Careful and Strategic Spending Will Dominate

In the financial services industry as elsewhere, fingers are crossed in hope of an economic rebound in the coming year. A greater number of CIOs than last year are looking to increase spending as 2004 budgets are drafted. But along with caution about the recovery, an existing financial burden will continue to limit spending, even if a rosier economic climate comes to pass.

"The budgeting/expense problem is going to be with us for some time," says Bill Levine, senior vice president and CIO, AXA Financial (New York, $480.9 billion in assets). "The days of the late '90s when money was flowing are probably gone forever. In those days we capitalized a lot and now we're paying the mortgage."

Levine is working on reducing his organization's ongoing cost by concentrating efforts on efficiency. To that end, the technology organization split at the end of November into two major focus areas. "More than half is on what we call continuity"-or maintenance tasks-"and the other part is dedicated to development," Levine relates. "We're going to have the continuity people think about how they optimize their job, how they cross train and how they take cost out of their end of the equation."

Merely keeping maintenance spending flat was a challenge in past years, but Levine's organization is committed to cut spending by 10 percent in that area per year going forward. "That's a major shift in what we're trying to do," he says.

Cost-control is also increasingly driven by the demands of regulatory compliance, which consume resources while providing little positive return. "It's a diversion of funds and a distraction of management attention and staff time from all those things we do to positively impact our business and our customers," laments Dennis Callahan, senior vice president and CIO, Guardian Life Insurance Co. of America (New York, $32 billion in assets).

Guardian has a solution waiting in the wings, depending on the final form of the USA PATRIOT Act, and has brought in ChoicePoint (Alpharetta, Ga.) to deal with the "know your customer" demands of the USA PATRIOT Act customer identification program, Callahan says. "To deal with the requirements of storing e-mail we're bringing in a solution with write-once-read-many (WORM) archival storage and natural language capabilities in order to screen out-bound e-mails and put appropriate e-mails in front of compliance personnel for review before release."

The burgeoning security issue also involves the shifting of resources to avoid exposure rather than reaping return on investment. During 2003 MetLife (New York, $302.5 billion in assets) expended enormous efforts in patching up Microsoft exposures, according to Steve Sheinheit, CTO. "When we do that we have to update 40,000 devices to make sure that they're adequately protected," he says. Given the negative aim of security, the business sometimes fails to appreciate its costs, Sheinheit claims. "For example, a number of months ago we put in a new spam control product and it's trapping 400,000 messages a day. The fact is that more things are happening in the security space than ever before," he remarks.

But despite unwelcome burdens on available resources, the gains of recent years have set the stage for delivering something beyond mere efficiency, according to Sheinheit. "We've taken a lot of cost out over the last number of years, and I think we've run out of the ability to 'do more with less,'" he says. When Sheinheit arrived at MetLife three years ago, the firm was in the midst of major investments to support e-business capabilities. Following the e-business party, so to speak, came a period of retrenchment and cost containment. "We started to put the brakes on a bit, focusing on ROI," Sheinheit recounts. "Now I see a shift towards quality: bringing things together with greater standardization, leveraging what's been accomplished, executing repeatable processes and creating greater speed and agility with what's already in place-that's the shift I see here for 2004."

Jan Franklin, CIO, Farmers Insurance Group (Los Angeles, $12 billion in assets), differs with Sheinheit somewhat on the issue of more-with-less. "Just when I think there's no way we're going to get another dime out of a particular vendor, we get it," she says. But Farmers, along with its parent Zurich (Zurich, Switzerland, $3.43 billion net income) shares the experience of reaping the benefits of ongoing cost-control efforts. The shift Zurich has been pursuing is one of centralization in the interest of efficiency. "With an organization the size of Zurich, you end up with multiple policy processing platforms, billing platforms-you name it," Franklin says. "Even a federated structure gives too much latitude, so we're moving to a very centralized structure that will encompass all new projects, major changes, staffing and sourcing."

Zurich is finishing up the first stage of an infrastructure consolidation on both sides of the Atlantic. "Our next big challenge in 2004 is to address the application side," Franklin says. Another step will be for Zurich's European sister companies to follow the North American affiliates' lead on exploring sourcing options. "The focus is on how we can become more efficient and flexible so that we can go up and down on resources without the difficulty you typically have with large employee bases," Franklin remarks.

The fruits of IT efficiency-from both consolidation and outsourcing-are influencing Franklin's budget, which she says is going down about 10 percent for 2004, and probably a further 10 percent in 2005. "But the way we're doing it is by reducing maintenance costs down significantly more than 10 percent," she explains. "Budgeting for our strategic projects will actually increase in 2004." Franklin is cautious about future advantages, however, because of concerns that protectionist moves may impinge on sourcing advantages. "The backlash that is occurring is a real concern and we're working to mitigate those risks."

There is hope that rising employment will mitigate protectionist initiatives, at least in the United States, but the outsourcing trend is still a viable option, in the opinion of Guardian's Callahan. "Outsourcing needs to be done with sensitivity, but the fact of the matter is that a company that denies itself outsourcing's economic benefits can put itself at a competitive disadvantage," he says. Guardian currently outsources 40 to 45 percent of its development, and will likely stick at that level. However, more of it is being done on a fixed-price basis, to minimize economic risk, Callahan notes. "We're looking at more things in the BPO space and we'll see where that leads us on the operations side of our business," he relates. "I'm also interested in the on-demand infrastructure model, and I think that can take us in the direction of pay-by-the-drink pricing, or looking to grow outside rather than inside, but it's too early to tell."

Legacy Challenge

Many insurers might wish they could trade off their legacy systems for newer models, but that's not an option for workhorse systems that represent enormous investment. The problem is how to adapt those systems to changing needs over the next decade or more. "We have to be a lot more nimble in our ability to develop product, change product, make rapid regulatory changes and make modifications without having to change an entire set of modules or code," explains Wayne Ratz, CIO, Harleysville Insurance (Harleysville, Pa., $2.7 billion in assets). At the end of 2003, Ratz brought in TATA Consulting Services (TCS, Mumbai) to help create a template for the rejuvenation of Harleysville's multiple legacy systems. "They're documenting one of our systems, looking at how it's structured in terms of presentation layer, business logic layer and data layer, and we're trying to figure out how to decouple all those layers and make them componentized," Ratz says. "What we want to do is make sure that all the systems' front ends are more easily maintainable so that we can add components in an almost 'plug-and-play' fashion, and we think that part is easier done as you separate all the various parts."

To match more flexible systems, Harleysville is driving for a parallel flexibility in its technology staff. Currently IT professionals' expertise is oriented to entire separate systems. "We're changing that model to one where we will have people who are experts in, say, data collection and presentation generically, and they don't care whether they're presenting in the commercial lines policy, homeowners or whatever," Ratz says.

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Reader Advisory Board IT Spending Outlook

Jan Franklin, CIO, Farmers: "Overall our budgets are going down about 10 percent, but the way we are doing it is by driving maintenance and support costs down by significantly more than 10 percent. We'll actually see an increase in our strategic projects."

Steve Sheinheit, CTO, MetLife: "We've had a fortunate marketplace for being able to negotiate hard with vendors and take cost out over the last several years. It's no longer a matter of doing more with less, it's making sure that every dollar is giving us the best return."

Wayne Ratz, CIO, Harleysville Insurance: "Spending will increase about 10 percent, mostly in software and services. Most of our money will be spent re-engineering core systems in 2004 through 2006."

Mark Boxer, chief strategy and business development officer, Anthem: "We're trying to screw down 'lights-on' spending, so that we can focus on those functions that would add more value, while trying not to radically increase the overall IT spend."

Bill Levine, CIO, AXA Financial: "We have a very busy product calendar for 2004," in addition to upgrading AXA's HR system to PeopleSoft 8.8, continuing a focus on business continuity, rolling out an agent workstation and tackling a merger with MONY.

Dennis Callahan, CIO, Guardian Life: "Our spending is up this coming year, and it's driven by three things: disaster recovery, the regulatory issue and a strategic initiative to greatly enhance the competitive stance of one of our business units."

Craig Lowenthal, CIO, Hartford Financial Products: "For the most part our budget will remain fairly flat for 2004. There will continue to be level spending on maintenance, but we're going to try to focus technology investment to be more efficient and nimble."

Mike Keller, CIO, Nationwide: "Our aggregate spend for next year will be flat to slightly up. We're trying to save money in certain areas by eliminating duplicate capabilities and freeing up those dollars to invest them in strategic areas."

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Health Insurance Tech Outlook

Efficiency is imperative for any insurance company, but it rises to a unique level of importance in the health insurance industry. As healthcare navigates a continuing crisis in affordability, technology is playing a rapidly increasing role. Mark Boxer, chief strategy and business development officer, Anthem (Indianapolis, $13.2 billion in assets) discusses the trends that will drive technology's increasing importance in 2004:

Rising Healthcare Costs: "We've seen premium increases of 15-plus percent across the marketplace, and drug costs rising at 18 to 20 percent annually. This is causing backlash from employers for more affordable products, and ways to manage the acutely diagnosed in much more aggressive ways. You'll see much more sophisticated applications used to proactively identify the acutely ill, to better manage those that are already diagnosed, and allow healthy people to better maintain their own health."

Consumer-Orientation: "There is an important shift to greater accountability on the part of the individual employee as opposed to the traditional employer-based model. The consumer-directed paradigm will have requirements relative to IT infrastructure and applications, driving health insurers to behave more like financial services companies, being able to mine information in meaningful ways. If you're putting accountability with the consumer, you have to give them the tools to make educated decisions."

Regulation: "HIPAA was just the first thing that hit in an upswing of regulatory and legislative mandates. The industry is responding to things like the migration from ICD-9 (International Classification of Diseases) to ICD-10, and is waiting to see what will happen with Medicare legislation. There is a general ramp-up in the regulatory domain that will continue to have implications for information technology infrastructure."

Clinical and Information Technologies: "Emerging treatment options and information sharing will require the healthcare vertical to manage information in much more robust ways than ever before. For example, EMRs (electronic medical records) are seen as a way of reducing the number of errors in systems and treatment. Developments such as these will have implications for handling clinical data and improving disease management, but will trigger increased investments in privacy as well."

The Race for Scale: "There has been a lot of M&A activity in managed care over the last few years. The fact is that scale matters; there are synergies to be had through M&A activity. For example, in the WellPoint Health Networks (Thousand Oaks, Calif., $13.9 billion in assets)/Anthem merger in process, we are targeting in the neighborhood of $74 million for information technology pretax synergies. Across the industry we are seeing that M&A activity growing."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio