Improving IT efficiency at Allianz

In the world of insurance, efficiency in both operations and sales strongly depends on the IT environment. As Allianz AG’s board member responsible for IT, Gerhard Rupprecht explains that IT efficiency and effectiveness have become a substantial source of competitive advantage for insurers. Securing a competitive advantage from IT means that information technologies must enable business processes as efficiently as possible. But in order to survive under tough market conditions, IT performance must also improve continuously – both in terms of efficiency and new functionality.

This is why today’s global insurers spend up to 30 percent of their total operating expenses on IT. On average, 75 percent of their IT budgets are dedicated to IT operations and maintenance and 25 percent to IT innovation and development of new functionality. The job of the CIO is to ensure a sustainable competitive advantage for his company based on efficient and effective information technology.

Setting top-level strategic goals for IT

To preserve and improve Allianz’s competitive position based on IT, the company has taken a top-down approach and defined three top-level goals for the strategic management of IT resources:

• To balance the run-the-company expenditure verses the change-the-company expenditures at a ratio of 70 to 30 percent to ensure ongoing improvement of IT services and functionalities.
• To strive for highest standards in IT efficiency as measured by market-specific key performance indicators.
• Align all IT activities with strategic business requirements to ensure IT effectiveness.

Transparency of IT costs is essential

Only a few years ago, most insurance companies were facing heterogeneous, highly complex IT landscapes with several governing bodies. Another problem was the significant lack of cost transparency in IT. Yet, transparent IT costs and performance information are essential to the strategic management of IT resources. Every company must know if it is providing IT services efficiently, and maintain a competitive IT cost position within its local market. In order to achieve this, it must also be able to identify and realise IT optimising potential. At the same time, a company should use key business performance indicators, such as back office productivity, to see if IT is effectively supporting the business and facilitating opportunities for business growth.

This is why Allianz has implemented a global framework and reporting standard for both key business and IT performance indicators. The standardised reporting process allows decision makers to internally and externally benchmark, for example, the unit cost of commodity IT services.

Allianz IT efficiency programs

Complementary to the top-down goal setting and introduction of reporting standards, Allianz has also turned to bottom-up IT efficiency programs in order to further improve the company’s competitive position. The aim of these programs at Allianz is to optimize the IT landscape and its cost drivers, or in other words guarantee efficient operations. Streamlining Allianz’s IT operations and maintenance has, to a large extent, been driven jointly by Allianz's central and local IT organizations. Allianz has set up efficiency programs to address major cost blocks, such as application development, application maintenance and IT infrastructure including workstation and data centre costs.

Specific measures are used to gauge the success of each of these programs. Also, using best practices and knowledge transfer within the Allianz is an integral part of these efforts. Project tracking and controlling are continuously applied to monitor results.

Optimising workstation infrastructure and services

Allianz's workstation efficiency program focuses on one of any company's major infrastructure cost components; the cost of workstations including hardware, basic software operating systems and services. This program has investigated the savings potential using internal and external benchmarks. Cost and performance ratios were analysed and annual savings goals established and broken down at the local level. Workstation complexity, due to for example multiple PC configurations, was identified as a major cost driver, especially in terms of maintenance. Corrective measures at Allianz, should result in workstation cost reductions by up to 20 percent.

Streamlining data center operations

In the last few years, almost every large insurance company has been addressing efficiency in data center operations. Allianz has set up an efficiency program in this area to address this major infrastructure cost block. The objective is to analyse the savings potential of optimising data centers and to support and monitor savings achievements on a worldwide basis.

To achieve this, Allianz conducted a benchmark analysis. Together with the local entities, savings potential and implementation measures were identified and are now being implemented locally. Allianz ensured the transfer of best practices, for example on server consolidation. This initiative will reduce data center costs by more than 20 percent.

Stricter project screening for better ROI

To boost the return on investment for all medium to large budget IT projects worldwide, Allianz has prescribed standards and guidelines for the local project approval process. This includes demanding quality criteria for business cases, as well as tracking savings and project-specific key performance indicators, and savings recommitment mechanisms. All IT projects starting in 2006 are required to adhere to the new rules.

External benchmarks for improving efficiency in project portfolio management indicate that rigid project governance can save approximately 40 percent of overall project budgets. Although improved efficiency based on cost avoidance is difficult to measure, Allianz expects efficiency gains to reach between 10 to 20 percent of the IT portfolio budget.

IT must support business goals

In any company, new business initiatives demand IT innovation and the development of new functionality. The job of IT is to ensure professional support and enable major business initiatives on the IT level. Often, the focus is on cost and/or revenue potential levers, for example, back office productivity, cross-selling potential or new distribution channels.

This year, Allianz launched a global strategic initiative to increase operational excellence and to identify and implement best practices for Allianz's products, processes and services. IT involvement in this initiative entails making IT requirements more transparent and pooling the business requirements in order to identify and share IT best practices throughout the Allianz Group.

Several recommendations for reducing the number of vendors and pooling licenses for software were developed and more are forthcoming. Best-of-breed solutions within Allianz were identified and recommended or even mandated for group-wide use.

Boosting IT performance

Allianz’s holistic approach to IT efficiency by making IT costs and performance more transparent, setting goals according to internal and external benchmarks, and introducing a number of IT efficiency programs has allowed Allianz Group to reduce its annual IT budget for 2005 by more than 25 percent compared to 2002. In 2004, relevant key performance indicators such as the IT expense ratio, back office productivity and IT unit cost showed performance gains ranging from 3 to15 percent for the insurance business lines. Allianz's IT organisation, like in many other companies in recent years, has focused on optimising existing IT operations and maintenance. In future, Allianz's focus will be on efficient management of new applications, including their development and maintenance.

Savings from efficiency improvements on the operations and maintenance side now allow Allianz to dedicate more of its IT budget to innovation and development of new functionality. Allianz's target for IT innovation expenditure is set at a ratio of 70:30 – higher than the industry average (75:25). Why? For one, growing customer expectations are reshaping the insurance markets. For example, many customers increasingly expect a fast, high-quality personalised service, while others prefer ‘electronic advice’ via the Internet. Insurance companies will have to introduce new ways to meet these changing needs.It goes without saying that Allianz will continue to leverage IT to maintain and increase its competitiveness on the market.