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INDUSTRY WATCH:
Technology’s Impact on Ratings
By David Rubinstein
November 1, 2004 — Cooperate on standards, compete on implementation. It’s a mantra we’ve heard time and again in the software development industry. But does adoption of and adherence to standards make a broad statement about a vendor’s overall health? ACORD, a standards organization for the insurance industry, thinks so.
ACORD approached bond rating firms Fitch Inc. about examining the technological capabilities of insurance companies in deciding how to rate the company’s financial health.
While bond-rating companies do consider the use of technology as a part of their analyses, that’s not been as direct a component of the process as, say, revenues or profitability projections. The standardization of data definitions and formats for transactions in the insurance industry has allowed Fitch to compare as apples to apples the strategies for utilizing these standards, and ranking companies accordingly.
The ratings plan was the brainchild of Denise Garth, a vice president at ACORD, who wanted to educate the ratings companies as to what the standards are and how they apply to strategy and the potential financial success of a company. “Companies are asked questions about their technology by ratings companies,” she said. “Now the questions will be more precise.”
The new questions address a company’s IT philosophy and operating principle; familiarity with XML standards, industry data and best practices; and deciding which systems to keep in place after a merger.
“This begins to focus people in,” Garth said. “Business drives the technology but they can’t be separate. There has to be business/IT alignment and partnership.”
This, of course, is another mantra we hear a lot: IT must serve the needs of the business, not exist for its own sake. The explosive growth of the business process management market, and the creation of tools that let business analysts get more involved in the development process, shows that business seems intent upon taking back control of their own IT departments.
How insurance businesses use IT to impact their bottom line is something Garth said should be considered by ratings companies. ACORD, she said, has set data standards for life insurance, annuity, medical health and property and casualty. “We’ve defined what’s a premium, and have built standards to support process flow,” she explained. “We agree on what the data means. So how do we use that to build out these process flows? When the transaction is defined, it’s the business rules that are the differentiator.”
Using standards also helps companies cut costs, as XML has allowed companies to reduce the number of interfaces they employ for data exchange “from 600 or 700 down to 100,” Garth said, because of the reusability factor. The annual costs of maintaining that system are reduced, there are savings in not having to build new interfaces each time, and the company’s time to market is faster, she said. These are things that impact a company’s financial viability, and should be considered when they are being rated.
In a statement announcing the work with ACORD, Fitch senior director John Bareiss said the effort provides his company with “an understanding of a company’s general approach toward technology, how well it uses technology to enhance its competitive position, and an understanding of whether costs are managed effectively.”
The way companies look at these issues strategically is a huge differentiator that should be reflected in how they are rated. “Technology has gone through so many cycles,” Garth said. “There was a competitive thing in the ‘80s, then a cost thing due to bad decisions in the 90s, when we had the whole ‘e’ thing. Now it’s how can we be strategic.”
What makes Fitch able to rate companies on all this is the standards. Insurance is one vertical industry in which all the major players have come to agreement on definitions and data standards. As other verticals also move in this direction—financial and health care are two in which standards are in place and work on others is progressing—the other leading corporate ratings companies, such as Dun & Bradstreet and Standard & Poor’s, should start to place more weight on technology in their assessments.
That would be a sure sign that the days of technology driving business—often down dark, lonely roads—are behind us, and that the business people responsible for making decisions that impact a company’s bottom line are buckled into the driver’s seat.
David Rubinstein is editor of SD Times.
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