Is your CIO funding projects or business capabilities?

Context

Earlier, the CIOs tended to organize their teams and functions around specific projects. Wherever possible, consolidation was touted as the panacea! The seemingly good candidate is RTB (Run The Business) function that typically “Keep the lights on.” Support, both application and infrastructure, falls into this category.

As the rest of the units start aligning themselves to operate nimbly in an agile and digital world, what happened to the IT organization? Many CIOs have simply reorganized them using fancy terms but essentially retaining the same flavour. Ask them about the IT budget. They will talk about RUN and CHANGE. Drill them into more detail, for example the cost of introducing a new product and see their reaction!

In this blog, I share the experiences of working with CIOs and IT organizations around two important aspects.

• How to look at the IT budget and get answers quickly?
• How to align and develop an operating model?

Let’s understand the changing paradigms to the meaning of IT as organizations go digital and embrace new technologies:

Diagram #1: Emerging interpretation of IT in the digital context

In short, business strategy automatically becomes IT strategy. It is no longer possible for CIOs to emerge victorious when the entire business is going southwards! The CIOs are in the thick of things.

Funding Model

Diagram #2: IT Funding by Portfolio

Typically, the CIOs look at the funding by any of the three categories:

1. Type of focus - RTB (Run the Business), CTB (Change the Business) and Grow (Linked to Business Growth)
2. Budget (Cost of personnel, license, hardware, storage etc.)



Diagram #3: IT Funding by Budget

3. Financial accounting sense (Capex / Opex)

Diagram #4: IT Funding by Accounting

These types of funding keep the technological interdependencies and the business led IT aspects deeply hidden. The real cost drivers become virtually impossible to find quickly. In a way, this explains all the IT costs but presents an incomplete view. This may lead to investment silos and/or duplicates. The flexibility needed to understand digital investment is not the hallmark of these methods. Moreover, justifying the legacy refresh takes inordinate time.

Diagram #5: Allocation of IT Budget

Instead, allocate the IT budget by product line. For this, work with business to understand the strategic / relative importance of the product lines annually. Empower the PLMs (Product Line Managers) with the discretion to allocate funds to maintenance, technology refresh, innovation etc. They should have the wherewithal to reallocate the funding as priorities change.

In the diagram #6 below, an illustration is given. The key focus area is to build new business capabilities and ensure the business strategy is not impeded by IT. 

• New business capabilities (BC) are financed by respective business area budgets. Examples can be subscription based services like SaaS or getting third party services.
• New business capabilities are funded by IT to the extent of technology implementation or major changes/enhancements.
• Then comes the "Maintain to Operate" layer that focuses on licenses, upgrades, hardware/software maintenance, staffing etc.



Diagram #6: Shifting Budget Patterns



• Finally the digital foundation layer that addresses cloud / building new platforms etc. This directly mitigates operational risk.

As can be seen, the key differences to this type of approach are:

• Part of erstwhile IT budget for funding new products or building new capabilities is shifted to the respective business unit or area.
• Business area is the owner of the budget for introducing new capabilities.
• The funding that is required for digital foundation is separate from maintenance.
• The linkage of technology to the business capability is clear.

What comes out clearly is that enterprise wide view of technology spending covering business-led IT. This view complements the traditional views to gain quick insight into cost of transforming the landscape, cost of sustenance of new capabilities as well as introduction of newer ones. As the technology funding is clearly aligned to business, the ability of IT to influence and respond increases.

Operating Model

Let's start with what we aspects we should expect from the IT operating model.

• Faster time to market
• Greater business integration
• Flexible ways of working
• Improved customer experience

For this, we need to shift the mindset from projects to products. What are the differences?

Diagram #7: Redesigned Target Operating Model

How do we factor them in the operating model?

• Diagrams 7 and 8 give an overview of how to visualize these changes in the model and consequently the organization of the teams.
• Choose products or business capabilities over projects.
• Each capability is a vertical tower that comprises all IT operations pertaining to it. RTB and CTB work will come under this.
• The product line manager is empowered to organize his teams, allocate budget and change funding.
• These operations are done on the product lines in an agile / DevOps / CI manner.
• Everything cannot operate in a vertical stack. IT has to spot scaling / efficiency opportunities wherever possible. What is not common to each capability but to the entire organization is (1) the building blocks of application and (2) Cloud based scalable infrastructure. These may include shared applications, shared ERP, shared platforms, shared BI and shared data centre etc.

Diagram #8: Team Organization

Conclusion

It makes immense sense to appreciate the paradigm changes in the way IT is viewed and linked to the business. This should logically flow into the way the IT teams are structured and funded. 

What are the advantages of reorganizing the IT along these lines?

• Business knows easily the respective IT to discuss/contact.
• As the IT services each business capability, the skill sets / knowledge of understanding of the business grows within that unit. This means informed resources that have the ability to respond to changes.
• IT supports the business more efficiently in terms of understanding the cost components and come up with answers to question like – what will be the time taken / savings in IT if a product line is killed? what will be the incremental cost of introducing a new product in a particular market? Etc.
• The IT landscape becomes less complex and easier to understand/operate.
• The portfolio metrics, at each capability level, make direct sense to the business head as well as the CIO.

On a lighter note: If a CIO's lingo becomes as close to the business and everyone understands the CIO's response in the first instance itself without seeking further clarifications, latch on to that CIO for God's sake!

Skills for shaping the digital enterprise

In the world of digital transformation happening, how do we see the roles emerge? Does the old definition still hold good? Here is a brief view.

Most organization will become “digital” in some way or other. When they change from a monolithic to a digitally agile unit, usually a saviour is recruited and he or she is called CDO (Chief Digital Officer). But things do not end there. Rather it is a start. The entire organization should become digitally nimble. For that, we also need to see how the roles encompass some of these aspects. Mind you, today’s world will not be strict 1-1 mapping. We will find that CHRO and CMRO should work together in incubating labs and the would be their joint KPPs.

CHRO (Chief Human Resources Officer) - Starts with identification of digital gap and engages in acquisition of such talent to fill the gap. Target is for the CHRO to own the “digital experience” and initiate a culture of “incubation labs” that foster and nurture talent closely allied to business as the enterprise becomes digital throughout.

CMRO (Chief Marketing Officer) - Starts with setting up marketing related digital aspects. Target is to own the “digital experience” along with CHRO. All start up labs / eco-systems for building products and experiences should be the mainstay.

What about CTO (Chief Technology Officer)? The vision of CTO means a nice team of geeks who set the enterprise architecture standards for the organization. Of course, the starting point is development of digital architecture. Target will be to own digital product labs.

The all-pervading CIO (Chief Information Officer) will be responsible, initially, for defining and managing digital infrastructure as part of the enabling function of IT. The entire portfolio including the actual digital infrastructure of the organization as well as the target channels of interaction should be governed in the end.

The CDO (Chief Digital Officer) is the digital evangelist at the beginning. He or she should lead the digitalization initatives as well as the incubator labs.

Chief Data Officer is responsible for modelling digital standards and driving data access. All the development of data-driven products and usage of digital to fuel more data and innovation will become de rigueur.

In summary:

1. Culture will change form strict compartmentalization to porous boundaries. Roles and KPPs will impact each other and will require working together not only across functions but also with various service providers and other technology partners.
2. A common set of traits will form the bedrock of digitally nimble organizations. They will include digital thinking and lean principles. The mindset will move from a generalist to digital generalist taking into account the “domain” knowledge specific to the industry.
3. Finally, every one in the new era cannot be a risk avoider. No reward for such a strategy. They will be encouraged to take calculated risk, try out new things rapidly harnessing data from different channels, discard things that do not work out but in the process go towards what is likely to work.

Changes happening in Insurance industry impacting IT service providers

Usually people associate technology changes more with banking sector.  about insurance? Global insurance market is valued at $5 Trillion. How the people use insurance and even think of it have undergone a tremendous change. The expectations are different and so is the service catalogue from the providers. How is the technology shaping up the industry?

Here are 3 important changes driving this sector.

All encompassing digital transformation – New models / Personalization

Like any other industry, this has shaken the leaders as well as laggards. No one could afford to be complacent. The overall impact is very positive for both the organizations as well as the customers. Customers’ expectations are changing: They expect very specific bouquet of services, expect services anytime anywhere and through any channel. EY estimates that 80% of customers want better communication with the insurance organizations. And this communication has to work seamlessly across channels!

Big Data And Analytics will play a huge role. Are today’s insurance organizations equipped for collecting all data online and real time? Have they made changes to their organizations as well as the processes in order to make use of the data? Can they offer a single user based insurance and personalized premium based on the data available online? What are the ways to collect data in order to get a competitive advantage?

If 80% of the premium is lost due to distribution costs, imagine the power of digital models. Perhaps they will make the intermediaries redundant in the entire value chain. APIs will redefine insurer-insured-InsurTech relationships. Insight-driven offerings will be the buzzword! An insurance company, in Europe, partnered with Panasonic. The latter’s sensors provide alerts to both the insurer and its customers using which issues are resolved quickly. Drones are here to stay and will become increasingly used for many purposes. Some of them are assessment of property damages, accurate estimation of property, analysis etc. In order to assess Hurricane Harvey’s damages and settle the claims faster, leading auto insurers used drones. In Australia, many big loss claims were settled within 90 days using drones.

Insurtech modernization

The system of records, especially the legacy systems, need to be transformed and operating costs minimized. RPA (Robotics Process Automation) and SaaS are being extensively used. Many companies buy products and customize them so much so that it loses the product flavour. This can only increase the costs of maintaining such systems. Companies are looking at  standardization as a means to cut costs.

Some of these are likely to encompass the following:

• AI and automation to cut down costs
• Focused application for digitalized customer experience and focused approach to problem-solving.
• Implementing a global Blockchain for a more secure and safe information sharing channel.

Partnerships

The collaboration between insurance and InsurTech firms will happen faster. The result will be new revenue models, higher profitability and reduced costs. If we look at the InsurTech firms’ growth, it happens in almost all the areas such as auto, cyber security, home etc. These call for increased technology capabilities which may be difficult to develop by the traditional insurers or would take a longer lead time. The latter is not acceptable in the competitive world. This could even be a win-win for both. Reaching out to large customers could become easier using InsurTech companies.

References

https://www.businessinsider.in/the-insurtech-report-how-financial-technology-firms-are-helping-and-disrupting-the-nearly-5-trillion-insuranceindustry/articleshow/60258913.cms

https://www.itnews.com.au/news/qbe-deploys-drones-to-assess-insurance-claims-452739

https://www.nationwide.com/smartride.jsp

https://www.cbinsights.com/research-insurance-tech-trends

https://riskandinsurance.com/5-tech-trends-for-insurers-to-watch-in-2019/