Legacy life and pension portfolios stretch a long way into the future and most are still maintained on the systems in use when they were issued. Old world administration is leaking cost and legacy systems have been highlighted as a barrier to the change necessary to compete in the new world. Providers clearly need to respond but how?
Before a provider decides what route it should take with its legacy systems, it must ask what it is trying to achieve. Fundamentally, what is its business strategy? Several crucial questions require answers including:
What is more important – reducing costs or improving service to customers and intermediaries? Are these two objectives mutually exclusive? If attempting to achieve both, what are the targets and tolerances for risk?
Can a provider achieve massive cost reduction and service improvement on its legacy portfolios while increasing its speed to market for new business? That is not even a question worth asking – there is no choice and it has to be the default business model.
In-source or outsource? Does the current fashion for outsourcing anything that does not provide added value actually miss the point? Are companies failing to recognise where the value-generation opportunity really is?
For those providers wanting to keep their policy administration in house, it is imperative that they recognise and understand the need to invest in their legacy systems. This is easier said than done as many companies are stuck in a kind of paralysis, reducing IT budgets just at the time when market and business pressures mean they need to be investing in order to change.
Spending on technology has so often promised more than it has delivered and a much more stringent approach to investment is clearly appropriate. But while stockmarkets recover a little and providers become slightly more confident of the future economy, they are still very wary of committing new money and many simply do not feel they can make cash available for major systems changes with the future remaining unclear.
The main options available are encapsulated in the three Rs – renew, replace, rebuild. But any decision will have an effect on intermediaries' ability to conduct business so how do these options stack up for them?
When time, complexity, and cost factors are in balance and the existing systems' environment is adequately supporting the business, the renew option – prolonging the life of legacy systems by enhancing them in some way or working around them – is a popular choice. But in reality it is actually a decision to do nothing.
Bolting new applications on to the outside of an IT system can leave companies open to potential break points across the system as new applications are forced to fit uncomfortably alongside older systems. While some parts of a process may be automated, other parts will have to remain manual so there is greater potential for things to go wrong, take longer or not take place at all. All of which means poor service for intermediaries.
Furthermore, system renewals are rarely accompanied by a tightly controlled programme of change management. They tend to be made on an ad hoc basis, leaving systems knowledge in the hands of a few. So what happens when an application breaks down and the intermediary needs help? Chances are the person who wrote the original application is on holiday or, worse, they have left the company. Again, this not very helpful for intermediaries or their customers.
When the risks associated with keeping ageing legacy systems are high or even unacceptable, companies should consider the replace option – purchasing a new package system. Since new package systems are generally not geared towards the business processing requirements of older-style policies, there must be meticulous assessment as to whether this option really can deliver value.
With most packages, the in-force servicing functionality is at best only partly built so while they might be geared up to register and pay out a claim, the proc-esses in between may well be manual.
Not just any old system will do. What is really nee-ded is a system that is specifically focused on the back end of the policy cycle. This is an area where most packages promise only future delivery.
A new system implementation may also be a concern for intermediaries. Where will customers' policies end up? Will they migrate on to the new system or will they remain on the old system? Some customers with more than one policy may find themselves on both. But if the provider does not map all fields from the existing system to the new package successfully, someone will have to take responsibility for collating information manually.
For an intermediary, there is nothing worse than being told by a provider's customer services staff that they can give you a, b and c but to get x, y and z they will need to go to another department.
Where there is no acceptable package option, providers must consider the rebuild option. This involves redesigning systems to meet the requirements of the servicing portfolio, not just importing and continuing with archaic processes.
If a provider is an intermediary-driven company, rebuilding will enable it to change the way it does business today to meet the needs of tomorrow.
Rebuilding may also be the lower-cost option, as well as the safer option, given the specific requirements for the system to reduce the cost of policy and claims administration. This option is all about enabling cost-effective customer servicing, which is good news for intermediaries.
Maximising profit from legacy business is an obvious target for life and pension providers in today's market, when every penny counts. Upgrading policy administration capabilities and consolidating IT systems is the key to achieving it. But choosing whether to renew, replace or rebuild is not a decision that can be made lightly or without considering the effect that decision will have on intermediaries.