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© Bostick and Associates, LLC Enabling Transformation Building a Better Business Case Russell Bostick Creative Disruption: A Core Systems Strategy Workshop November 3, 2011
© Bostick and Associates, LLC BOSTICK & ASSOCIATES specializes in technology strategies for life, annuity and supplemental health insurance Areas of focus include: Application portfolio strategy IT governance Developing and acquiring human capital
© Bostick and Associates, LLC Topics Business Case Background The Role of Financial Measures Establishing the “Do Nothing” Scenario Defining the Scope and Identifying Key Stakeholders Questions ?
© Bostick and Associates, LLC Business Case Background Begin with a Problem or Opportunity !
© Bostick and Associates, LLC Business Case Background Weaknesses Declining market share Regulatory change High (fixed) costs Poor service quality Opportunities Differentiation Re-engineering Mass customization Labor 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
© Bostick and Associates, LLC Project Challenges Source: Reviving the Insurance Core Systems Business Case, September 2011
© Bostick and Associates, LLC SWOT Analysis – Small Life Insurer
© Bostick and Associates, LLC Surround vs. Replacement Addressing Weaknesses and Opportunities Source: Reviving the Insurance Core Systems Business Case, September 2011
© Bostick and Associates, LLC It’s really not about the money! Yeah, sure it isn’t
© Bostick and Associates, LLC The Role of Financial Measures Internal rate of return (IRR) Return on investment (ROI) Cash payback period Embedded 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
© Bostick and Associates, LLC 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 Source: Reviving the Insurance Core Systems Business Case, September 2011
© Bostick and Associates, LLC CBA Tools There 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’
© Bostick and Associates, LLC `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. `I 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. `Oh, you're sure to do that,' said the Cat, `if you only walk long enough.' Copyright 2008 Conseco Services, L.L.C. 13 Starting Points
© Bostick and Associates, LLC 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 costs 4.Secure consensus to a risk-adjusted discount rate and a planning horizon 5.Determine the PV of the current capability under various scenarios
© Bostick and Associates, LLC Define the Scope: Building a Modern Business Case for Legacy Systems Conversion
© Bostick and Associates, LLC Legacy Systems Conversion Stakeholder 1. Actuarial Valuation 2. Law, Compliance, Audit 3. IT and Customer Service 4. Sales 5. Executive and Board The Opportunity Reduced earnings volatility Reduced expense More customer satisfaction Focus on sales, not service Focus on core business Enabling Transformation
© Bostick and Associates, LLC 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
© Bostick and Associates, LLC 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:
© Bostick and Associates, LLC 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.
© Bostick and Associates, LLC 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
© Bostick and Associates, LLC 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
© Bostick and Associates, LLC 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
© Bostick and Associates, LLC 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
© Bostick and Associates, LLC 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?
© Bostick and Associates, LLC 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.
© Bostick and Associates, LLC QUESTIONS ?
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