06 · Commercial Capability

Turning Cost into Capability

Creating a commercial business from an internal operation.

A cost problem with another answer

The organisation was a UK run-off portfolio business with around 200 people in London. Its model was straightforward: acquire legacy insurance portfolios and service them efficiently over their remaining life.

Its technology function was a significant cost centre.

But it also had something valuable.

It owned a policy administration platform developed in-house and had the complete capability required to operate it — development, business analysis, infrastructure, support and service management.

The question was whether that capability had value beyond the organisation itself.

I thought it did.

Don't automatically make the organisation smaller

The initial cost-reduction discussion was familiar: do the same with less.

Reduce the technology team to the minimum possible size. Extend the life of existing assets. Reduce expenditure wherever possible.

That would reduce the cost base. It would also reduce capability.

I proposed a different question:

The organisation was already considering selling access to its policy administration platform to a third party.

I proposed going further.

Instead of selling access to an application, why not provide the whole technology service?

Turn an internal capability into a proposition

We already had an advantage.

We were using the platform ourselves to process insurance business. We understood the customer's requirements because we were operating a similar business.

We also weren't trying to build a standalone technology services company and recover an entire corporate cost base.

We were looking to defray costs that already existed.

Our target customers were new entrants to the insurance market. They needed technology and operational capability, but couldn't economically build everything themselves.

We could provide it.

Build around the customer

I expanded the proposition beyond application access.

We offered application development and support, software licensing, infrastructure, deskside support, asset management, networking and business processing services.

I restructured the technology organisation so that it could serve both internal and external customers.

Everyone became responsible for serving customers as customers — whether they were inside or outside the Group.

That mattered because we couldn't credibly sell an external service while treating our own business differently.

Make the economics work

The commercial model was critical.

Our target customers were start-ups. They needed a low barrier to entry, while we needed to ensure that additional costs were funded from the beginning.

I therefore created pricing that started low and grew with the customer.

The model was primarily based on users rather than revenue. There was a minimum level that covered our costs. As customers grew, the price per seat reduced.

I also created an early software rental model, combining software, maintenance, platform and third-party licensing into a simple per-seat charge.

Scale without compromising the core business

We considered spinning the operation out into a separate company twice.

On both occasions, the executive leadership team decided against it.

The internal business remained our most important customer, so I built the capability within the existing organisation.

We established external customer governance, licensing and service agreements and service levels.

We also agreed in advance when additional people would be required as the business grew.

I was not interested in doubling the workload and expecting the existing team to absorb it.

The objective was to create scale, not overload.

The difficult sell

The executive team could see the logic of selling the application.

It took more persuasion to convince them that customers would buy the infrastructure, support and other services as well.

The customer didn't care where the boundaries between application, infrastructure and support sat. They needed a functioning capability.

If we could provide it more economically than they could build it themselves, we had a proposition.

The executive team eventually supported it.

The result

The technology team grew to 30 people: 10 infrastructure and 20 application development and support.

At its peak, we supported 200 internal users and 150 external users across seven organisations.

Most importantly, the external revenue defrayed 100% of the company's technology costs.

The objective had never been to create a conventional IT services company with a separate profit-and-loss account.

The objective was to reduce what the organisation itself had to pay for its technology capability.

We achieved that.

More scale created better capability

The external customers effectively doubled the user base being supported by the technology team.

That created economies of scale.

It also gave us the ability to invest in better solutions that neither the internal organisation nor an individual external customer would necessarily have justified alone.

The result was counterintuitive.

We hadn't reduced the capability. We had made it more valuable.

The technology team became more capable, the internal business received a better service, and external customers helped fund the capability.

The lesson

When a business is told to reduce costs, the instinctive question is: How much do we need to save?

That can be too narrow.

The better question is: Why does the cost need to change?

If the problem is inefficiency, improve efficiency. If the problem is excess capacity, remove it.

But if the organisation has a valuable capability that isn't fully utilised, there may be another answer.

Find someone who will pay for it.

In this case, the opportunity wasn't to make the technology function smaller. It was to make the capability work harder.