Success in the insurance and financial industries in the next decade will require aggressive, innovative development of new baseline capabilities, says Bill Pieroni.

Preparing an organisation for global competition is high on the agenda of just about every chief executive today. But at a time when official audits and accounting practices are being brought into question, how does one assess the competitive fitness of not only your own company, but also of your competitors as well? Once you have a picture of your competitive position, what can you then do to improve it?

My attention was drawn by a recent study by Professor Jean-Claude Larréché of INSEAD Business School entitled The Competitive Fitness of Global Firms. The study aimed to provide a measure of the overall market effectiveness capability (OMEC) of the top 500 or so North American and European firms.

The study ranked these firms against a set of fundamental business capabilities:

  • mission and vision;

  • customer orientation;

  • corporate culture;

  • organisation and systems;

  • planning and intelligence;

  • human resources;

  • technical resources;

  • innovation;

  • market strategy;

  • marketing operations;

  • international performance; and

  • e-business.

    The findings that measure the competitive fitness of finance and insurance firms against other sectors are of particular interest (see graph p14).

    The average score for the top five firms in finance and insurance rivalled that of most other sectors. Swiss Re, for example, was the highest ranked finance or insurance firm, and it came fourth overall. However, the average for all firms in the sector is significantly lower than all the others, indicating that a large number of finance and insurance firms had been assessed as either mediocre or poor (for more information and results of the study, visit: www.corvaltec.com).

    So how can insurance companies compete at the highest level? How can they limber up for global competition? Over the next decade, a number of significant industry forces will undermine some of the historically important bases for competitive advantage in the insurance industry. These forces will compel insurers to develop new baseline capabilities to achieve and sustain profitable growth. While it is impossible to predict the exact nature of industry change or long-term impact, there are a number of `no-regret' IT capabilities that should be developed over the next few years.

    Change drivers
    Three key forces are driving industry change, centred on customers, competitors and IT.

    The first is a shift in customer needs and expectations. Insurance firms will find that emphasis on value delivered beyond just personal relationships will lead to an erosion of traditional value propositions. Ever-more demanding, ever-savvier customers with access to online comparative information will become increasingly more self-directing and will demand improved capabilities from insurers including mass customised products and services. Customers will also begin to demonstrate a willingness to manage multiple financial services relationships and frequently change providers, increasing competition between insurers to maintain share-of-wallet and customer loyalty.

    The second is the continuously changing competitive dynamic. The main focus will shift from cost reduction to revenue generation among financial services companies and emerging competitors. Dramatically reduced customer acquisition costs and an ability to capitalise on existing trust or transaction-based relationships will lower the cost of market entry for non-insurance firms. Also, increased competition and informational transparency will cause a move towards product and service commoditisation.

    The third key point is the increasing number of beneficial but potentially disruptive new technologies that are emerging. Other technologies are enabling increased collaboration and information sharing across insurers. Winning firms will harness these new technologies to better leverage their customer data through the use of powerful business analytics and knowledge management tools. Customer interaction will change as mobile devices become the dominant means of information access, and voice and biometric advances improve their security and ease-of-use. The value of IT will advance as more high level software components are built, increasingly delivered via e-utilities and based on intelligent infrastructure.

    These customer and competitive forces, when fuelled by the emergence of the digital enterprise, will create a number of organisations, processes and IT imperatives across the insurance value chain. The most successful organisations will simultaneously focus on organisational, process and IT imperatives, and ensure alignment with existing and emerging business strategies and tactics.

    Competitive edge
    Insurers aspiring to leverage IT for competitive advantage will need to focus on developing a number of interrelated IT competencies among management, the IT organisation itself, the actual IT applications and processes, and overall IT infrastructure. There should be little doubt that IT-driven sources of advantage will be critical factors in determining the firm's overall operational, organisational and implementation effectiveness.

    Value-creating insurers will successfully develop these IT-based organisational and process capabilities, and leverage the changing business and technology environment to gain competitive advantage. More than ever, long-term positioning is dependent upon developing an intelligent and highly flexible infrastructure to support the evolving business. Insurers will need an infrastructure that enables strategic flexibility and operating adaptability at relatively low operating cost.

    New business and technology opportunities cannot be fully realised if each initiative requires creating a new `silo' support infrastructure. Insurers aspiring to fully integrate their value chain and establish effective alliances need a robust infrastructure that fully supports internal and external integration and connectivity.

    Developing and continually enhancing intelligent infrastructures requires focus in four areas:

  • leveraging industry standards for information exchange. ACORD is emerging as the most significant global player. Many of the major standards organisations including WISe, RINET, LIMNET and WIN have been merged into ACORD;

  • implementing common middleware platforms across the enterprise (increasing the interoperability of software to enable information and transaction flows);

  • utilising shared infrastructures where appropriate (driven by a willingness to create speed and efficiency through shared infrastructures, such as helping administer 401k); and

  • virtual sourcing of skills, technology components and business services, tackling the increasing sophistication required to build and run large infrastructures, recognising the trend towards large external services providers.

    Winning tactics
    What are some of the fundamental IT capabilities or success factors critical to getting winning strategies and tactics operational? A close look at a select group of insurers, which have successfully developed the required IT capabilities, led to the identification of at least five:

    1. Establish a strong sense of urgency
    There is a need to examine market and competitive realities of the industry in the context of the key dimensions of your organisation, for example, customer base, distribution and skill sets. Potential issues and major opportunities across the business and IT organisation that require near-term focus need to be identified and communicated.

    2. Create a guiding coalition
    This should be a business and IT team with an adequate level of informal and formal power to organise and orient the group to work, as a high-performing team will need to be recruited.

    3. Make a vision, strategy and communication plan
    An important consideration will be the creation of a vision, followed by detailed strategies and tactics to enable implementation. This will need to be supported not only by a communication plan, but also by any necessary behavioural change, where the core group `leads by example'.

    4. Empower broad-based action
    It will be essential to remove obstacles including systems or structures that undermine the IT capability development effort, and to encourage risk-taking and non-traditional ideas, activities and actions.

    5. Consolidate change and produce more change
    The increased credibility of the core group must be used to enable change to all systems, structures and policies that are not aligned with the IT capability. It is then possible to hire, promote and develop people to implement the vision, while seeking to continually reinvigorate the effort with new initiatives, themes and change agents.

    Success in the insurance and financial industries in the next decade will require aggressive, innovative development of the new baseline capabilities just described. Historical success, as they say, will be no predictor of future value creation. Insurers will not be able to rely solely upon brand, distribution, product and pricing strategies for competitive advantage. Increasingly, the ability to identify, deploy and adapt technology will be a core element in value creation.

    Sustainable value creation requires continual reinvention, especially in the context of rapid and unpredictable change. Clearly, winning insurers will develop a comprehensive set of organisational, process and IT capabilities needed to support and sustain the organisational and process strategies and tactics.

    By Bill Pieroni
    Bill Pieroni is the general manager, global insurance industry, at IBM Corp.