Perspectives

Published Article

Think Like a CFO: Part I

December 2004

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By Russell J. Pass, Published in Insurance & Technology

After years of relative autonomy, senior IT executives at insurance companies are finding themselves increasingly under the thumb of tech-savvy CFOs charged with reducing costs.

Newly recruited or promoted CIOs are at least as likely to find themselves reporting to the CFO as the CEO. Justification for greater finance involvement in IT decision-making is based on IT's perceived profligacy in the previous decade, Sarbanes-Oxley legislation and the heightened importance of expense control — all familiar rationales to insurance company IT professionals. To succeed in this new environment, CIOs must learn to think like CFOs — and prepare to address tough questions that go beyond the traditional IT domain.

On balance, the impact of these changes on insurance companies has been positive. Greater scrutiny and oversight by finance has brought a healthy rigor to IT decision-making, with many IT organizations adopting formal portfolio management processes and tools. An increased emphasis on reaping the benefits of earlier investments has not only improved business productivity but helped to rescue earlier IT projects from real or perceived failure. Moreover the greater insistence on business sponsorship for IT initiatives and on stronger business cases overall has improved returns on IT investments dramatically. Increased finance involvement has not always been positive in the characteristic shift to a nearer term focus, with neglect of infrastructure and architecture too often the result.

Rather than battling tooth and nail, successful IT organizations have embraced these changes, viewing them as an opportunity to become more business-savvy and of greater value overall. They have seized the opportunity to spend more time with CFOs and educate them on the complexities of IT in the insurance industry. Few CFOs fully appreciate the technology-related challenges presented by the unique mix of document and transaction processing, aging legacy systems, customer-specific processing and state-level regulation faced by insurance company IT organizations. Fewer still recognize that had the same tight screen been applied to earlier investment ideas that many would like to apply to current ones, the 15- to 25-year-old applications on which the company is completely dependent would not exist (potentially along with the company itself).

The challenge facing insurance company CIOs and IT organizations today is how to prevent the quest for ever-stronger business cases and ever-quicker business benefits from squeezing out IT investments that will be critical to the company's ability to compete — not just tomorrow but the day after tomorrow. To be successful, they will have to adopt a CFO mindset, understand the pressures he/she is feeling from the CEO, board of directors, rating agencies, and regulators, and use that improved understanding to anticipate the tough questions a CFO might and should ask when reviewing technology investment ideas.

These questions will not be as predictable as they might have been a few years ago and will not be limited to superficial issues of cost and benefit. Instead, CIOs should expect their tech-savvy CFOs to challenge proposed investment ideas with the following questions:

  • Which costs— turnover, unavoidable disruption to the operations of customers or suppliers, etc. — might the business bear as a result of this project that are not quantified in the business case?
  • What is the risk that this will be a technical success (i.e., development completed on time and on budget) but a business failure (i.e., benefits never materialize), and what are we doing to make sure this doesn't happen?
  • Is this simplifying or complicating our IT architecture, thus imposing a "tax" on things we may do in the future?
  • How can I be sure we are capable of executing on this?
  • How will I know if this project goes "off the rails" and needs intervention to get back on track?
  • Are there alternatives to this investment that could produce the same business benefits at lower risk (e.g., offshoring rather than automating a business function)?
  • What are the business consequences of doing nothing?

Russell J. Pass (RPass(at)BridgeStrategy.com) is a Partner with Bridge Strategy Group, a Chicago-based management consulting firm focused on serving the insurance industry.