It’s a rare year when departments at insurance companies aren’t being asked to do more with less. Even now, when the business climate is on an upward trajectory, non income-producing departments like IT remain under particular scrutiny to find ways to lower their costs.
It is not easy to manage IT operations under tight spending constraints, but sustainable cost reduction frameworks can make the effort pay off now and in the future.
For a while during the economic downturn, IT cost-reduction programs were an immediate necessity, and any dollar saved helped shore up the insurer’s bottom line. The improved economy and company profitability over the last 4-5 years have loosened the purse strings, though not the desire to keep costs in check, and savvy insurers are now redirecting and reinvesting those savings to innovate and improve speed to market, digital capabilities and other modernizations. In other words, the goal of reduced IT spending has shifted from meeting short-term capital needs to investing in short- and long-term improvement. Those investments can provide the flexibility so essential for the digital marketplace. That’s a very good thing.
Regardless of what happens with the economy, managing costs while enhancing quality will likely remain an imperative, so the logical question organizations should be been asking is, “How can we do this in a strategic manner?”
Just before the millennium, insurers and other data-heavy industries discovered India as a source of well-trained, inexpensive IT staff to test systems for Y2K resilience. Soon, a huge percentage of jobs were being sent offshore to India, and eventually to China, Russia and Brazil. A lot has changed in the past few years, though. According to the Economist, IBM, which was India’s second largest private employer after Tata Consultancy Services (TCS), originally paid wages that were 20 percent of their American staffers’ salaries. That wage gap had narrowed to 30 to 40 percent by 2013 so savings were diminishing. Meanwhile the increasing use of automation software and cloud computing is changing the required skills and composition of the IT workforce, further decreasing the allure and need for offshore staff.
Instead, some insurers are now bringing jobs back to the U.S. and taking advantage of the lower costs and large workforce in some parts of the country and have moved to places like Dallas, Atlanta and Phoenix.
But moving resources to different locations is just one small chance to reduce cost and increase workforce capabilities.
Opportunities exist across the full IT operating model: business interface, architecture and strategy; project lifecycle; service management; infrastructure; security; IT back office and the workforce. Our IT Cost Reduction Framework takes a look at four sustainable cost reduction building blocks:
- In the short term, the emphasis is on minimizing IT spending,
- Optimize the organization to make it efficient.
- Re-architect systems for efficiency.
- Use IT to enable business optimization.
Each approach contains savings opportunities that will grow substantially over time. Reducing the use of legacy systems, for example, would eliminate some high maintenance costs, allowing more resources to be applied to cloud technology. Efficiencies from cloud could then be used, for example, to innovate claims by developing a blockchain-based automatic claim handling system. Savings, properly invested, beget other savings, which eventually beget innovation.
When working with a client, I find it most effective to explore the entire IT organization, identify cost savings and opportunities, and then help the business to develop a target state for IT that is both effective and efficient. Our IT Cost Reduction Toolkit helps an organization explore:
- Reducing the cost of legacy systems by modernization or replacement,
- Providing space for investment in digital technologies,
- Delivering IT value for money,
- Optimizing cloud benefits vs. cloud costs and
- Exploiting IT to find new ways to reduce business costs.
In some cases, this is quite a challenge. Many organizations have repeatedly examined their IT organizations and have already picked the low-hanging fruit. For them, additional gains may be harder to find and benefits may be incremental. In addition, the constant focus on costs may exhaust an organization’s workforce, so there needs to be a process that involves and empowers employees to keep morale high.
Reducing costs needs to be a strategic surgical procedure that prunes some organizational branches, leaving room to plant new technologies. Repeatedly chopping operations with an ax just weakens them and won’t get the results you want.
Since expenses will always be under scrutiny, sow an effective strategy to trim costs and reinvest savings. Then reap an efficient, competitive organization.
- Read, “IT Cost Reduction: Using new technologies to reduce costs and gain agility.” (Accenture – PDF)
- Read, “India No Longer Automatic Choice for IT Services and Back Office Work” (Economist)