Change Management barometer

What are the pressures currently experienced by insurance industry CIOs and CTOs who are required to support business change, differentiation and innovation while maintaining a stable system of records - and all in these times of austerity? Richard Williams, CIO of Mitsui Sumitomo Insurance’s (MSI) London and European operations, explains.

Innovation - The insurance CIO’s conundrum

For the CIO charged with cutting costs and protecting an organisation’s data, innovation has not been an investment priority. The well-known irony is that for an industry that takes risk, insurance is extremely risk averse. As a result, innovative IT investments have been allowed to languish in the in-tray.

While considering technology that may give the business a competitive edge, CIOs have to deal with the fact that maintaining and updating legacy systems can easily consume most of a company's IT operating budget. Gartner’s Worldwide Enterprise IT Spending Forecast from November 2012 reported that many companies spend up to 70% of their IT budgets on infrastructure and application maintenance or “keeping the lights on”.

Despite this figure, I believe we are at a turning point of accelerated IT adoption and innovation in the insurance industry. Deloitte’s Global Insurance Outlook 2012 highlighted that, while these are difficult times for insurers to grow their business, there is a fundamental need to change how the industry meets rapidly evolving consumer expectations; with transformation coming in the form of products, distribution, service and technology.

The growth of online and social media is driving a seismic shift in expectations of how products and services are marketed, priced, sold and serviced, and how companies are perceived. This disruption has been coined by Gartner as the “Nexus of Forces” - the collision of cloud, social, mobile and information. The power of customer service has shifted into the hands of the customer, and to the most agile organisations that can adapt to and master these converging forces.

The CIO’s role in this shift is paramount - in making it happen, and in justifying investment to the board. Now charged with maintaining competitive advantage, improving productivity and protecting against risk, CIOs must demonstrate which innovations work for the business and accelerate new initiatives.

Innovation - The architect’s guide

The challenges for the insurance CIO/CTO are clear: drive innovation without the luxury of significant IT budget increases, and be more agile without disrupting legacy-based operations.

Insurance firms typically have several generations of applications, each designed with technologies that were both state-of-the-art for their time and appropriate to the business needs of the time. A complete technology overhaul is risky and expensive. Given that business and technical requirements will keep changing, companies today have to accept change as a permanent factor and start building in agility gradually.

The best way for a CIO to tackle this challenge is to differentiate clearly between ‘systems of record’ from ‘technology that will provide competitive edge’. Gartner’s Pace Layering strategy is one that allows the CIO to have design goals for different parts of the organisation to address the fundamental business needs while introducing innovation.

Pace Layering is based on an architectural approach where a building is designed to tolerate change at various frequencies. Some aspects of a building are built to last a lifetime, while others are reconfigurable. This concept is applied to the enterprise application portfolio, dividing it into layers, allowing changes to each without disrupting the other.

The layers in enterprise technology are:

  • Innovation layer – User interfaces, emerging applications.
  • Mid layer built for change  - Systems of Differentiation.
  • Core base layer built to last - Systems of Record.

With this model, insurance companies can embrace innovation because it does not have to impact the systems that underpin their organisation. With data’s overriding omnipotence in insurance, systems of record have to stay stable and strong. The mid layer can easily be changed at a cost, independently of the record layer, without causing any disruption to the core base. The product suite and workflow system sit at this mid layer.

The innovation layer is where one must be able to rapidly make changes, like furniture and décor in a building. Investment is low initially – one should be able to trial it first to see if it works: suck it and see. Potentially, it can be thrown away. On other hand, it might work, becoming part of the other layers.

There will always be a requirement for these three layers and organisations need to develop this layered application strategy to keep up with the rate of change in applications and underlying business processes. The key is that each layer must stay separate to allow changes to be made rapidly without affecting the core base layer.

Cloud – The great enabler

What really is driving innovation AND making it possible is the advent of cloud computing, virtualisation, software as a service and platform as a service. CRM applications, cloud, Big Data, and mobile are fundamentally changing the way companies view the world and conduct business.

These new technology themes fully support and validate the Pace Layering model, enabling companies to make better use of their existing technology while controlling IT spending and freeing up a greater proportion of their IT budgets for innovation. They also enable experimentation without large investment: Trial a technology as a service – if it doesn’t work for your organisation – ditch it.

Two big implications

The implication of Pace Layering for the customer, and I speak from my company’s experience, is that it is changing the way we think about how we consume software and how we relate to the vendor. In the past at MSI, we would have selected and then insourced a vendor solution in an attempt to integrate everything and fix a problem "once and for all" – a ‘big’ technology approach. However, these packages are often too integrated, with their data, differentiation and innovation layers to allow further or sufficient change. Now, we look for suitable ‘small’ technology to meet our needs and if these don’t exist we’ll communicate our needs to a forward thinking vendor and challenge them to a relevant solution.

Driven by globalisation, BYOD and mobile, MSI has introduced Huddle, the external sharepoint in the cloud. Pairing this simple application with a BYOD e-mail application has released senior managers from the constraints of laptops, paper and the office and the associated mind shift is beginning to drive the appetite for ‘small’ technology all over the business. Meeting this appetite represents both the biggest challenge and greatest opportunity for a responsive vendor to build agile applications based on our needs.

The implication of Pace Layering for the technology vendor is that it takes the emphasis away from offering systems that purport to do everything. Vendors need to make huge shifts in their product offerings, demonstrating the ability to be agile. Some, like Agencyport Software, a provider of software and services to the global insurance and reinsurance industries, recognise this is the way the market is going. Agencyport is leading the way amongst insurance technology providers in rethinking how it develops products, understanding that offering all things in a single platform is no longer beneficial in an agile marketplace.

Innovation and dependability

Returning to Gartner’s Worldwide Enterprise IT Spending Forecast, the year ahead and beyond looks set to be an innovative period for the insurance industry. Having significantly cut discretionary IT spending growth over the past several years, most enterprises have little room to reduce IT spending further over the long run. Enterprises overall are forecast to increase IT spending in 2013 by 2.5% from the projected 2012 spending. For the insurance sector, spending is expected to rise more than 4% in 2013.

With a tumultuous couple of years behind us, CIOs – and more frequently, boards — recognise that cost-cutting alone is insufficient, because while times are tight, they also keep changing. There is a shift of mindset from a focus on solely reducing costs to a focus on agility, with the knowledge that one will have to keep changing and innovating to stay competitive. It is now more important than ever to think laterally and spend strategically. Investments need to add shareholder value but also enhance the firm’s ability to adapt and compete in an environment where business needs, platforms and technologies all change constantly. The IT budget of 2013 will be challenged to address both innovation and dependability.

Richard Williams is CIO of MSI's London and European operations.