Nearly every life insurer, wealth manager, retirement provider, and bank is under pressure to operate in a leaner, more efficient manner. They have executed cost programs, with varying degrees of success. But the next level of efficiency gains won’t come from another spans and layers exercise. Instead, companies must fundamentally reset approaches tied to the legacy aspects of their organizations.

The challenge typically involves addressing legacy issues along three dimensions: long-standing business processes, legacy enterprise technology, and entrenched company culture. Outdated ways of working pervade core processes, from the annual budget cycle to engaging customers when they need advice. Manual processes, with controls and risk processes layered over the top, do not fit a cost-effective future state. While many financial services companies deploy some degree of automation, few have reimagined their processes, nor have they dealt with their legacy IT, which hinders efforts to create a simpler, modern business. Progress runs up against the “permafrost” in the middle of large organizations, which stifles attempts to change.

Confronting timing and coordination issues

When management broaches the topic, timing issues sometimes discourage them from acting quickly. The cycle time on performance improvement programs, typically about 24 months, does not sync with enterprise technology modernization programs, which require three to five years. Efficiency programs depend on using new digital and automation tools, but it takes years to get core systems in place to make this happen on a large scale. “We could automate this process,” the debate goes, “but maybe we should just wait until the new core system is in place.” Separately, people who resist change slow down decisions, with some middle managers behaving as if “this too shall pass” rather than proposing or acting on innovative ideas.

Another complication is the lack of coordination. One corner of an organization can attempt to address inefficiencies, but single-point solutions rarely work. Instead, success tends to come from weaving together tools such as AI and automation technologies and integrating them across the organization.

The good news is that significant advances in tools and techniques over the past couple of years can help reshape operating expenses. Leading financial firms are starting to deploy the full suite of tools in a more coordinated fashion to overcome the asynchronous time issue and fundamentally reset their cost position.

AI’s role in transforming business processes

Most firms are excited about AI’s potential to transform existing processes, and many are already pushing through a set of use cases. The challenge will be scaling up use cases across the enterprise and integrating AI with other technical tools. Companies will want to avoid the mistakes of the automation craze a decade ago, which led some firms to drop robotic process automation into thousands of subprocesses, without redesigning how the work got done. As a result, the return on those investments was often low.

Today’s automation tools, by contrast, can be quite effective if thoughtfully implemented. In the retirement industry, a Bain & Company survey of nearly 100 companies found an average 22% reduction in labor time across a range of processes, from plan design to reporting, with an average 36% reduction expected over the subsequent two years as organizations mature in implementing automation (see Figure 1).

Figure 1

Heavy automation users are seeing even greater savings. And this does not come with a sacrifice in quality. Indeed, the most important benefits cited are higher service quality and accuracy, along with better financial controls and lower risk (see Figure 2).

Figure 2

By now it’s well known that AI can raise developer productivity by writing code. One wealth and asset manager recognized that combining AI, automation with process redesign, and current workflows would yield big benefits. The company deployed generative AI to speed up processes to develop or fix code and to resolve production incidents. In parallel, it optimized the levels of automation, even while wrestling with legacy system issues. And the company took a holistic look at the entire software development life cycle, restructuring it to take maximum advantage of these new tools. On $600 million of annual IT spending, the company is on a path to realize about 15% in cost savings. Given the value of developers and the company’s IT ambitions, it’s reinvesting much of the savings into faster code development and fixes, as well as improved unit testing.

Modernizing legacy enterprise technology

Companies looking to move to modern technology stacks often find that the return on investment and the time to realizing benefits fall well short of expectations. They’re also weighing how to sequence technology investments while managing cost and profitability goals.

Returns on large programs tend to get diluted for several reasons:

• excessive customization and complexity due to not spending enough time harmonizing products, brands, and internal rules;
• lack of a bold future-state design, which means organizations wind up accepting a merely incremental version of the capabilities that exist today;
• poor program governance, which slows decision making and escalation of problems as they occur; and
• delays in delivery, cost overruns, and scope cuts that weaken returns.

While no single solution fits all circumstances, companies can realize greater benefits and returns by addressing three questions.

What future design of our products and processes will help us leapfrog the competition? Determining the right future state entails knowing which differentiated capabilities the company will need to excel at over the next few years. Companies must also assess the right levels of straight-through, low-touch processing to achieve. And they will have to choose the internal and external data sources required to make key decisions, such as underwriting in insurance.

If we were a smaller business, would we be making different architectural choices? If only half of the investment level were available, architectural choices might be quite different. In addition, the use of AI can reduce the cost of data ingestion, translation, and decision making, so deploying AI at scale will be essential. Finally, companies should determine which processes are best suited to off-the-shelf technology and which will require custom technology developed in-house.

What can we do to bring business benefits forward? Quick wins can motivate the organization to adopt modern technologies faster, and bringing such wins forward will accelerate the transition. The key is to link the proposed sequencing of technology changes and use cases to tangible value.

One Asia-Pacific insurance company designed a sharp vision for how the business will operate in the future. It identified near-term opportunities to bring forward tangible benefits, along with the critical capabilities needed to deliver this new model. These opportunities centered on improving underwriter productivity as well as the experience for brokers and customers. For example, it is speeding up renewals through a simplified review process. The freed-up capacity will be redeployed in writing new quotes and fostering relationships with brokers. Underwriter productivity will be more closely tracked. And referral rules for new business quotes are being updated to enable more of them to go into a straight-through processing platform. This work then shaped a business and technology blueprint with oversight to ensure the blueprint would yield value.

Changing behaviors among users of the technology

Transformation to improve performance entails meaningful change, and change is inherently disruptive. Without diligent management, this disruption can become debilitating, eroding a company’s ability to transform effectively. Bold ambitions in the C-suite often get watered down as the broader organization resists the change. Leaders spearheading major change efforts should strategically sequence important initiatives to prevent overwhelming the organization with a flurry of simultaneous changes.

The transformation journey itself should evoke energy and enthusiasm, with recognition and rewards playing a pivotal role. Bain research highlights the potency of recognition and reward in positively influencing behavior, indicating that they have four times the impact of penalizing undesirable behaviors. It falls upon leaders to establish effective mechanisms for identifying individuals and teams that demonstrate positive adaptation in their routines and to offer explicit recognition and rewards to maintain the momentum of transformation. Importantly, rewards don’t always need to be monetary, as not everyone responds solely to financial incentives.

Financial institutions that make a sustained effort, beyond one-off initiatives, to transform outdated technology, business processes, and culture will be able to operate more efficiently. The resulting better economics lead to a greater capacity to invest, which further enhances the economics for a continued cycle of improvement.