A changing industry is driving the transformation of the finance function within insurance companies and financial services in general, as companies seek to cut operating costs and improve revenue in an effort to achieve greater profitability and return on equity. But the proximate drivers of and key tools to achieve that transformation are technology related, according to a BearingPoint study.The McLean-Va.-based consultancy conducted a 2006 survey in collaboration with IDC (Bedford, Mass.) across various industries and geographies of 153 CFOs, approximately 25 percent of whom represented financial services companies. In 2007 BearingPoint separately surveyed 30 financial services CFOs. When asked to identify drivers finance organization transformation, 67 percent of financial service CFOs said demands for better information and insights to improve ROI. Fifty percent of those CFOs responded that new technology implementation enabling process improvement was driving transformation, and 47 percent said that the need to respond to high operating costs was a driver.
The research also revealed that financial services CFOs found transformation more difficult because some of the "low-hanging" fruit of cost-cutting opportunities had already been harvested. Other impediments cited were lack of budget to pursue further cost-cutting initiatives; low morale and the risk of losing additional staff; and lack of personnel with the skills needed to identify new cost-cutting opportunities.
In the face of those challenges, 70 percent of financial services CFO respondents identified the implementation of a single enterprise resource planning (ERP) system for finance as the most effective strategy for cost-improvement in the short run. Financial services CFOs, in contrast to their counterparts in other industries, also responded heavily in favor of more open and simpler application architecture, with 60 percent saying that service-oriented architecture (SOA) and XML are critical to their overall performance.
ERP figured high among favored long-term solutions as well (78 percent), along with business process outsourcing (BPM). However, the top long-term strategy, identified by 82 percent of the respondents, was the implementation of consistent data definitions and technology standards. The insurance industry faces some of the same general drivers as other financial services verticals, such as globalization, M&A and intensified regulatory scrutiny. Another important factor is demutualization and the market responsibilities insurers have taken on by becoming public companies, according to Paul McDonnell, BearingPoint's global insurance segment leader.
Historically the insurance finance function took a more purely administrative approach, focusing on the top line, according to McDonnell. "They assumed that if they got the revenue that everything else would follow," he says. "Now they're getting much more engaged in understanding profitability and trying to drive strategic decision making based on an understanding of the metrics of the business."
Insurers face the challenge that the means of generating vital financial information is scattered throughout the enterprise, according to McDonnell. "A lot of the calculations associated with the financials of a company are actually embedded in legacy policy administration systems," he explains. "One of the things insurance companies are trying to do is extract the accounting rules out of these legacy systems and bring them into a centralized system."