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Break the Costly Habit Of Legacy Hardware

Daniel Joelson March 2007

Unwilling to deal with the tribulations of converting to new IT hardware, many insurance companies cling to legacy systems despite inconvenience, high costs, inflexibility and a decided lack of nimbleness.

And the consequences of relying upon past-its-prime hardware and operating systems don't end there, according to Chad Hersh, a senior analyst for the Boston-based research and consulting firm Celent LLC and author of the report "Legacy and Mainframe Migration: An Insurance Imperative."

"There is no ability [for them] to try new products, new billing formats, new payment plans and new ways of paying commissions," Hersh says of the companies that insist upon nursing along their aging hardware.

One of Celent's insurance company clients could serve as a poster child for the inflexibility and cost of such an approach, Hersh continues. The carrier needed 10 weeks to change the wording on a regular customer statement. They would need just as much time, he adds, for a task as simple as changing the company 800 number.

Just the same, Celent has found that some 40% to 50% of all American insurers aren't actively replacing legacy systems (see chart on page 36). Worldwide, the picture looks much the same.

"There is a strong resistance at first-tier insurers to replace legacy applications due to the massive complexity and the hard-wired process and product specifications," says Klaus Hackbarth, CIO, Deputy CEO and board member of Württembergische Gemeinde-Versicherungsverein AG (WGV), a Germany-based insurer.

"The second-tier insurance companies are much more inclined to replace," Hackbarth continues, "as their existing applications have not reached that level of old-fashioned sophistication and tend to be less complex and easier to change."

Pushback still comes from top management as well as the rank and file, observes Petra Wildemann, director of insurance for the EMEA (Europe, Middle East & Asia) financial services industry of the Palo Alto, Calif.-based technology solutions provider Hewlett-Packard Co.

"CIOs are not valued by their ability to obtain modern technology but rather on cost-cutting issues," observes Wildemann. "There is very little room for somebody to include innovative pieces."

She says the current generation of CIOs lack job security because their performance is evaluated after two to three years, rather than the five- to 10-year cycle of the past. That gives them little leeway to think big and revamp the firm to reap long-term benefits, she says. Executives worry about delays and budget overruns with technology.

"Change equals risk," says John Pierce, vice president of global insurance solutions for Patni Computer Systems Inc., an IT services provider with headquarters in India and U.S. home office in Cambridge, Mass. "Insurers are risk-averse and have an interminable resistance to change of any kind."

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