Earlier this week, Glenn Willis, Editor-in-Chief of ITO America and CEO of CDM Media, interviewed Srini Koushik, SVP and CTO of Nationwide Insurance. Srini discussed the Nationwide Development Center, an innovative project that will eliminate the company’s need to outsource application development, while improving the IT experience for associates and customers. Below is the transcribed interview. To listen to the podcast, click here.
This interview was part of ITO America’s Thought-leadership Series, an ongoing project that features one-on-one interviews with innovative thinkers from top companies in North America. If you would like to be considered as a participant, please leave a comment with your contact information.
What exactly is the Nationwide Development Center?
The Nationwide Development Center is a pretty unique concept. Nationwide spends roughly $200 million on application development and maintenance every year. These applications are undergoing significant modifications. The traditional way of looking at application development with the skill shortage we’ve got in the United States has been to go out and do massive outsourcing. A lot of my peers have done that and they’ve had different levels of success with it. What we decided to do is to take a different approach to it. We wanted to set this up, given the fact that we are going to have this level of demand coming at us. The problem we were trying to solve was, can we actually get to be very good at this? In order to do that we had to make sure that we put the right tools and processes and technologies in place for us to be able to both improve the productivity of our associates and increase the recruitment rate. And one of the things you get out of it is a very high level of quality. So our eventual objective with the Nationwide Development Center is to actually prove that we can deliver the same if not better proposition then taking all of this stuff and outsourcing it to India, China or any other place.
What was the catalyst behind the creation of the Development Center and what issues did the company face that the Development Center will address?
You talked about Nationwide’s growth in your introduction. With that growth comes increased expectations. Increased expectations of being able to not just be a follower on technology and IT, but actually be a leader in that space. So the demands for our business partners became tougher and tougher. They wanted things better, faster, cheaper. You know that cycle never ends. It’s a continuous cycle of trying to get better and if you get there, hoping I do that faster and at a price that is economical. So the external pressure that we were getting not only to keep pace with the industry, but also to stay ahead of it, was one of the driving factors behind the Development Center. What I’ve just outlined for you is not different than a CIO in any growing company is going to face. But, as I pointed out earlier, the standard approach that a lot of IT leaders use is to find the skills where you can. That’s led to increased outsourcing of work and that’s actually a very viable alternative. The challenge becomes the increased management overhead that you get managing 24/7 development in a foreign country. What many people find out when they get into that model is that even though they are able to meet the demands of the customers, the business case and the factors that the business case was built upon don’t typically hold together. We looked at that model. We spent some time talking to some of our peers in the industry and said we’ve got to solve this differently. Is there a different way for us to solve this without just throwing more and more armies of people at it? And, as we looked at it, one of the things that’s evolved at a very high pace in the past few years is the application development environments and the tools and techniques that are available today to make application development more efficient. So, all of these things were coming together. I’m lucky to work at a company where IT is actually viewed as a competitive of advantage. We’re not viewed as a cost center. The company recognizes that in order to be successful out there, we have to be good at IT. And in order to do that, they look to IT to come up with new ways to solve it. So when you put all of these things together, we had to come up with a different way to solve this problem and we started the Development Center as a pilot in 2008. We started to build upon it and, in a six-month time frame, we were able to prove out the value proposition so where we are is the build out of it. We are in phase two, growing the development center and taking on the $200 million in application development.
So it’s a fairly large plan across the board. How much did it cost you to create the Development Center and what ROI are you expecting?
I’m going to give you very high numbers. We have a pretty detailed business case. If you think about today, we run about $40 million of application development through the Development Center. We’ve taken a look at how we executed these projects over the last few years and it was very clear that about 15 percent of that was spent on what we would call waste. So one of the underlying tenants of the Development Center is lean management. The Toyota production system and applying lean management and lean software techniques to application development. Lean management is built on eliminating waste. Whether it’s identifying the different types of waste in software development, but also focusing on what waste is necessary waste. Necessary waste being what you have to do to be able to continue to deliver value to the customer and the unnecessary waste which is the wait times, the increased number of defects, those types of things. So 15 to 20 percent of the application development budget was going into these areas that we would consider waste. So that was one problem. Second, since most of our employees were working on supporting existing systems, a lot of these new development projects that we we’re doing–and we’re working in some very cutting edge technologies and we’re proud of that fact–in order to get it done, the way we used to do it was to work with some of our partners. The very cynical associate would look at this and say, “Well, you’re spending all of that money to train your contractors and suppliers so the knowledge leaves once the project is done.” And there’s a certain element of truth to that. There was enough waste built into our application development process. From 2008 to the end of this year, we will have put in roughly about $3.5 million into the Development Center and we’ve got more planned for next year. So if you think through that, I gave you some very high numbers earlier–$200 million–15 to 20 percent was what we were hoping to save. $3.5 million is paid back very, very quickly. And that was the business proposition. The key was to convince the executive management and the business partners that this was a good use because these are funds that are taken away from some other project. And to make that happen, a big component was that the business was comfortable with IT and how we were delivering that. We have a very solid business partnership at Nationwide and all the way up to our CEO have been involved and very supportive of the Development Center. So that’s made it easier for us to go down this path.
How do you expect the company to benefit from the Development Center in the future?
We’re not different from any other company out there. Our ideas are far greater than our ability to execute. We have some really good ideas to penetrate the marketplace and gain market share. But if the engine that delivers these ideas, IT, is not efficient or not productive enough things have to wait. I think the longer-term benefit is that when you get this thing cranking and moving at the right type of pace for the entire portfolio, we’ll be able to get to some of these ideas way sooner than what’s planned today and that means a lot. People tend to focus on IT innovation in this space. If we go out and create a new mobile application for the iPhone, which we’ve done, you get an advantage, you get the buzz from the marketing and you get maybe two or three months in the marketplace and then there’s some of our competitors that are going to do you one up and then it becomes a race of trying to catch up. The point being is that IT innovation or specific IT related improvements are short lived. Some of the ideas on the backlog are business model innovations that if we are able to get done and put in place, we get a year or two year type of advantage in this marketplace and that’s big for our business. I’m looking forward to the day when we get the Development Center cranking and working and we are able to T up a lot of these ideas. And not everyone of these ideas are going to work, but if we can actually provide the capability to do the fast trial and deliver things with a very high level of quality in a predictable way, that will benefit the business big time. We’re not there yet, but that’s our goal.
What benefits are the customers going to experience?
First of all, when you think about financial services today the amount of features and functions that are now considered to be the bare minimum keeps going up all of the time. Three years ago getting an electronic bill was considered unique. Today it’s almost cost of entry. So as expectations from our customers keep going up, when we don’t deliver to those expectations, we don’t show up in their consideration set. I think one of the things customers get out of it is that the company that they are working with, Nationwide in this case, is able to constantly provide them with best of breed capabilities. So that’s one big thing that they do get. The second is that every software development organization has a certain level of defeats that make it into production. It doesn’t matter if it’s Microsoft or Oracle or any of the big guys. We as an IT organization have defeats that could make its way into the process and that could affect customer experience. The fact that we can deliver better quality code coming out of this is going to be something that a customer can directly see. The third one ends up being that, at the end of the day, cost and prices is very important and as we improve efficiency and productivity the cost of building out this incremental feature-function capability is going to go down and that literally has to get passed on to the customer these days. Again, in the insurance business, it is price competitive. This is a way for us to be able to stay there and keep providing better prices for our customers.
What is your advice to a CIO or CTO that is perhaps thinking about opening a Development Center and how do they get started?
I think if you’re a mid-size insurance company, a lot of the concepts that I’ve talked about still apply. I do understand that the ability to invest at this level may not be there, but there are ways in which you could take advantage of this. One of the things that the state of the economy provides us is that there are large software development companies that are opening up onshore centers. One of the things they could do is to partner with one of these companies to be able to both share in the investment, but at the same time try to leverage some of the advantages that I’ve been talking about. I think that’s one thing that they can definitely do. They can start working with some of these guys who are establishing local presence. And I keep insisting on that local presence because the knowledge transfer component of this thing is really important. Any financial services company will eventually come to the realization that technology and IT are at the core of their business. Unlike a manufacturing company, say an auto manufacturer, they make cars and IT tends to be a support function. In the financial services, what you sell is information. You sell data. You sell a promise. So any insurance company in this marketplace really has to have IT as a core capability and if you get to that point than you are committed to building a big chunk of that capability—maybe not 100 percent—within your organization. As you commit to do that, you have opportunities to work with individual teams. The other thing about the Development Center is that almost half of the projects that go through the Development Center are very small, quick turnaround—two to three month—projects. These are not massive multi-year projects. So, if you think about it from a mid-size insurance company perspective, they tend to see the same type of projects in their portfolio. A lot of the techniques of applying lean management to software development, all of those still apply to any of those companies. I think that there’s a lot to be leveraged from what we’ve done. The challenge will be, what’s the best way for them to sell this concept to their business partners? CIOs and their teams really have to go back and figure out what’s going to work for them.