Principal Financial CIO Gary Scholten on cloud, vendor management, digital business

Scholten talks about how vendors react to quarterly report cards, cloud strategy and how digital is transforming the business.

Gary Scholten, CIO of the Principal Financial Group, has seen multiple technology shifts since he joined the Des Moines, Iowa financial services giant in 1980 as an assistant planning analyst.

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Principal Financial CIO Gary Scholten
Virtualization, cloud, the Web, the PC, mobility and data science are just some of the trends Scholten has had to navigate.

Now Scholten is immersed in an ongoing digital transformation effort. Throughout the transformation, Scholten has to analyze trends that have staying power while expanding Principal's global footprint for its retirement and insurance businesses.

Amid those moving parts, perhaps the biggest takeaway from Scholten is that basic blocking and tackling such as vendor management, outsourcing best practices and business alignment can't be ignored.

Here's a look at some of the highlights from my conversation with Scholten:

The cloud strategy. Principal is taking a hybrid approach to using the cloud. The company uses Salesforce in the cloud and Oracle on-premise for its key enterprise apps. The best use for the cloud is bursting of compute power, said Scholten. However, there are issues to ponder for Principal. "You have to do a lot of the cloud due diligence up front," said Scholten. "Are they subbing out their data centers? Do they own the facilities or not? Are they liable in case of a cyber attack? How is data separated?"

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Scholten said that those aforementioned issues are often overlooked by companies, who may not understand what multitenant means for a regulated industry. The key is to work through all the arrangements a cloud vendor may have to deliver a service. Scholten said that companies that have run their own infrastructure may have an advantage when conducting their due diligence because they have groups that have worked through service level of agreement items.

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Oracle. Scholten deployed Oracle's Fusion ERP platform as a couple of years ago as its on-premise system of record. Now Principal rolling it out to other countries where it has retirement businesses. When I asked if Oracle's cloud offerings were interesting to him, Scholten noted that he would "more seriously consider it today," but the company's maturity wasn't there a few years ago. The main argument against going cloud in international markets such as Latin America and India is that the customer data has to stay local, said Scholten. "You may have to have tighter control of the data in those countries," he added. All of that said, NetSuite's concept of two-tier ERP makes sense for global implementations and a cloud option in international markets has its appeal.

"We're doing more cloud in Asia then anywhere else," said Scholten. "We use the cloud in areas that tend to be a new location. The cloud is a way to scale more quickly."

Software licensing as a cloud deployment issue. Scholten said the cloud is appealing on many levels, but one hidden cost that can kill you is software licenses that may not carry over. "Everyone starts with AWS, Google or Microsoft for infrastructure, stretches into platform as a service and then finds licensing issues," said Scholten, who noted many of his established vendors are software companies transitioning to the cloud.

Even with these cloud-savvy vendors, there are issues when carrying on-premises licenses over to the cloud. New licenses require more costs and negate some of the cloud advantages, he said. A company like IBM or Microsoft may be able to help customer deal with cross licensing issues, but Scholten said there's little consistency across vendors. "Different vendors have different models with a licensing scheme," said Scholten. "It's similar to new cores. New (processor) cores were great until the software licensing went up."

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CMO, CIO relations and digital transformation. At Principal, Scholten said that most of the technology spending is in the control of the IT organization. That said, the CMO-CIO partnership has to be tight. "For long-term improvement you need business alignment," said Scholten. "Digital business is a big deal across many industries and you can't just dip a toe into it." Working with other CXOs on multiple fronts is critical to transforming the business and companies have to make a series of digital bets, he said.

Projects that illustrate digital transformation at Principal include everything from educational 401k tools for customers that are based on behavioral economics to algorithms designed to enable Principal professional to make better investment choices and an analytics project that cut the time it took to process life insurance. In all of those cases, Principal had to bring together investment pros, data science and technology.

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Outsourcing. Scholten also led Principal's outsourcing strategy. In the 1990s it was challenging to land talent so the company used a third party outsourcing firm in India. "Culturally, it was not a great fit and there was a ceiling on what we can get there," he said. The solution for Principal was to create a captive facility in India with its own employees that would learn the company's infrastructure, business and knowledge. Principal only moves large projects where there's efficient knowledge transfer. As for the turnover, Principal's India rates are higher than the U.S., but lower than a third party.

Vendor management. Principal's vendor management practices revolve around a central group reporting to him, multiple groups in the company and quarterly grades on performance. "Sourcing and supplier management reports to me, but it's not just IT. There is a team on the contracting up front, an infrastructure capacity planning group and people deeply knowledgeable about plans and licensing," he said. "We need the flexibility to scale and each business has significant vendors. Vendor relationship management means work across all parts of the company."

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As for the feedback with vendors, Principal has quarterly grades and meetings. The meeting revolves around how the vendor relationship is going and the value provided. "Some vendors really like it and take the feedback back to their organization. At the least, the meetings give the local rep some leverage to go back to the organization and detail what needs fixing," said Scholten.

"And some vendors hate it. We have to have a conversation and say 'how important is this partnership?'," he added. "These vendors may see the value of the feedback and don't like what they hear."

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