Anyone who has ever attempted to handicap a horse race can tell you that trying to strike a balance between minimizing risk and making a bold wager can be the most difficult of tasks.
If you bet the low odds (low risk) favorites in a race, youll have a better chance of scoring, but then again the payoffs are likely to be small. Betting those tempting long shots promises much bigger rewards, but the risk increases in proportion to the size of the payoff, because those 50-1 odds plodders have proven their incompetence over and over. Hundreds of books and probably just as many systems have been developed to attempt to held handicappers with this problem, but as those of us who occasionally play the ponies know, a system is only as good as todays results.
Yet those who take wagering seriously and do it well are not just taking shots in the dark. They make their bets based on information, and the more data they can gather, the more informed the decision. They also allocate their betting funds in such a way as to get the maximum return on the risks they are taking. Above all, those who do this successfully will tell you that you should never gamble more than you can afford to lose.
This brings us, perhaps improbably, to the subject of insurance IT budgetsin particular, setting the budget for the coming year. It seems to me that, especially in this horribly uncertain economic climate, the task of finding a budget number and setting priorities is extremely difficultand potentially risky. Should insurers play it safe and either maintain or decrease the budget number in the hope of standing pat until conditions improve and the risk profile decreases? Or is now the time to spend on new systems and programs that will set an insurer up to take advantage of the recovery with great products that are already in place or ready to launch?
The stand pat approach is clearly less risky, and nothing appeals more to an insurance company than less risk. On the other hand, as my friend Chuck Johnston of Oracle said recently, insurance is a business that favors first-movers. Thus, companies that are forward-looking are much more likely to be in a better competitive position when the economic situation improves.
How, then, does an insurer strike the needed balance? I suggest you take your cues from the professional gamblers. Making decisions starts with priorities, and a companys priorities are tied up in its primary goals. If you consider both existing and proposed IT projects and rank order them according to how much they contribute to those goals, youll have a good start. Of course, you will have wanted to gather as much information on each of these projects (projected costs, time frame, and how well they have worked elsewhere) as possible.
Next, you need to balance the priorities with their associated risks and anticipated returns. If the risk is too greatmore than your company can afford to losethe project may not be right, at least for now. The final step involves putting more of your budget into the high priority items (the ones that best meet your companys goals and objectives) that have the largest potential payoffs.
And there you have it. The year is winding downthe horses are in the gate. Theyre off!
This article can also be found at InsuranceNetworking.com.
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