December 13, 2011

When it comes to IT spending in the insurance industry, the 80/20 basically rule holds true: Insurance companies typically spend 70 to 80 percent of their IT budgets with a few large vendors. And despite leaner technology budgets over the past several years, it's with these big vendors that IT overspend is the greatest.

Shocked? You're not alone. Most insurance IT professionals have cut their IT spending for so long that it's tough to imagine they could be spending too much with anyone. The problem is that there is no IT equivalent of the Kelley Blue Book to help a company validate that it's paying the right price for the right terms and conditions. The price a vendor charges one firm can be 30 percent more than the next company. The issue is further exacerbated by the increasing complexity of offerings, contracting practices and pricing.

The challenge is growing due in part to the rapid (and long overdue) IT modernization that's happening across the insurance industry. Companies are finally loosening their purse strings to invest in IT initiatives such as cloud computing, mobile applications and business intelligence software. Those companies that want to avoid overspending must focus on optimizing their spend with their largest IT providers, using every resource available to neutralize the vendor advantage.

Here are several spending pitfalls to avoid:

Microsoft: If you're looking to expand or change the Microsoft footprint across your organization, know that Microsoft offers programs that may be more cost advantageous than the published programs. Be diligent in exploring all license and program options, as even your rep and reseller are often not up to speed on the latest licensing rules. Also, there have been many changes to Microsoft's offerings and T&Cs since the last time you signed their enterprise agreement.

VMware: VMware recently announced a major change to its vSphere licensing and pricing model that includes a pooled virtual RAM entitlement (vRAM). Many clients may see a licensing cost increase as they pursue the latest versions of VMware products and are forced into this new pricing model. This is good reason to reevaluate your VMware agreement and align pricing and terms more closely with your business requirements. By doing this, you can determine the best product and service mix for your current and future state as well as neutralize any "gotcha" contract terms.

Cisco: If you use Cisco's SmartNet offering for support, then chances are you probably renew your contract every year (90 percent of SmartNet users do). Try signing a three-year contract to maximize discounting. It requires due diligence during the term of the support contract to ensure it reflects your evolving network support needs, but the savings can easily be in the 15 to 20 percent range. Or consider third-party support options. Non-certified third-party support providers can save you as much as 50 percent, while certified providers can save you as much as 20 percent.

AT&T and Verizon (wireless): Insurance companies are increasing their mobile technology investments, leading to higher wireless carrier spending. Here are a few things to consider: Did you know most companies are paying prices for AT&T and Verizon services that are well above fair market value? Did you know you can negotiate for your unlimited data plan to be grandfathered into your future contracts? Are you pooling minutes across your company -- or are you paying for thousands of unused minutes? Each of these questions ties to a major area of overspending.

Oracle: Support/maintenance and licensing continue to be the two biggest elements of overspending with Oracle. For years, annual support rate increases -- 14 percent in some years -- have risen with little justification. Know that these increases are negotiable, and that there are third-party support options that can significantly reduce costs. Additionally, enterprises are renowned for purchasing too many licenses and failing to manage their license inventory, which leads to substantial overspending.

Today's insurance IT professionals have a tough job. They need to drive IT business value and innovation to keep their enterprise competitive, but operate under strict mandates to stay within budget. By navigating effectively around these spending pitfalls, insurance companies can optimize IT spending with their top vendors, freeing up significant budget dollars. These funds can be used to support a company's commitment to IT innovation and for new initiatives that will deliver even more business value.

About the Author: Jeff Muscarella is EVP of IT at NPI, an Atlanta-based IT spend management consulting firm. He frequently writes and speaks on how enterprises can improve the way they plan, source and implement IT.