The insurance industry has weathered the economic crisis somewhat better than its peers in the banking and financial markets, but has still taken its hits across all business functions, including IT. Given how tightly coupled the business of insurance is with its core business applications and infrastructure, how have insurance IT organizations adapted to weather the economic storms?
In a survey that Forrester conducted during the second quarter of 2009, we asked insurers to tell us what actions they were taking to deal with the downturn as well as what was to come in the next year. (See Figure 1). Given their responses, the following represents the top tactics among respondents to cope with the troubling times.
- Freeze IT hiring: Even in the midst of big core app projects, insurers are looking to squeeze more from less. That means that anything to improve the productivity of IT resources will be essential to deliver the business value envision from core app investments.
- Reduce contractor and consultant use: Carriers are looking to cut consulting and staff augmentation services to reduce costs. That means that tech vendors need to be selling not heads, but business value.
- More stringent ROI justifications for IT projects: There had better be a solid business case with a rapid payback, in some cases, in the same quarter the project’s delivered. Vendors will be on the hook to help prepare objective business cases.
- CAPEX put on hold: Capital expenses impact the carriers bottom line, meaning they’ll be interested in moving to functionality that can be delivered in the OPEX domain such as applications and infrastructure outsourcing (see Nos. 7 and 8).
- IT staff cuts: A year ago the insurance industry was a safe employment haven. That employment picture has changed, and insurance employment has fallen in seven of the past nine months, as reported by Best Wire Services. IT services that can make the variable expenses even more predictably variable will be in high demand.
- Speed up projects to accelerate cost savings: While some projects got cut, others went turbo because they could deliver some big cost reductions. That means that projects with high initial expenses and long-term payoffs will never be considered. Tech vendors will need to bust up big projects into smaller bits and be ready to show fast payoffs.
- App outsourcing on the rise: With CAPEX and headcount hits, carriers still need to run their shops, and many are turning to more predictable transaction-based pricing models. Carrier IT shops know the old models can’t work, but still are hesitant to cede control. That means tech vendors need to build and sustain trust with their carrier IT clients, and be ready to pitch new thinking such as Software-as-a-Service, which will require lots of vendor education to quell control fears.
- Infrastructure outsourcing increases: Insurance IT demands a solid foundation that consists of the network and systems infrastructure that, while critical, is now considered a non-core service. That’s good news for remote infrastructure management service providers, but that means horizontal tech vendors will need to be able to distinguish the business value they can bring to carriers in a crowded market (hint: focus on insurance expertise, even for a commodity like infrastructure).
- Use more consultants and contractors: While a vanilla consulting or staff aug gig will get hit in the downturn, carriers are turning to consultants and contractors for new ideas that can help them reduce operational costs, improve business decision-making or create better customer experiences. That means tech vendors looking to capture the attention of insurance IT stakeholders could very well be bringing examples of work from outside the insurance industry.
- Economic stimulus money means more insurance IT spending: Fuhgetabodit! Tech vendors should instead be thinking about the implications of something else on the minds of the feds—regulation. So, can some tech vendor PLEASE tell me how they’re helping their insurance customers deal with the Medicare, Medicaid and SCHIP Extension Act?
This article can also be found at InsuranceNetworking.com.
Ellen Carney is a senior analyst with Forrester Research. She focuses on how the financial services industry researches, procures and deploys business technology, and is responsible for developing the global forecasts for IT budget and spending forecasts for insurance and banking. She can be reached at ecarney@forrester.com.
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