It’s that time of year again. Strategies are being updated. Priorities and plans are being set. Budgets are being finalized (or they are still being agonized over). And business and technology initiatives are getting prioritized accordingly.
But this year is different. Change and uncertainty has blown in like a strong wind, tossing business and technology priorities around, sending some to the back fence and placing others on top of the heap.
What we are all realizing, however, is that status quo budgeting for the business and technology no longer exists. Advancements are happening too rapidly. Change is rewriting process. Our ability to predict tomorrow’s business and use of technology is being held up by our ability to predict with any certainty, the whims of tomorrow’s customer, let alone external dynamics. There is so much to consider that it can feel overwhelming. We need a new way to think about the future that acknowledges planning and budgeting realities while accepting the world’s propensity to change.
In order to wrap our heads around this new world of planning, I brought in two “deans” of disruption in insurance — the experts and book authors, Rob Galbraith and Bryan Falchuk. Both are well-known industry veterans and speakers on the topic of industry change and recognized industry influencers.
Rob is the author of The End of Insurance as We Know It. Bryan wrote The Future of Insurance: From Disruption to Evolution. They joined me for a conversation on our webinar, Planning and Preparing for Tomorrow — Today: What You Need to Focus on for the Future of Insurance. In today’s blog, I would like to hit on the highlights of our conversation and encourage you to listen to it.
Where are insurers today? What is the state of digital transformation?
We kicked off the conversation with a state of the industry perspective. Though there have been some bright spots in the industry throughout this year, we have also seen some hurdles and hiccups. When you look at our premium growth, we are not growing at the level that a lot of other industries are, nor are we getting the level of profit margins that most companies would be expected to achieve if they were owned by private equity, venture capital or held publicly on the stock market.
Insurers have a lot of operational challenges facing them – most because our business models have changed little over the last few decades. Shifting market boundaries around people, technology and insights are causing us to reevaluate and reinvent our business models. These market changes are forcing most insurers to completely reimagine insurance. The driving force is the customer and their needs and expectations.
As an industry, we often talk about business transformation, but we really need to talk about digital transformation. Leaders are fast-tracking their investments in key areas to accelerate digital transformation.
What does this mean for transformation planning for next year?
“A lot of organizations are already on digital transformation journeys, and those journeys may be mutli-year. They are making the move to get off of legacy systems that may have been around since the 70’s or early 80’s, but so much has changed in the last five years.
“Motivating them is the need to move to the cloud and the desire to have core systems become a platform or ecosystem that opens them up to integrate with a variety of different partners. Carriers are wanting to open up their pipelines because they don’t know which startup is going to be founded today that six months from today they will want to integrate into their system. The issue is that we are driving down the freeway at 70 miles per hour and we’re trying to redesign the car on the fly.
“While it would be tempting to pause or delay, we’re seeing carriers that have already made these investments starting to lead the pack. Instead of delaying or slowing down, carriers should be trying to match the accelerating curve.”
So, what Rob mentioned leads to two very basic issues related to budgeting and planning: prioritization and time-lines. How can insurers transform on the fly? Do they really have to reprioritize so much? How can insurers transform quickly and seamlessly when the need arises?
“So, you are an insurer and you want to make sure that your platform has the capability to take advantage of all of the various tools from companies with witty names that keep coming out every week. New technologies are emerging. We need to be able to take advantage of them on the fly and swap them out when something better comes along. In order to do this, you can’t look at this as a massive monolithic system. That’s a huge undertaking that scares everyone. Break it down into a sort of Agile methodology with smaller implementations of flexible tools that are point specific transformations.
“In many ways this is a mentality. But it is a mentality that has to be carried into the budgeting process and the budgeting process is something that we’re all hitting right now. “
It might be helpful to step back for a moment and consider the budget conundrum from an organizational level. The pace in the shift to cloud took a lot of companies by surprise. It has been amazing to watch how quickly the technical architecture changed with APIs and microservices. For many insurers, their technology investments over the last 10 years have left them in a quandary because of the amortization of the investments. Budgets are actually forcing their hand. They have to find a way to get to the cloud, because that’s going to give them some flexibility and elasticity as the business grows and contracts. Waiting 2-3 years may be dangerous and place insurers farther behind.
“The time scales are very different, especially when you’re talking about working digitally. You can’t think ahead 18 months. It doesn’t mean you should make rash decisions. But it does mean changing the way you make those decisions.
“The idea that we set the budget once a year and we work to that budget is tough. What if something wasn’t budgeted, but it is needed for survival or is a game changer or could help the company seize a massive opportunity that just opened up…and it doesn’t fit the annual budget? We need to relook at the notion of budgeting. Digital does not happen once per year. Everything is changing too rapidly.”
“It would be great if companies could have some type of continuous budgeting cycle. You have a challenge of being in this difficult budget environment. You need some certainty. But if you’re looking 18 months out, it can radically change. It boils down to strategy. Your strategy can’t be changing every three months. You look at the landscape. When you think about your company and your competitive edges, are these going to continue to be your competitive edges? What are your core competencies? You can’t be the best at everything, so what are those true differentiators for your company? What are the ones that you simply need to keep pace with? Determine how you execute on your strategy and then the project portfolio will organize itself.”
Rob then pointed out the value in looking backward. Companies are often so forward focused that the decision cycle is wrought with reactions that aren’t tied to organizational learning. It is fascinating how this relates to the budget.
“One of the key things that I don’t think companies do enough of is to formally document the assumptions that they are making. When you look at the environment today, you are making assumptions about your company and how you are going to move forward and how the environment is changing. You probably need to revisit those assumptions every six months or so.
“You might be saying, “Six months ago, when we built this plan, this is what we thought was going to be happening in 2022 or 2023,” but in reality, when six months have gone by, that thing that you thought was going to be too expensive to do — you may now be able to do much cheaper and faster than you ever thought was possible because of how quickly the landscape is changing.”
So, the lesson here is that budgeting too far ahead is not only dangerous for the level of uncertainty about market trends, it is also dangerous for the assumptions of what resources will be needed to accomplish your strategic goals. Time flies. Technology costs (for specific technologies) go down over time.
Rob suggests, “If you look at these things from a portfolio perspective, you don’t need to just go to the next project on the list. You can evaluate your portfolio and your previous assumptions, asking yourself if those assumptions still hold. If they’ve changed, then maybe you need to reprioritize what is in your budget portfolio.”
This fits with what I pointed out in one of my recent blogs, “Strategic Planning in the ‘New Normal’ Digital Era of Insurance.” Future-ready, digital business models are moving some insurers to the very top of the competitive landscape, in part because of their forward-thinking flexibility. According to a recent McKinsey article, those that are leaders are fiscally-profitable by a large margin.
What’s interesting here is that COVID-19 is just accelerating these market strategies. We can see, almost in real-time, the increased growth of insurers who champion change. Digital priorities are taking precedence and we are witnessing how those who were prepared are advancing and how those who are just now preparing are pushing to catch up.
In the coming weeks, we will highlight what specific tools and changes seem to be making the most impact for insurers. Which ones give the quickest ROI? Which implementations are best for preparing the organization for a business model shift? Which are enabling their digital transformation?
To listen in on the full conversation, be sure to listen to Planning and Preparing for Tomorrow — Today: What You Need to Focus on for the Future of Insurance.