vendors provide an array of conversion services but rarely share in carrier risks.
  • Legacy in-force blocks are often underperforming due to automation issues.
  • 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:

the 5 conversion problems1
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.

the 5 conversion problems2
The 5 Conversion “Problems”
  • Funding each project rather than an overall program
  • Lack of expertise
  • Maintains an illusion of more control
  • Keeps funding for discretionary projects flexible

2. Most companies approach conversions as one-off projects.

the 5 conversion problems3
The 5 Conversion “Problems”
  • Lack of fixed labor pricing for larger projects
  • Excessively large balancing tolerances
  • Frequent staff changes
  • Actuarial advice, but no reliance

3. Vendors provide an array of customer services but rarely share in customer risk

the 5 conversion problems4
The 5 Conversion “Problems”
  • Customer service and compliance fix defects that short-change policyholders
  • Incorrect COI charges
  • Missed riders
  • Incorrect loan interest or crediting rates

4. Legacy in-force blocks are often underperforming due to automation issues

the 5 conversion problems5
The 5 Conversion “Problems”
  • 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

5. Staff that understand aging in-force blocks are steadily leaving the work force

so what
So What?

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?

The back story is always about whether the goal is worth the risk!

summary
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.