© Bostick and Associates, LLC Enabling Transformation Building a Better Business Case Russell Bostick Creative Disruption: A Core Systems Strategy

© Bostick and Associates, LLC

Enabling Transformation Building a Better Business Case

Russell BostickCreative Disruption: A Core Systems Strategy WorkshopNovember 3, 2011


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

Business Case BackgroundThe Role of Financial MeasuresEstablishing the “Do Nothing” ScenarioDefining the Scope and Identifying Key StakeholdersQuestions ?


Business Case Background

Begin with a Problem or Opportunity !


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


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


SWOT Analysis – Small Life Insurer


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



It’s really not about the money!

Yeah, sure it isn’t


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


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



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’


`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.

Ì 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. Òh, you're sure to do that,' said the Cat, ìf you only walk long enough.'

Copyright 2008 Conseco Services, L.L.C.

13

Starting Points


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


Define the Scope:

Building a Modern Business Case for Legacy Systems Conversion


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


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”

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:


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 “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


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


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


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


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?


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.


QUESTIONS ?

Documents

© Bostick and Associates, LLC Enabling Transformation Building a Better Business Case Russell Bostick Creative Disruption: A Core Systems Strategy