Unlocking value: how finance leaders can optimise operations and achieve sustainable cost reduction

The insurance industry has seen a great deal of tech-driven change in the last decade, from the rise of cloud computing and service-oriented architectures, to the advent of advanced analytics and artificial intelligence (AI). But for all the innovation, disruption and new technological possibilities, IT and business leaders still face one constant: the pressure to reduce costs.

Whatever the main rationale for reducing costs –?market demands, shareholder expectations, organisational imperatives –?the job has become more difficult because of the challenges and complexities arising from regulatory and accounting change. Still the goal of lean and cost-efficient, business-as-usual (BAU) operations is a worthy one, especially when cost optimization is combined with sustainable performance improvements.

We have all likely been through cost reduction exercises (and possibly several) over the years, and there are multiple management theories (not to mention entire books) on the topic. This article aims to offer targeted and (hopefully) useful insights based on my experience working with global insurers and seeing what works and – just as importantly – what doesn’t.

Cost optimisation as a discipline, not a project

Cost reduction is an evergreen topic because transformation is often perceived as a once-and-done process, which usually leads to repeat initiatives. Past investments have focused on point solutions (e.g., large technology implementations) without addressing end-to-end processes or broader enterprise needs.

The medium- and long-term objective must be to build more flexibility into the operating model, which reduces the need to layer on costs when demand increases. To sustain efficiency benefits, it’s critical to “design-in” solutions, create a culture of continuous improvement, and establish the necessary capacity and capability to deliver.

While sudden and drastic cuts are possible (and sometimes necessary), they are rarely sustained. And they often cost the organization some key people or damage the culture. Thus, the best way to reduce costs sustainably is to develop cost optimization as a discipline, embedding the mindset, capabilities and strategic decision-making directly into BAU operations.?

It is also important to think in terms of unlocking value, rather than strictly on lower costs. Granted, “unlocking value” may sound like consultant-speak. Throughout many cost-cutting initiatives, I’ve found the emphasis on value to be helpful both in designing solutions and communicating to teams and stakeholders. Because it’s your people who deliver the change, having a positive message to motivate them and drive culture change is no small consideration.

As for the value to be unlocked, it can take many forms, from eliminating manual effort, to streamlining processes and data flows, to simplifying the overall technology environment, all of which lead to lower run rates over the long term. But the most compelling returns come from people working on the right things in the right way. With technology adoption a clear differentiator moving forward, adding capacity for skilled professionals to think and analyze is genuinely strategic and value-adding for insurers.

A proven approach: from smart scoping and business case development to strategic sourcing and disciplined execution

There is no single template for sustainable cost reduction. Different organisations will need to find their own paths, because they start from different places and have different capabilities, operational strengths and strategic priorities. However, all successful initiatives share a few common themes.

Rigorous scoping: The old saying “well-begun is half done” comes to mind here. Focus is the most important element in producing the outcomes you want and effective scoping starts with designing your service model around priorities. Among the questions to ask:

? What services do you provide and to whom?

? Which services do you want to offer as best in class and which as best in cost?

Investment decisions – both where to spend money and where management should direct its attention – will be made based on answers to those questions, which don’t need to be comprehensive or overly detailed. Choosing a few key focus areas is all you need to start (and avoid paralysis by analysis); as you progress the work, you’ll likely find additional opportunities.

By looking at all the key addressable elements of your operating model, you can identify what you can realistically change and see more clearly the variability of your cost base. These sorts of insights help determine the “trajectory” of change (and avoid the risk of trying to do too much too fast). The options typically include:

? Improvement: smaller initiatives designed to deliver incremental benefits and gains with relatively low investment required.

? Transformation: large-scale and multi-dimensional programs, usually delivering medium-term benefits but with more significant investment and broader, more complex change required.

In my experience, the right blend of improvement and transformation is the most successful in terms of delivery and outcomes.

Building a realistic business case: Whatever target cost savings you are aiming for, you will need another 20% or more in your backlog at the start. That’s true because invariably some aspect of the program will fall short or prove economically unviable. Leaders can expect to be challenged on pay-back and return on investment (ROI). I view this as the “economic common sense” test; some things that look sensible on paper may take more resources than you will ever get back in benefits (legacy IT issues are often the culprit here).

It is also important to recognize the risk of stranded costs. Automation automates activity, not people or roles. In finance this is especially true, as many monthly or quarterly tasks need post-automation re-engineering to free up capacity and release benefits. For instance, when data provision is handled as a service, common data can be shared with multiple finance and actuarial teams, eliminating the need for each group to source its own data.

The business case should also include future investment capacity, which is necessary to support continuous investment as technology continues to move so fast. ?

Adjusting the levers – process, data and tech: The most effective change initiatives are holistic in nature, in that they address multiple dimensions of finance operations, including process, data, technology, AI and organisational design. When cost reduction efforts fail, it’s often because they solve problems locally or address only one component of a wider process. End-to-end views (e.g., the close process) help anchor solutions in practical reality. Tools available today simplify process mapping and documentation and can identify pinch points and inefficiencies. Integration across locations, teams and third parties can eliminate unnecessary hand-offs and data-scraping activities.

In the end though, as I said in my last post, it truly is all about the data. Long-term success will be underpinned by the right adoption strategy and platforms, transforming the way we source, process and manage data. Data’s impact on AI is also worth mentioning. AI is already being used for ingestion, processing and analysis. Adoption will only expand but these solutions are only as good as the data they use.

Simplifying technology is also key. Replacing big core finance applications (e.g., general ledgers, reserving tools) rarely delivers transformational cost benefits on its own. Rather, it’s the improved data flows, re-engineered processes and ecosystems around these tools and end-user computing (EUC) that actually reduce costs and improve outcomes. Low code and automation can definitely help by eliminating the use of spreadsheets and EUC solutions. In regulatory reporting, for example, they have significantly reduced timelines while improving control and transparency.

Designing the organization: Labor costs are always a target in optimization efforts. Looking only at “spans and layers” or setting an arbitrary target percentage for cost reduction may produce some upfront savings, but those are typically short-lived, rarely lasting more than a year. The key is to model what the function and organization should look like (and what it should cost) and then assess what people and skills you need to make that vision a reality.

Some insurers bring in new talent to address legacy issues (e.g., hiring people with coding skills to remove ancient spreadsheets). Automating reporting workflows can also free up senior resources to actually analyse data rather than spending most of their time gathering it.

Smart sourcing strategies: Who handles work and where it gets done clearly determine the cost structure. Some insurers have captive solutions in place; some are on their second or third generation of outsourcing relationships; and some are just beginning to explore their options.? Whatever the position, senior leaders should evaluate partnerships holistically, looking at specific operating capabilities, innovation opportunities, and access to new technologies and specialised skills (particularly those the organization struggles to hire and retain) through third parties.

On a more strategic note, eliminating a significant proportion of production activity via automation may impact sourcing strategies, and provide a transition route to both lower costs and access to high-value tooling and capabilities. Among the factors to consider:

? Low-cost solutions can carry higher operational risk, thus pre-emptive risk mitigation plans are essential to manage the transition and support ongoing operations.

? Investment in proper integration capabilities (across teams and processes) are fundamental to successful sourcing relationships.

? Managed service solutions provisioned via external providers can help refocus management time on value-adding tasks and activities.

Similar to the “once and done” thinking, it can be tempting to “transition and ignore” when outsourcing. But successful partnerships require continual engagement and ongoing alignment.

Disciplined execution: Even the strongest strategy for unlocking value needs disciplined execution to pay off. Delivering incrementally against tangible targets and milestones can build momentum and buy-in. For instance, shortening the close or cutting run-rate costs by a small amount each quarter forces teams to orient on outcomes.

In both planning and execution, simple and iterative approaches are almost always better; setting clear targets is important but it’s not necessary to spend months designing detailed future states. It’s about striking a balance between planning and action and continually reassessing and refining plans and targets; agile doesn’t mean there’s no need to plan, but rather puts a premium on planning well, quickly and repeatedly.

Final thoughts

In my experience, the best way to think about cost optimisation is in terms of unlocking value. Beyond focusing on outcomes, unlocking value works as an over-arching design principle and in communicating the “why” to your teams and getting people on board. Solutions should be designed into business-as-usual operations, with new ways of working and toolsets embedded into the day-to-day environment.

In a market where competitive advantage often comes with technological advancement (not least from AI), those firms able to unleash their human capital and create appropriate investment capacity will be best positioned to achieve both cost reduction and performance improvement objectives. ?

I would love to hear your views on the perspectives I have shared. Please share your thoughts, insights and experiences in the comments section.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

?

?