How CIOs Can Prepare for COVID-19’s Impact on IT Budgets

While the full financial impact of the COVID-19 pandemic is unknown, it is almost certain that there will be a negative short-term impact on IT budgets and pressure to cut costs for the entire organization.

In the short to intermediate term, revenue and cash flow shortfalls will occur as cancellations increase due to missed payments; commercial account payrolls are reduced, which will impact workers’ comp premium; bankruptcies limit small commercial growth; and new sales by agents decline due to less frequent interaction with potential clients.

Reduction in loss frequency may help auto insurers, but other lines will see an increase in fraudulent claims. Life companies will see an increase in death claims, which could get offset by ending some annuity income payout streams. However, lower bond yields will exacerbate life company expense issues.

The world was already moving toward full digitization, but recent experiences due to the virus will increase customer expectations for full digital access and accelerate these trends. Traditional cost-cutting approaches may be too shortsighted. Historically, contracting expenses are first to be reduced when there is expense pressure. This is perceived as an easier cut to make as employees are not impacted. However, with IT relying on outsourcing to deliver new capabilities, this will significantly impact all business transformation projects.

Pilots and any experimentation or R&D are also the first things to be cut. Pilots are meant to generate learning and test new technologies or processes. By continuing to invest, an organization will gain knowledge and be better prepared for rollout as the economy turns around. Failing to conduct pilots will put insurers further behind.

What CIOs Should Do Now

  • Create a prioritized list of projects to be cancelled or delayed. Instead of waiting for across-the-board mandates for reductions, CIOs should identify lower priority initiatives or troubled projects and stop them rather than weakening every effort or removing a critical resource from a strategic project. This may actually sharpen focus, reduce risk, and improve delivery prospects for highest priority projects.
  • Proactively discuss plans to reduce expenses in various steps or levels with key executives. Identify the impact of each level of cuts, from short-term to long-term cuts. Suggest the timing of reductions based on project completions, not arbitrary dates.
  • Invest in key digital capabilities. In the future, these capabilities will be even more important than previously expected. They should be prioritized at an enterprise level. While a CIO may authorize fewer pilots, it is important to continue making these investments to generate learning and be prepared for rapid rollout in the future.
  • Authorize RPA or OCR projects. Such efforts can help improve digital workflows and lower expenses. If modernization slows, these projects will allow organizations to gain efficiency without significant investment. These are quick-hit projects which yield costs savings quickly and improve cycle times.
  • Slow core systems rollouts if necessary. Rollouts of modern core systems are often expensive and require a lot of resources. By cutting the number of programs, states, or LOBs being delivered simultaneously from, say, four to two does impact final rollout dates, but it may actually yield productivity improvements if the best people are retained and focused.
  • Consider bringing configuration in-house. Lower cost resources can be trained to do this work if it is repeatable and enabled by core solutions. Current employees can be repurposed, saving corporate knowledge. Some offshore deals are still very cost effective, but COVID-19 could hit those offshore firms. Having some internal capabilities is a great risk mitigation approach.
  • Lean out IT processes. Inefficiency and waste cannot be tolerated and will subject IT budgets to even more scrutiny. Agile teams and DevOps improvements will yield visible benefits more quickly.
  • Manage talent effectively. Talent was scarce prior to the arrival of COVID-19. While people will be less likely to look for another position during these stressful times, how employees are treated could significantly impact an organization’s ability to create or attract talent in the future. Engaging employees in professional development discussions and in IT process improvements will help them grow professionally as well as improve productivity and retention in the long run. Managing performance issues will also help improve the morale of better performers.

Experienced CIOs prepare for contingencies. Recent increases in remote workers and in security risks have put some CIOs in a reactionary mode and have taken much of our CIO clients’ time. It is time to look to the future and prepare to address not only the downturn, but the increased need for digital capabilities and product changes in the future.

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