December 31, 2012 – The main business benefit of a core systems replacement is increasing business agility, according to 58 percent of respondents to Celent’s “Tracking Progress in Core Systems Replacement, Global P&C Edition.”

Just 12 percent of respondents pursue such projects to reduce business costs, 11 percent to reduce IT costs, 9 percent had other reasons, 4 percent had no business case and 3 percent were pursuing such projects in efforts to increase revenue.

Celent said that while the benefits of increased underwriting efficiency through workflow, rapid product design, or improved customer service may be instinctively clear, attaching quantifiable monetary benefits to such projects can be difficult. However, addressing the legacy IT environment will become the cost of staying in business.

“Why does Celent dedicate so much time to researching these engines? It is the misalignment of the abilities and the business aspirations that attracts our attention,” the report authors said. “Should the business need to drive on the autobahn at 200 mph, the engine should be ready to go that fast. If an emergency stop is required, followed by a 180-degree turn, the engine should enable that too. This flexibility is what is missing from most great engines in the insurer. As such, restrictions are placed on what the business is able to execute. Current engines may allow the insurer to speed up, but not too fast, and certainly not to execute any emergency braking.”

Asked to rate issues related to their legacy systems on a scale of “not important” to “very important,” the top issues were: inflexibility of applications, inflexibility of data models, difficulty of integrating with other systems. “This raft of issues stands in the way of the IT department delivering on business requirements and supporting business strategy,” Celent said.

Findings from the research include:

  • Legacy systems continue to constrain the front office, affecting the ability to create and manage new products effectively; the timeliness of getting new products to market, and achieving desired levels of customer service.
  • The business case plays an important role in communicating the need, cost and goals of a core system replacement program to senior management. However, many fail to treat it as a living document and thus forgo a great learning opportunity for the organization undertaking the project.
  • Costs estimation is more art than science, and IT needs to improve accuracy in requirements definition, system configuration, data conversion and system integrator costs. “Putting in place a process by which the organization can learn and improve on estimation is a good investment for future programs of change,” the report says.
  • Managing the IT complexity of a change program keeps CIOs awake at night. The IT landscape has grown and has many interfaces, interdependencies on systems, and technology stack. If responsibility for maintenance resides with an outsourcing partner, that can add complexity.
  • Insurers are ready, willing, and waiting to leverage strategic skills and expertise from third parties. “A legacy modernization project is multidisciplinary, and, for its duration, will go well beyond the operational skills readily available inside the insurer,” Celent said.
  • The greatest challenges to core systems replacement projects are largely the same as they were two years ago, the last time Celent conducted this study. The biggest challenge continues to be having the right staff in the right areas to take on the challenge. Next was deciding on the best approach to the legacy modernization program, followed by managing the impact on the organization. Two years ago, those challenges were ranked in reverse order.

Early adopters of legacy modernization programs offered the following lessons:

  • Undertaking legacy modernization has a significant impact in several areas of the business, and organizations undertaking that challenge without senior management backing do so at their own peril.
  • Legacy modernization program should be broken into manageable projects of six to nine months with some associated benefits.
  • Avoid inventing new legacy. Using a service oriented architecture, business logic can be developed once and used wherever it is required. Components may need to be replaced over time, but a modular design provides flexibility over the long run.
  • Outdated business rules and processes are embedded in legacy systems; businesses should look to refine and improve existing processes.
  • Partnering with a handful of system integrators to bring deep expertise and knowledge is an important risk mitigation strategy.

The online survey asked questions about current state of the IT environment, future plans, views on data migration and modernization preferences, and vendor roles; 141 P&C/general insurers responded to the survey. More than 40 percent of respondents had more than $1 billion in annual premium; most respondents were on the IT side (46 percent), followed by a mix of IT and business (32 percent), and 22 percent on the business side.
This story originally appeared at Insurance Networking News.