Putting Your Investments Where Your Transformation Is
Insurance Experts' Forum, June 25, 2014
Part 1: Fixing a Broken IT Investment Budget
This week, I’m beginning a 3-part series on IT Investments that may change the way you consider IT budgeting. Today we’ll cover difficult issues in budgeting and how to set a course for change. Next week, we’ll look in detail at IT project allocations and what IT investment rebalancing may look like. The week after that, we’ll uncover the seven steps to moving IT Investments forward under a new model, beginning with the development of your Transformation Steering Committee.
Before we discuss IT investments, let’s consider the realm of personal investing.
If you are an investor, even in just a 401k, and you know anything about investing, you know that when your investments seem to be headed in the right direction, it still occasionally makes sense to rebalance your portfolio. Rebalancing is done in preparation, not as a reaction. Your life circumstances are in flux. Your ability to accept risk changes over time. You prepare to move forward more appropriately.
Within IT budgets, we also need rebalancing. We tend to build our budget expectations based upon our past foundations and our perceptions of the future. But what if our future is best built, not upon our past, but upon an entirely new foundation? Yearly budgeting seems very strange in an era where daily changes are creating daily needs. To build the right kind of enterprise, we need to build flexibility into our plans, and that may mean a new kind of IT investment foundation.
Just like in our investments, rebalancing our IT portfolio may help us introduce new approaches, create that new foundation and leave some of the old approaches behind.
Driving the need for transformation is an insurance industry that is undergoing a major transformation. The five digital forces, namely, Social Media, Mobility and the Internet of Things, Big Data and Analytics, Cloud, and Artificial Intelligence and Robotics are impacting every aspect of the business. Insurers that can harness the power of these five digital forces will succeed in the new digital insurance industry; and those that are unable to will fail. This is the reality of the situation.
The challenge faced by most Insurance CIOs is how to fund programs that harness the power of the five digital forces in order to truly transform the company. Most insurance CIOs are faced with having a significant amount of their budget (e.g. 70 – 85%) committed to delivering IT services to run the business and a smaller portion to fund new programs. And within the “new programs” is an even smaller amount that can be utilized for major transformation programs.
CIOs may desperately want to transform their IT services, but they are stymied by a budget that won’t allow them to budge or may allow them a few vital “pet projects,” but will not give them the support needed for a full transformation.
Investments Portfolio Management Methods
Historically, IT investments were made under two categories.
I. Ongoing: The IT budget to fund ongoing IT services operations. (aka “Run the Business” spending)
II. Forthcoming: The investments needed to support new business requirements (aka “Change the Business” spending)
This evolved over years into a method commonly used by CIOs today where there are at least five major categories, including:
New Programs & Initiatives
Enhancements (Desired new functionality and/or needed to raise service levels)
Regulatory Requirements (Mandatory)
Critical Enhancements (Needed to maintain current service levels)
Operate and Maintain (Needed to run the business)
In the chart above, you can see that four of the five categories cover 90% of the IT spend, leaving only 10% for new programs & initiatives that may or may not be “transformational.” Assuming that most carriers may not be prepared to spontaneously produce a new IT transformation budget, their goal should be to shift the percentages in order to free up funds in the New Programs & Initiatives category.
Next week, we’ll discuss a practical approach that will help IT redirect funds and optimize its investment portfolio.
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