Tag Archives: legacy

Insurance Hasn’t Changed, but… (Part 5)

This is the fifth part of a five-part series. The previous articles can be found here, here, here and here.

If you’re just tuning in to this series, here’s a brief recap of what we’ve discussed so far: Insurance is ripe for disruption, and insurers must balance two measures to respond. They need to get the Brilliant Basics right, and they need to innovate with Cutting New Ground initiatives. Both are necessary, as Brilliant Basics enable core transformation, which in turn frees up investment capital and enables the agility needed to innovate.

It’s about this point in the conversation when insurance leaders start looking uneasy. That’s when the elephant in the room starts knocking over the furniture. The elephant is legacy: legacy thinking, legacy processes and, most definitely, legacy systems.

Legacy is a legitimate concern. Chronic underinvestment in IT and growth through acquisitions has left many insurers facing high technical debt—the amount of money it would take to get legacy systems to a state fit for today’s business environment.

Digital decoupling for an intelligent enterprise

Insurers can look to new digital architectures to help address the issues of legacy. For example, cloud services, data lakes, microservices, open APIs and robotic process automation can not only reduce dependency on—and the cost of maintaining—legacy systems but also help them execute business strategy more quickly.

See also: Innovation Is Really Happening

Accenture calls this digital decoupling. Digital decoupling is a way to release an organization from its dependency on legacy systems. In many cases, we can rebuild the capabilities needed for the back office in the cloud, without the convolution of the legacy system. Robots and cognitive processes can help identify where the cloud-based system needs to plug into the legacy system. Digital decoupling can deliver savings to release capital for investments. It also contributes to the stable foundation required to underpin agility and support innovation. Let’s look at a few ways that digital decoupling can help insurers.

Case study 1: Buy a car…while you’re in the car

One global bank was mired in legacy systems but wanted to grow its car financing market. Accenture helped it launch the capability to have customers buy a car when they’re in the car. Think of it: You’re immersed in the new-car smell, fresh off a test drive. With the push of a button and a digital signature, you can buy the car, along with the financing, insurance and extended warranty. Talk about delivering a knockout customer experience at the moment of truth.

Accenture made it happen in just three quarters. We used cloud-based digital tools to rebuild the bank’s back office, enabling almost exclusively straight-through processing. Next, the cloud-based back office was integrated into essential enterprise systems, but otherwise bypassed the legacy system. The cloud-based office is 50% cheaper to run, creating an immediate cost advantage over the competition. And in this particular market, where the economy declined by 8% over the past two years, the bank’s car sales are up 30%.

Case study 2: Robots enable Sunday mortgages

This particular bank had a mortgage office with typical office hours: Monday through Friday, 9 am to 5 pm. But when do people buy houses—and, therefore, when do they need mortgages? The weekend. But in this region, weekend mortgages weren’t possible.

Accenture worked with this banking client to develop an AI-backed mortgage capability. Robots worked beside people to learn how to make mortgage decisions. When the people go home for the day, the robots keep working. Today, if you want a mortgage on a Sunday, you can get one—and, more important, you can buy your dream home.

Accenture tapped into new technologies to bypass this bank’s legacy systems to deliver the AI-backed mortgage capability in just 20 weeks.

What’s notable about these digital decoupling efforts is that they tend to be self-funded, especially when data lakes are leveraged. For example, using data lakes and other technologies, Accenture was able to create an entirely new bank in about six months—and eventually, as the business shifted to the data lake from the mainframe, the project became self-funding. Using data lakes, in particular, tends to result in a new architecture that is more efficient and cheaper to run than the legacy system.

See also: Linking Innovation With Strategy  

With digital decoupling, insurers can innovate without being shackled by their legacy systems. Think of it as two-speed IT. You can move fast with innovation by decoupling the back end. Meanwhile, you have time to move slowly later as you start shutting down parts of the legacy system—a process that releases even more trapped value.

4 Steps to Ease Data Migration

Mobile has been a huge change agent for technology across all industries, and insurance is no different. The demands of today’s customer have dictated that legacy systems with siloed data be re-examined and replaced with modern, digital-ready solutions. With 64% of insurance employees willing to use a mobile app or site to improve access to sales information in the field, data must be accessible across all channels of an organization.

Migrating data from siloed, disconnected systems to a new cutting-edge platform is no easy task. A successful data migration requires extensive preparation, custom software architecture and knowledge of both old and new systems. Before moving to new business software systems, developing a plan to streamline the transition and to prevent major hiccups is imperative.

Get Rid of Unnecessary Data

The longer that insurance providers have been in business, the more data there is to deal with. Additionally, legacy data that is no longer necessary for current business operations accumulates for a variety of reasons. Before moving to a new house, most owners take the opportunity to clean the attic and get rid of items that have accumulated and are no longer needed; the same idea applies when migrating data from a legacy system to a new solution. When preparing to migrate, insurance providers should take a close look at data in legacy systems and only migrate data that is necessary for today’s business operations.

See also: Why Exactly Does Big Data Matter?  

Rethink How to Map Data to New Systems

Demand for real-time data access and frictionless user experiences has led many digital-ready software solutions down different paths than those taken by legacy systems. Both the underlying technology that stores the data and how the data is structured relationally is very different from what was seen decades ago when insurance providers were developing their first software systems. Insurers need to account for these changes while helping data make the transition to restructure it to best suit today’s needs. Because this process is time-consuming and complex, many providers benefit from third-party digital transformation partners whose expertise can be leveraged to provide a best-of-breed solution.

Use Out-of-the-Box Best Practices

Legacy systems have been unable to adapt to business processes that have evolved dramatically in recent years, meaning many insurance providers have been forced to rely on outdated practices. When rolling over to a new system, starting with the best practices contained in the new software and modifying only when necessary is a key best practice. The software vendor has evolved its out-of-the-box processes over the years, and they should be considered best-of-breed. As a rule of thumb, an insurance provider should only modify these processes because of some unique part of the business that is key to its strategic goals. Migrating old processes or modifying recommended ones can be inefficient and costly, so providers shouldn’t throw away time-tested solutions unless there’s a critical strategic reason to do so.

Plan Ahead for a Smooth Rollout

Making the transition to modern software solutions can easily derail day-to-day operations if providers don’t take the right precautions. To make sure the rollout is seamless, providers must develop a strategy to “keep the lights on” that often involves mixed-mode operations between the legacy systems and the new digital solutions. This strategy involves a great deal of up-front architectural planning to ensure the data is in sync between the old and new systems, along with a road map that sunsets the legacy solution piece-by-piece in a surgical fashion. A smooth rollout also requires training on buy-in and training on how to use the new technology, which, along with an extensive beta testing phase to gather feedback, are wise investments to the overall long-term success of the rollout.

See also: 3 Types of Data for Personalization  

Migration of mission-critical legacy business systems to modern digital-ready solutions is not easy. Up-front planning for data migration, training, business rules, process, architectural evolution and both short-term and near-term business goals are all key considerations that should factor into the overall migration road map. Rushing a digital transformation effort can result in incredibly costly mistakes down the line, so insurance providers need proper planning to ensure a smooth transition. Providers should strongly consider enlisting the help of a partner that is skilled in digital transformation to help guide them along the journey.

The Great Recession And My Business

For many closely-held and family business owners, 2008 and 2009 was a stressful period. The volatile market followed by the Great Recession often produced

  • a contraction of business revenue;
  • the loss of profitability;
  • the reduction in value of their companies;
  • the aggressive and often not rapid enough implementation of business and personal cost-cutting measures;
  • the layoffs of far more employees than these companies imagined might be necessary;
  • the reduction of personal asset values;
  • the reduction of owner pay and employee pay levels;
  • the liquidating of owner personal assets to capitalize the business;
  • the development of tenuous relations with their banks;
  • a need to reinvent their business offerings in the marketplace; and,
  • the concern about being able to meet their future financial goals.

Plus, the stress of all the previous mentioned events produced the most burdensome time of our business and personal lives. I, in fact, can say there were several occasions in 2009 when I called to reach a business owner client mid-workday to find that I reached them at home while they were nursing a stiff drink. To compound all this, while most baby boomers do not own businesses, most of our clients who own businesses are baby boomers, and the age in relation to retirement, personal savings, and lifestyle spend factors that make retirement a challenge for most baby boomers are often compounded for our business owners.

I had many a conversation with an owner who confided in me that they built their company, and would build its value again, but they were tired. Because the recession induced exhaustion, they felt that they only had the energy to build it one more time. As a result, they wanted to be very proactive and intentional about planning to maximize the business' value and minimize taxes upon their transition out of the business. It is in this regard that the development of a Business Transition Plan is of paramount importance. The development of a Business Transition Plan involves multiple steps:

  1. Identifying the owner's financial and timing objective for the transition out of the business.
  2. Assessing the business and personal resources available to help contribute to the owner's objectives.
  3. Developing and implementing strategies that will contribute to maximizing and protecting the value of the business.
  4. Evaluating the opportunities for ownership transition of the business to third parties.
  5. Evaluating the opportunities for ownership transition of the business to inside parties.
  6. Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee.
  7. Developing a post-transition plan for the owner that aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment.

Let's look at each of these in greater detail.

Identifying the owner's financial and timing objectives for the transition out of the business: For most business owners, the transition out of their business will be the single, most significant, financial event of their life. Identifying when and how much the owner desires is the first step in the planning process.

Assessing the business and personal resources available to help contribute to the owner's objectives: In order to evaluate if the owner will be able to meet his or her financial objectives, we believe we must start by developing a personal financial plan for the owner(s). This plan takes into account the reality that both business value upon transition and personal wealth accumulated during the operation of the business, combined, will together finance the lifestyle of the retiring owner. The more efficiently a person manages their non-business wealth prior to exiting the business, the less pressure it places on the value obtained from the business upon exiting.

Developing and implementing strategies that will contribute to maximizing and protecting the value of the business: In my many discussions with business owners, I often conclude that the owner believes their business is worth more than it really is. One of the most beneficial things a business owner can do to maximize and protect business value is operate in a constant state of planning and operations as if their business is “For Sale.” By evaluating all of your company's planning and operations in alignment with this premise, an owner can proactively manage the investment in their business. These planning and operational strategies often include:

  • Development of non-owner management.
  • Implementation of Buy-Sell Arrangements between owners helps protect owners, and their heirs, from the termination of employment, death, disability, or divorce of an owner. Though not every risk in a business can be insured for, death and disability can and often should have insurance policies implemented to finance the buy-sell.
  • Business Dashboard Metrics of sales and profitability.
  • Task functionality planning within the business.
  • Maintaining sufficient capitalization within the company for growth and banking purposes.
  • Maintaining appropriate amounts of key-person insurance on valuable company personnel to protect the company from the loss of an owner, or key-employee, and the financial burden that can result. Examples of this burden can include loss of revenue, reduction in profitability, cost of hiring a replacement, or default of or risk to credit facilities. In the midst of a crisis, I don't believe it's possible to have too much cash.
  • Formalizing appropriate compensation agreements with executive management, including golden-handcuff incentive compensation plans.
  • Maintaining a certain level of outside audits of the company's financials.
  • Recognizing when family should not be running the business and hiring professional outside management.
  • Consistently reviewing customer contracts to maintain the most favorable terms for your company.
  • Maximizing tax reduction planning opportunities on corporate profit, and at the time of a business ownership transition.

Evaluating the opportunities for ownership transition of the business to third parties: Many businesses are good candidates for a sale to a third party. These third parties often come in the form of a Strategic or Financial Buyer. The Strategic Buyer is often a competitor, or non-competitor that desires to enter your geographic market or industry, and sees your company as a lower cost or more rapid pathway to entry. The Financial Buyer typically comes in the form of a private equity group that owns another company that, when combined with some aspect of your company's offering or value, can acquire or joint venture with your company's offering to multiply the value of both companies within the private equity group's portfolio.

Either of these alternatives can produce an excellent financial transition windfall to a selling business owner, assuming the selling owner's company is clean. When an acquirer performs its due diligence, if it finds that the company hasn't been operationally managing itself in a professional manner as mentioned, hasn't applied consistent accounting principles, doesn't have a deep management bench, or depends upon the owners for ongoing revenue or profitability, the value it will pay in a transaction plummets.

Evaluating the opportunities for ownership transition of the business to inside parties: Whether your transition intentions are to transfer ownership to heirs, key employees, or the employees as a whole through an Employee Stock Ownership Plan (ESOP), assessing the skills and leadership capabilities of your successors is as important as the development of your ownership transition plan.

A successful transition plan requires the implementation of both Leadership Succession Planning and Ownership Transition Planning. One without the other greatly increases the potential for a failed transition. Once both have been designed, it is then important to evaluate what ongoing role the current owners will maintain through the transition, and the timetable of the transition.

Unlike a 3rd party sale, with an internal transition, the owner's gradual departure often helps facilitate the smoothest transition of Leadership Succession, while the owner can ease into retirement with the benefit of continuing to receive compensation during the transition, distributions of profits, implement gifting strategies, receive seller-financed note payments, or benefit from other strategies, thus lightening the burden on the owner's personal financial assets post departure.

Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee: Despite the implementation of intentional planning, life can bring surprises. The premature death of an owner or key-employee, a disability or incapacity, the recruitment of a key employee by a competitor, can all derail the good planning, revenue stability, or corporate profitability.

Every good transition plan should address the need for Buy-Sell Agreements to protect owner personal finances, cash out the family of key-employee minority owners, permit the next generation to purchase the company from the previous owner at its current value before it grows further, reap the benefit of any Step-Up in Basis deceased owner's estates receive at the time of death, and benefit from the income and estate tax-free liquidity that properly designed and owned life insurance policies can provide the business and its family owners.

This planning can also present an excellent opportunity to utilize life insurance liquidity to fund the buyout of next generation family heirs who may not desire to stay in the family business, but otherwise the business might not have the funds to initiate these realignments of ownership.

Developing a post-transition plan for the owner that provides for their post exit Income and Wealth Management needs, and aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment: For many owners, their lifestyle, hobbies, net worth, and self-esteem is wrapped up in the business. The transition out of the business can be a stressful one.

Many of our clients find this transition to be an opportunity to develop a new personal life mission statement, having experienced great success in life, now focusing on what they desire their Legacy to be. This Legacy planning may involve an increased participation in philanthropy, spending more time with family, possibly even stepping into a new “missional” career. This change in life focus is only possible if post retirement Wealth Management provides for ongoing stable income, which we believe is more important in creating financial independence than a client's net worth.

However, the long-term potential threat of inflation, current low interest rates, increasing U.S. Federal debt, deficit spending and stimulus spending can present major obstacles for the retiree to generate sufficient income when developing a “traditional” post-retirement wealth portfolio. It is for this reason that we approach personal financial planning from a “non-traditional” perspective as we evaluate and recommend investment options beyond stocks, bonds, mutual funds and ETFs and also focus on the tax-efficiency of Wealth Management as it is not “how much you make,” as much as it is “how much you keep.”