Brokerage Ops the July/August 2016 issue

The Yin and Yang of Cloud Computing

Ditching expensive in-house legacy systems could be like cutting loose an anchor. Just make sure your navigational map is plotted before you do.
By Russ Banham Posted on July 26, 2016

And while the answer may be an easy one (most people recommend the cloud), the results can be surprising and far broader than ever considered. Cloud coverage plays a role in everything from lower IT costs, software upgrades, and data security and mobility to the integration of acquired firms. Cloud computing also is the best friend of mobility, giving users, anywhere they are, 24/7 access to systems.

Of course, a brokerage could do nothing and stick with the status quo. But then it risks continuing to expend valuable internal resources on automating insurance transactions that otherwise could be focused on generating business, serving clients better, and effecting more insightful strategic planning and forecasting.

There’s nothing wrong with refusing to fix what ain’t broke. Yet those who have migrated to a cloud infrastructure have found value in this commoditized approach, including greater revenue, improved customer service and superior resource allocation. But, do you need to follow their lead?

Take a step back and ponder. You have invested quite a bit of time and money in an on-premises IT system that is transactional in nature. Sure, it’s an improvement from the days of manual processing, seamlessly and cost-effectively automating tasks like coverage endorsements and sending out certificates of insurance. But guess what? Like it or not, you are now in the data business. Why not outsource these basic IT systems and functions and spend your budget on developing data-analytic capabilities?

Eventually, all companies will make this transition. The challenge is determining the optimum cloud structure, as each organization has different goals and challenges. In some agencies and brokerages, the advice of current IT staff may not be enough to make the best long-term decision, which requires a higher level of financial and business acumen to align IT resources with business strategy. 

“In smaller firms, these decisions are often left to the IT person who configured the servers and email accounts,” says Anthony Abbattista, principal and insurance technology leader at Deloitte. “The person may not have the same level of expertise as the chief technology officer in a bigger shop.”

Consequently, agency or brokerage heads sit on the fence and watch. It’s just too complicated for them alone to sift through all these technological choices.

What’s in That Cloud?

First a brief primer on cloud basics. Cloud computing is simply the most efficient and cost-effective way to do business. Each time a new business application is deployed, it is available to users as soon as it’s released—there’s no need to wait for your company’s IT staff to upgrade the on-premises system with this functionality.

We’re hitting a tipping point with respect to cloud adoption. Many large government agencies are now moving to the cloud in the belief that it is actually more secure than their internal IT infrastructure.
John Loveland, managing director, Consilio

Cloud infrastructure can also flex and grow dynamically. Reaching the limits of your processor memory requirements? The cloud system can allocate more as it’s needed, then scale it back down as the load goes down. You’re charged for only what you actually use. That alone is a game changer. What’s the alternative in an on-premises environment? Things get slow until your team orders new parts and physically installs them. It’s like comparing a Ferrari to a mule. Sure, they’ll both get you across town, but your clients probably prefer the Ferrari.

The cloud is also a more flexible way to spend a company’s money. Instead of one lump capital expenditure (and a big one at that) to invest in data servers, data storage and other IT infrastructure (some to be depreciated over time), buyers pay for computing capacity as they need it, on an operating expenditure basis. Other expenses, such as the facilities to store the equipment and the utilities to keep it all running, evaporate.

With all the cloud has going for it, it’s surprising that a good number of brokerages of all sizes and lines of business have not relinquished their tight grip on their privately owned servers and data centers. The reasons for their reluctance have to do with having already forked over a lot of money, sometimes millions of dollars, to the IT group to build the current infrastructure.

Brokerages are also concerned over the security and safekeeping of sensitive and highly regulated data. Business leaders want to trust that vendors can store and safeguard their proprietary data and provide 24/7 access to this storehouse of information. But what if for some reason they failed in this regard? For these risk-sensitive firms, the difference between an on-premises system and the off-premises cloud is analogous to tucking cash under the mattress where they can keep an eye on it versus depositing it in a bank. Each presents a different risk scenario and comfort level.

Brokerages have addressed these concerns in different ways. “Two years ago, we were acquired by Marsh,” says Trindl Reeves, Barney & Barney’s chief sales officer. Reeves says Marsh instructed the firm “to just keep doing what we were doing with our on-premises data center. Marsh wanted us to join it in the cloud later. This summer, we’re flipping the switch and going to a completely hosted environment. We think it’s great for us and our customers, as it promises faster connection speeds, 24/7 uptime and better data security.” 

Technology consultants agree on the inevitability of cloud-based systems for all businesses. “We’re hitting a tipping point with respect to cloud adoption,” says John Loveland, managing director at Consilio, a legal consulting and services firm specializing in eDiscovery and document review. Six months ago, Loveland was at a conference in Washington, D.C., attended by IT people from various federal government agencies. “Historically, when I go to this conference, the attendees express heavy resistance to cloud-based applications, due to perceptions over inferior security,” he says. “This year marked a change. Many large government agencies are now moving to the cloud in the belief that it is actually more secure than their internal IT infrastructure.”

The quality and speed of the Internet connection is definitely an issue for some brokers, especially those who have really fast corporate networks.
Theo Beack, SVP and chief technology officer, Vertafore

If Uncle Sam is increasingly comfortable with the cloud, corporate America should be too. Yet many agencies still find strong reasons to pause and ponder. “There is a point at which the flexibility, capabilities and long-term costs of running applications in the cloud will be so compelling that brokers and agencies will make the move, despite their investments in current IT infrastructures,” Loveland says. “But that doesn’t mean they should flip the switch today just because everyone else is.”

Legacy Issues

He’s right. Without a strong business case, no agency or brokerage leader is going to take on the risk or cost of a new IT system. They’ve spent considerable sums on their current on-premises systems and data centers. They’re likely loath to offload or sell this hardware at a fraction of the initial price.

“Many large national brokers have invested in significant IT infrastructures,” says Kris Hackney, executive vice president of customer experience at insurance technology company Applied Systems. “In some cases, they’ve just completed a multiyear rollout and taken great pains to get everyone on one system. Moving to the cloud right now is just not on the drawing board—not yet.”

However, many IT professionals pass on the cloud because of their perceptions of a problem and not the hard facts. For example, multiple studies indicate the cloud is a more secure means of protecting stored data from a security breach. Yet many IT specialists are persuaded this is not the case.

Before moving some or all of the their IT architecture to the public and/or private clouds, brokerages and agencies must carefully weigh the pros and cons—the potential upsides of business agility, enhanced security, lower cost and higher performance against their inherent confidence in their on-premises systems.

Large security firms also routinely test these vendors’ systems for holes. And if for some reason the system is down, you know they’ll have hundreds of people working night and day to get it back up.
Joshua Goldfarb, partner, PwC

Despite the many benefits, both public and private clouds are not flawless. For one thing, they are entirely dependent on the reliability of the Internet. If the Internet connection is down, intermittent or slow, so is your business. A cloud infrastructure will require some fundamental redesigning of your wide area network structure.

Sure, loss of Internet connectivity is a small risk but one nonetheless worth considering. “The quality and speed of the Internet connection is definitely an issue for some brokers, especially those who have really fast corporate networks,” says Theo Beack, senior vice president and chief technology officer at agency management systems provider Vertafore. “Any perceived or real slowness in the user’s experience, especially for those in the back office doing high-volume activities, is frowned upon,” he says.

Another potential downside is cost. Although the cloud promises incremental operating expenses on a monthly or annual basis based on use—versus a single, large capital expenditure upfront with ongoing maintenance expenditures—a total-cost comparison may indicate the on-premises IT infrastructure is cheaper over time.

Many vendors might demur, pointing to the cloud’s scalability—the argument that buyers pay for only the capacity they consume.

The Strategic Decision

The challenge is getting good advice. IT should be a part of this analysis but shouldn’t lead it or make the final decision, which is a strategic one. Consequently, it makes sense to bring in consulting expertise—firms like Amazon and Microsoft that can help agencies and brokerages weigh the many factors involved in developing the right cloud IT environment.

Consultants suggest linking the evaluation of a cloud IT infrastructure to the firm’s strategic plan. Ask three important questions: (1) Which will best assist the firm in implementing its plan—the current, on-premises IT architecture or the cloud? (2) Does the firm have the IT staff to grow the business, or will it be better off delegating the more mundane tasks to the cloud, freeing IT staff to work on more value-additive IT projects? (3) What is the competence level of my IT personnel to help me determine the best mix-and-match solutions in a cloud IT environment?

The next step is to undertake a rigorous cost-benefit analysis. Since there is a strong likelihood the firm will migrate at least some of its architecture to the cloud, vendor selection is crucial. Ask for customer referrals, check for service complaints, and ensure compatibility of current applications with the vendor’s cloud infrastructure.

Finally, vet the provider’s financial health and security protocols. Obviously, brokerages should enlist only vendors that have the highest levels of confirmable security, such as ISO 27001 certification.

So What About Security?

A recent Consilio survey of technology professionals in the legal space reveals that 62% are “concerned” or “very concerned” about the security risks of cloud-based applications, understandable since no system is totally secure. If the National Security Agency can be hacked, any enterprise is vulnerable. “Moving to the cloud doesn’t mean the security threat is eliminated,” says Joshua Goldfarb, a partner at consulting firm PwC. “But it should be less.”

Goldfarb notes that cloud vendors spend millions of dollars each year on security, while larger ones like Oracle and Workday spend more than a billion dollars. “This money represents a significant chunk of their budgets,” Goldfarb says. “Large security firms also routinely test these vendors’ systems for holes. And if for some reason the system is down, you know they’ll have hundreds of people working night and day to get it back up.”

Today’s server farms powering the Internet are Fort Knox-size bunkers, some more than a million square feet, that serve the enormous demand for cloud services. In a disaster, the server farms are more likely to be standing than an agency’s back room. Since the cloud is amorphous, data are backed up at multiple sites anyway. As for disgruntled employees with malevolent intentions, they have no access to the physical machines in the cloud to cause catastrophic damage, whereas with on-premises systems they can, if so inspired, simply walk down the hallway and wreak mayhem.

Is your life savings really safer under your bed? It’s human nature to feel that we are the best protector of our valuables, but it’s just simply not true.
Christopher Gagnon, CIO, The Council

This is not to say the cloud offers foolproof security. To protect against the risk of hacking, users must adhere to fundamental security principles like encrypting sensitive data, multilayer authentication and strong password protections. The risk that a major cloud provider could go down, while remote (none have been hacked), is nonetheless possible, and some sort of data backup is sleep-easy insurance.

For brokerages with growing employee benefits businesses that involve highly sensitive medical data, comfort may be a factor in avoiding the cloud. Goldfarb says that many businesses are more at ease knowing the data center is located down the hallway. “If something goes wrong like a virus,” he explains, “they’re comfortable thinking they can resolve the problem right there.”

In reality, this is likely a false notion. “Is your life savings really safer under your bed?” asks Christopher Gagnon, CIO of The Council. “It’s human nature to feel that we are the best protector of our valuables, but it’s just simply not true. Microsoft spent $1.5 billion last quarter on cloud maintenance. Google spent $2.4 billion. How much did your agency spend over the last three months? It’s time to get real.”

It’s likely that large enterprises will continue to maintain both on-premises servers and cloud services, a hybrid environment expected to remain in place for several years. But as a recent article in Information Age stated, the weakest link in this security chain will be the on-premises system.

Rapid Evolution

There’s one other factor that may explain why brokerages are taking a wait-and-see attitude. A recent report by technology market intelligence and advisory firm IDC predicts that 30% of the technology industry’s current suppliers will not exist “as we know them” in five years due in large part to the rapid evolution of new technologies, the need for industry consolidation (more start-ups than anyone can count) and the anticipated entrance of powerful players into the cloud platform market, such as Apple, which to date has only nibbled around the edges.

Some business leaders may be sitting on the sidelines to see which vendors emerge resilient before picking sides. Others may be thinking, “This is all moving so darn fast I don’t want any part of it!” That’s not the best attitude. As Frank Gens, IDC’s chief analyst and author of the report, told The New York Times, “Mainstream companies in every industry are realizing that they’ll be disrupted if they don’t get moving now.”

Many large national brokers have invested in significant IT infrastructures. In some cases, they’ve just completed a multiyear rollout and taken great pains to get everyone on one system.
Kris Hackney, EVP of customer experience, Applied Systems.

Gagnon agrees. “As insurance agencies, we have to get out of the hardware business. Seriously, if we want to get anywhere with data analytics, client experience or move the needle toward advanced retail technologies, we have to fundamentally shift the mission of IT and automation at our firms. Email systems and telephones aren’t differentiators. Everybody has them, so let’s get those systems out the door. If you want to truly stand out, your agency needs to evolve.”

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