empowering companies through knowledge® information technology trends and spends september 2010...

Empowering Companies Through Knowledge®

Information Technology Trends and SpendsSeptember 2010

2010 AASCIF IT COMMITTEE WORKSHOP


Agenda

• About Ward Group• Some Industry Perspective• Information Technology Trends • IT Expectations for 2010• New System Development Activity• Questions


About Ward Group

• Insurance Focus – most comprehensive operational benchmarking programs in the industry

• Performed nearly 2,000 benchmarking exercises for more than 350 North American insurance companies since 1991.

• Annual evaluation of every property/casualty and life/health company in the United States.

3©Copyright, Ward Group 2010

The recognized leader in insurance company benchmarking and best practices and a major sponsor of primary operational research studies.


Industry Premium Growth Trends

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Declining Investment Returns

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Major Tasks in 2009

Staying profitable

Managing economic conditions and expense control

Control Information technology spend

Improving claims handling abilities and systems

Recovering from the loss of surplus in 2008

Mixed

©Copyright, Ward Group 2010 6


2009 Surprises

• “Panic” in Q4 2008 and Q1 2009 - Companies stopped thinking/planning like normal, many bad decisions made

• Stronger surplus recovery than expected – Few major storms; strong investment returns; most kept insurance

• Reserve releases, at greater levels by small – medium, mutual and personal lines carriers

• Commercial lines stays soft longer, workers compensation hit particularly hard

• Avoided major federal intervention• Personal lines able to improve pricing• Few major staffing reductions• Lack of merger/acquisition activity• ERM was not a priority



Major Tasks for 2010

• Staying profitable• Managing economic conditions • Preparing for hard market/balancing expenses• Integrating new technology – make ROI work• Improving customer services processes• Understanding impact of healthcare regulation• Increasing employee engagement



Information Technology Trends

• How much are companies investing in IT?

• Where are they investing?• What are the expectations for IT

spending going forward?


Empowering Companies Through Knowledge®©Copyright, Ward Group 2010

IT Spending TrendsInformation Technology as a % of Premiums Written

• For 2009, the overall benchmark spent 4.11% of GPW on IT spend, compared to an average spend of 3.54% in 2005.

• Ward’s 50 high performers benchmark performed 26% lower in IT expense to premium.

• The Ward’s 50 group has invested in technology at the same rate as the overall benchmark, they have not have been affected to the same degree by declining premiums as the overall benchmark.

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IT Spending Trends

High Performers• Make incremental, phased

investments of technology.

• Tend to operate with custom developed systems (Many systems are legacy and have been incrementally updated.)

• Utilize less consulting resources.

• Lower expense in all functions.

• As a group, have minimal premium declines.

AASCIF Benchmark• Sharp increase in 2007 – 2009 in IT

expense as a % of Gross Premium. Consistent with large premium declines in the same time period.

• Prior to 2007, AASCIF Benchmark compared slightly above the High Performer Benchmark.

• AASCIF companies have an advantage to the overall benchmark from a complexity standpoint (single line of business, single state).

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IT spend nearly the same as 2001 conditions

BUTIT as % of total company budget 9.5% in 1998 and 10.63% in 2009

IT expense per FTE $15,116 in 1997 and $32,368 in 2009

More IT FTEs to support the business versus 10 years ago

Are Companies Spending More?


Will it Continue?Companies continue to invest in IT as a business enabler.

Most common projects:•System Replacement•Business Intelligence•Customer Capabilities


IT Expense Distribution


• Personnel Expense per FTE growth trends have slowed (lower merit increases, lower employer health premium contributions, and decreased bonus payout as a result of deteriorating performance).

• Consulting expense continues to grow despite recent efforts to minimize.

• 40% of hardware spend is depreciation expense and 25% of software spend is depreciation.

2009 IT Expenses by Category


IT Expense Distribution


• Applications expense has grown from 46% of the budget in 2005 to 53% of the budget currently.

• The only functions to decrease in spend since 2005 are Desktop Support and Mainframe Support. All other functions increased in expense compared to premium.

2009 IT Expenses by IT Function


IT Staffing TrendsInformation Technology FTEs per $100M of GPW

• For 2009, the overall benchmark had 17.25 IT employees per $100M in GPW. In addition, they had an average of 4.31 IT consulting FTEs.

• Ward’s 50 high performers benchmark performed 17% lower in IT FTEs, and 28% lower in IT consulting FTEs.

• IT continues to be one of the only areas in the insurance company experiencing resource growth.

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IT Staffing Distribution


• Applications headcount is a greater percentage than the application expense.

• The distribution of headcount is consistent with 2005. Applications has seen the most hiring with employee growth, as it represents 62.58% of the IT employee base.

2009 IT Employees by IT Function


IT Staffing Trends

High Performers• Investments in technology are

typically supported by employees.

• Tend to operate with custom developed systems (Many systems are legacy and have been incrementally updated.) Do not have a double legacy burden that is present in overall benchmark.

• Lower staffing in all functions.

• As a group, have minimal premium declines.

AASCIF Benchmark• Sharp increase in 2007 – 2009 in IT

FTEs per $100M of Gross Premium. Consistent with large premium declines in the same time period.

• Applications functions represent the largest percentage of IT headcount. Prior to 2007, these functions allowed the AASCIF companies to benchmark below high performers based on the complexity advantages (single line of business, single state).

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IT Investment Observations

• Most companies are not realizing full technology benefits due to:– Poor Management – Dependence on Vendors– Unrealistic Expectations

• Over 50% more IT FTEs now than 10 years ago for average company

• IT consulting as % of total IT budgets up over 80% in last decade



• When asked to compare their 2009 and 2010 IT budgets, in terms of total dollars spent, only 24% of companies reported they expected the IT budget to decrease in 2010.

• 56% indicated they were increasing their IT budget in 2010.

• 20% of companies reported no change to the budget.

• On average, Ward Group expects a 3% increase to IT spend.


Expectations for IT Spending2010 IT Budget

Percent Change Compared to 2009(Including Capital Spend)


User Support FunctionsGrowth Expectations

Staff Growth Expense Growth

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• 20% decreasing Desktop Support expenses- Equipment cost decreasing- Extending refresh periods - Evaluating virtual

desktops/thin client devices.

• 16% increasing Help Desk expense- Self-service capabilities drive

increased customer base and call volume

- Software packages for additional call management


Network Services FunctionsStaff Growth Expectations

• Minimal staffing changes to the network services functions

• 12% increasing server support staff

– Virtualization– Conversion of systems to

distributed environment• 8% decreasing mainframe support

staff

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Network Services FunctionsExpense Growth Expectations

• 24% reducing mainframe expenses

• Server support function is mixed with 24% increasing expenses and 20% decreasing expenses. Companies are in various stages of their server virtualization initiatives.

• 44% increasing telecommunications expense. Significant VOIP activity.

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Application FunctionsStaff Growth Expectations

• 24% increasing Application Architecture and Design staffing

• Volatility in projections for Application Development and Application Maintenance

• 20% adding staff to QA/Testing teams

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Application FunctionsExpense Growth Expectations

• 52% investing in Application Architecture and Design

• 44% of companies are increasing investment for Application development and 24% are reducing

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General FunctionsStaff Growth Expectations

• Few decreases in staff for General functions

• 28% increasing staff for data warehouse

– Companies are in all stages of development, but almost no company is ignoring the need for better business intelligence

– Increasing investment in data warehouse activities with the goal to leverage their information into actionable data

• 20% adding staff to Information Security

– Large increases since 2005

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General FunctionsExpense Growth Expectations

• More companies increasing external spend on General functions than increasing staff

– Information Security– Disaster Recovery

• Trend of companies recovering their distributed environment internally rather than using a third party provider. This is more costly in the short term, but will provide additional reliability and flexibility.

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Anticipated Change

• Companies believe in the value provided through IT organizations and are choosing to make investments during these trying economic times. Yet, there is not a blank check. IT leaders have made reductions in certain functions to provide for investment in other functions.

• Desktop Support and Mainframe Support have the largest net decreases.

• Information Security and Application Architecture and Design have the largest net increases.

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Net Anticipated Change to IT Functional Expense for 2010


Anticipated Increase

• Evaluating only the companies that are investing in a function, the average investments range from 7-10%.

• The applications and project driven functions tend to have greater investments than the user support and network services functions.

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Average Increases to IT Functions for 2010


New Systems Development Activity

• Are companies developing new systems?• Are they using vendors?• Why are they developing new systems?• How do companies rate their project

governance?



New System Development Activity

• 71% of companies are participating in a policy administration system implementation and 50% of companies are implementing a new claims system.

• Only 8.3% of companies are not currently participating in a system implementation project.

• New system projects remain a high priority item for insurance carriers. Many of these projects are based on driving out costs of other parts of the organizations in order to meet the ROI’s promised.

• Ward Group has also noted steady increases in system replacements among its client base over the past 5 years.

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New System Development Activity

• Prior to the last 10 -15 years, it was common for many insurance companies to custom develop their systems with internal resources.

• With many available vendors in the marketplace and the need to accelerate timelines, the trend has shifted towards buying systems versus building them internally. As indicated, only 28% of companies are custom developing with internal resources.

• This trend was evident across all system types – policy administration, claims, billing and other.

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• Only 1/3 of projects are in phase 2 with a product or location live on the new system.

• The other 2/3 of projects have significant milestones to achieve. This trend likely indicates the investment in new systems will not slow for 3-5 years since companies will need to continue to invest in these projects to get systems in production.

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New System Development ActivityOverall Project Status

©Copyright, Ward Group 2010


• A surprising metrics was that 35% of companies reported that their new system project was over budget.

• Comparing this over-budget statistic to the fact that only one-third of projects are in phase 2 does not provide a favorable picture for expense management issues. Companies are more likely to be over budget as the project continues into multiple phases.

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New System Development ActivityOverall Budget Status



New System Rational

• The number one reason for a new system was to improve the efficiency of the organization. This can be a challenge for IT organizations when budgets are tight. While a new system will generally add expenses to the IT budget, the IT department does not control staffing or expense reductions needed in other business units in order to justify the investment once efficiencies are achieved

• While it was in the minority of responses, 33% of companies reported rationale for the new system as the inability to maintain the current system. Companies are determining that they cannot ignore the long term viability of their system environment.

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• 27% of companies are adding a new system to their maintenance environment without eliminating a system,

• Although 73% of companies are retiring legacy systems, the retirement is generally not simultaneous with the implementation which will cause maintenance costs to increase

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System Replacement ProjectsIncludes Legacy System Retirements



Governance

Level of Governance (alignment of the business and IT)

Governance Process in Relationship to the Process 5 Years Ago

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• Maintaining good or excellent governance can mean the difference between success and failure. 21% of companies rated their governance process as excellent and 71% reported it as good.

• Another positive metric regarding governance is that 92% of companies reported that their governance process is better than it was 5 years ago. There have been many initiatives focused on increasing communication to improve timelines, prioritization and improving the relationship between IT and the business units.


Leah HollsteggeManager, Ward Group

[email protected]

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