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Insurers are looking for faster, more tailored responses to global market opportunities. The ability to introduce new products quicker, decrease operational costs and manage continuous compliance with evolving government regulations are top of mind.
Just about every carrier knows the capabilities they need to be successful in today’s ultra-competitive world of global insurance, but quite a few still do not know exactly how to acquire them. Transforming capabilities often requires structural changes and potentially expensive modifications to business processes, organization and technology. A failed transformation program can be very costly. As a result, many of our clients seek a cost effective way to mitigate the risk of introducing change. In response to this need, a systematic approach has been developed that will enable the transformation of an insurer using a business analysis technique called Component Business Modeling (CBM) and an IT enabling architecture called services-oriented architecture (SOA).
For many insurers, business transformation begins with the realization they cannot stay where they are and continue to prosper. They watch as existing and start-up competitors leverage new customer channels, and see themselves falling behind because they are not able to react quickly enough to market demands for new and customizable products. Determining how to design a business model that will enhance their competitive advantage, develop an optimal cost-efficient operational model, and identify the required changes in the organization or the IT infrastructure can be a slow and inexact process.
In some cases, it may take months or even a year for an insurer to develop a new product or modify an existing one when, ideally, it should take less than a day to determine where in the application portfolio to make modifications and change the selected IT applications. Today, making changes to legacy systems—often several of them—forces weeks or several month long bouts of rewriting and testing.
Many insurance companies have literally millions of lines of code contained in decades-old systems; determining where to modify a complex application correctly can become like finding a needle in a haystack. One change could have an impact on what appears to be unrelated parts of the system. To avoid that, a costly decision may be made to install a completely separate system to handle new products or to add new distribution channels. When there are administration problems related to new products, improper handling of policies in a tightening regulatory environment could mean potential trouble with a growing array of international governmental agencies and further complicate matters.
This occurs, of course, in an economic climate that has market share going to the insurer who manages to get there first with innovative new products and superior client service. Nowhere is this more apparent than in developing markets such as China and India, where the qualified first players may well be the ones who rapidly gain and keep market share.
Jack be nimble
The inescapable conclusion is that Insurance companies need a business model and a supporting IT infrastructure that is global in scope and lets them be more flexible and nimble, especially when it comes to developing new products, adding new and different channels and providing better customer service. At the same time, that business model needs to incorporate an integrated, cross-enterprise approach that focuses on what a particular insurer does best, and leaves non-core business functions to partners who can deliver best-of-breed service in the most cost-effective way, no matter where in the world they operate.
In terms of modern, IT-based capabilities, that all amounts to the what. It’s the how that continues to stump many insurance carriers in the face of intimidating technical complexity and unrelenting competitors. Insurers are reluctant to commit, and the IT modernization trip gets postponed—over and over again. For many companies, though, the high-level how is to move down the path from component business modeling (CBM) to an IT infrastructure built on a services-oriented architecture (SOA).
At its most fundamental, CBM can be used as a framework that helps to break boundaries created by organizational, product and channel silos so operational processes can be aligned effectively with IT. Use of CBM allows an insurer to deconstruct its business model into common processes and supporting systems that can be consolidated to eliminate duplication and streamlined to encourage productivity and faster market response. In other words, CBM can be used to analyze the components of the business architecture. It helps to have the company’s most experienced resources examine the business components that are most problematic or the most critical and must perform optimally in order to drive the organization towards achieving the company’s strategic goals.
Furthermore, the use of the CBM framework can help an insurance company associate its organizational processes with its business strategy, and then support that connection with appropriate technological solutions, facilitating fact-based decisions about the most effective methods for managing change. Deconstructing an insurer’s business operations into components—containing similar activities—helps the organization to focus on the way business units collaborate (or fail to collaborate) across product lines, functions and geographies. At the same time, componentization points the way toward eliminating redundancies, closing gaps and improving efficiency and resilience.
Important CBM activities include:
- Defining discrete components in terms of business activities, organization, operations and supporting technology
- Linking the consumption of resources with revenue generation and competitive performance—this can be the first step in restructuring the organization to be more effective and more efficient
- Analyzing underlying competencies to identify discrepancies between the way business processes currently are and the way they could be
- Highlighting system and application gaps, duplicative processes and systems over-extensions
- Identifying collaborative patterns that can help transform business performance
- Producing a multi-year, multi-phased initiatives roadmap to repurpose existing facilities and develop new processes, organizational structures and systems
Hot spots and cool solutions
As insurers begin moving down the CBM path, they often are able to leverage the potential of an on demand IT environment, combining seamless connectivity and efficiencies with the advantages of specialization and scale found in a fully networked business. In the area of risk management and regulatory compliance, CBM can help insurance carriers:
- Identify ways to remain compliant and restructure with less effort in the non-compliant risk areas and reduce remediation costs
- Highlight hot spots for immediate attention
- Solve problems innovatively, such as through global sourcing of non-core tasks and processes
The CBM methodology includes examining the cost of activities performed within each component, as well as the potential revenue impact of modifying or investing in selected components. Overlaying desired capabilities that can help the company differentiate itself from its competitors onto the components of the CBM map and examining the cost and revenue potential for each component results in identifying selected components that the company should focus its initiatives upon—these selected components form the Heat Map. Essentially, use of the CBM methodology can help show an insurer which business functions it can most cost-effectively keep, or improve, but more important, it serves as a detailed roadmap to implement change and achieve business transformation. Specifically, CBM can provide the business layer of an enterprise architecture that includes a service-oriented architecture (SOA), application architecture and a technical architecture. Properly executed, use of the CBM methodology will ensure an insurer’s ability to seamlessly align the IT development efforts to the business needs—an area where most of the enterprise transformation efforts often fail.
SOA, as an IT architecture, allows insurers to add user functionality using a flexible services infrastructure, without the need for redoing legacy code. At the same time it lays the foundation for implementing a more scalable and variable-cost on-demand business model. In a service-oriented architecture, business logic is not hardwired into programs; use of Services allows loose coupling of application components containing business rules that can be easily moved, consolidated or eliminated as the business and the market require. It’s a fundamental shift away from monolithic legacy systems design, and allows the organization to build, deploy and integrate services independent of existing applications and IT platforms. This is one of the most critical success factors for an insurer—flexibility—in this era of globalization and doing business in an ultra-competitive market place.
With an SOA-based IT infrastructure is aligned with operating model and strategy, an insurance company can redesign and streamline its business processes to deliver more flexibility, enable better interactions with business partners and, ultimately, lower costs.
There are several stops on the path from CBM to the development of an SOA, but the journey usually begins with the creation of a CBM map customized to the requirements of an individual carrier. Next, the desired business capabilities are determined, and then existing business processes are analyzed and major business activities within each component are identified.
Next, actual services related to the insurer’s business are identified, existing systems are analyzed and services that are candidates for realization (development) are documented. After specifications for those services are defined, a sub-system analysis is performed and Service specifications are developed.
In the final phase, low-level design specifications are developed, code is tested and an actual Service acceptance test is performed.
System Sherpa
The path from CBM to SOA and capabilities enablement isn’t always a straight one, and often it’s best to hire a guide (a Sherpa)—a business partner who knows the lay of the IT landscape—to lead the way. In the business world, as when climbing high mountains, prior experience can increase the chance of success in reaching the peak and avert potential dangers and challenges. In many instances, being “penny wise and pound foolish” could mean the difference between a successful transformation and innovation versus a costly failure.
The payback from using experienced resources and leveraging proven assets can justify the expense of hiring a technical Sherpa. Experience has shown that the cost of SOA development efforts can be recovered in as little as two to three years based on cost-efficiencies and additional productivity gained through reuse of functions, reduced maintenance costs, shorter time to market for new products, greater market share, improved customer satisfaction and more effective utilization of resources
With a CBM and SOA approach, insurers can tackle one line of business (LOB) at a time, and then economically adapt the results to other LOBs as time and budgets allow. The benefits gained from smaller scale transformation within the enterprise can help justify and support continual transformation within other areas of the organization. As most business executives will acknowledge, maintaining a status quo is no longer an option nor is it a survival strategy. Only continuous changes—meeting new market demands, new geographic expansions, and adapting a new approach for business—can lead to that all-important differentiation of capabilities and help an insurer to compete and prosper.
Finally, many business executives know what needs to be done—but this tried and proven CBM to SOA approach provides the how to help insurance companies get to where they need to go. Effective implementation, or how to, can make the difference and help a company succeed in the ever competitive global insurance market.
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Daniel Lee is an Associate Partner in the Global Insurance Practice with IBM's Global Business Services. Daniel can be reached at dmlee@us.ibm.com.
Kishore Ramchandani is an Associate Partner with IBM's Financial Services Industry Consulting Practice, specializing in Information Technology and e-business Strategy and Change Planning. Kishore can be reached at kramchan@us.ibm.com.
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