Wednesday, February 19, 2014

Rethinking the Claims Value Chain

As a claims advisor, I specialize in helping to optimize property casualty claims management operations, so I spend a lot of time thinking about claims business processes, activities, dependencies, and the value chains that are commonly used to structure and refine them.  Lately I have been focusing on the claims management supply chain---the vendors who provide products and perform services that are critical inputs into the claims management and fulfillment process. 

In a traditional manufacturing model, the supply chain and the value chain are typically separate and distinct--the supply chain provides raw materials, and the value chain connects a series of activities to transform the raw materials into something valuable to customers. In a claims service delivery model, the value chain and the supply chain are increasingly overlapping, to the point where it is becoming hard to argue that any component of the claims value chain couldn’t be handled directly by the supply chain network.
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Which creates an intriguing possibility for an insurance company—an alternative to bricks and mortar and company cars and salaries--a virtual claims operation! Of course there are TPAs that are large and well developed enough to offer complete, end to end claims management and fulfillment services to an insurance company through an outsourced arrangement. That would be the one stop shopping solution---hiring a TPA to replace your claims operation.  But try to envision an end to end process in which you invite vendors/partners/service providers to compete to handle each component in your claims value chain (including processing handoffs to each other.) You select the best, negotiate attractive rates, lock in service guarantees, and manage the whole process simply by monitoring a performance dashboard that displays real time data on effectiveness, efficiency, data quality, regulatory compliance and customer satisfaction. You would need a system to integrate the inputs from the different suppliers in order to feed the dashboard, and you would also need to make certain the suppliers all worked together well enough to provide the ultimate customer with a seamless, pain free experience, but you are probably already doing some of that now if you use vendors. You would still want to do quality and compliance and leakage audits, of course, but you could always hire a different vendor to do that for you or keep a small team to do it yourself.  Your ULAE costs would become variable, tied directly to claim volume, and your main operating challenge would be to manage your supply/value chain to produce the most desirable cost and experience outcomes. Improved cycle time, efficiency, effectiveness, data accuracy, and the quality of the customer experience would be your value propositions.    You could even monitor the dashboard from your beach house or boat—no more staff meetings, performance reviews, training sessions—and intervene only when needed in response to pre-defined operational exceptions. Sounds like a no-brainer. Insurance companies have been outsourcing portions of their value chain to vendors for years, so why haven’t they virtualized their claims operations?

If you are running an insurance company claims operation, you probably know why.  Many (probably most) claims executives are proud of and comfortable with their claims operations just the way they are.  They believe they are performing their value chain processes more effectively than anyone else could, or that their processes are “core” (so critical or so closely related to their value proposition they cannot be performed by anyone else) and thus sacrosanct, or that they have already achieved an optimal balance between in-house and outsourced services so they don’t need to push it any further. Others don’t like the loss of control associated with outsourcing, or they don’t want to consider disruptive change.  Still others think it might be worth exploring, but they don’t believe they can make a successful business case for the investment in systems and change costs. Unfortunately, this may help explain why claims executives are often accused of being stubbornly change averse and overly comfortable with the status quo, but I think it is a bit more complicated than that—it all begins with the figurative “goggles” we use to self-evaluate claims operations.

If you are running a claims operation, you have an entire collection of evaluation goggles—the more claims experience you have, the larger your collection. When you have your “experience” goggles on, you compare your operation to others you have read about, or seen in prior jobs, or at competitors, to make sure your activities and results benchmark well and that you are staying up to date with best practices. At least once a year, someone outside of claims probably demands that you put your “budget” goggles on in order to look for opportunities to reduce ULAE costs. or legal costs, or fines and penalties, or whatever.  You probably look through your “customer satisfaction” goggles quite a bit, particularly when complaints are up, or you are getting bad press because of your CAT response, or a satisfaction survey has come out and you don’t look good.  Your “stakeholder” goggles help you assess how successful you have been at identifying those who have a vested interest in how well you perform, determining what it is they need from you to succeed, and delivering it. You use your “legal and regulatory compliance” goggles to identify problems before they turn into fines, bad publicity, or litigation, much as you use your “no surprises” goggles to continually scan for operational breakdowns that might cause reputational or financial pain, finger pointing and second guessing. Then there are the goggles for “management”—litigation, disability, medical, vendor—and for “fraud mitigation” and “recovery” and “employee engagement.”  Let’s not forget the “efficiency” goggles, which help you assess unit costs and productivity, and the “effectiveness” and “quality control” goggles, which permit you to see whether your processes are producing intended and expected results.  And of course your “loss cost management” goggles give you a good read on how well you are managing all three components of your loss cost triangle, i.e., whether you are deploying and incurring the most effective combination of allocated and unallocated expenses to produce the most appropriate level of loss payments.

Are all those goggles necessary? You bet. Claims management involves complex processes and inputs and a convoluted web of variables and dependencies and contingencies. Most claims executives would probably agree it makes sense to regularly evaluate a claims operation from many different angles in order to get a good read on what’s working well , what isn’t, and where there is opportunity for improvement. The multiple perspectives provided by your goggles help you triangulate causes, understand dependencies and impacts, and intelligently balance operations to produce the best outcomes. So even if you do have a strong bias that your organization design is world-class, your people are the best, and all processes and outcomes are optimal, the evaluation should give you plenty of evidence-based information with which to test that bias and identify enhancement opportunities--as long as you keep an open mind.

No matter what you do, however, there will always be others in your organization who enjoy evaluating your claims operation, and they usually aren’t encumbered by such an extensive collection of goggles. They may have only one set that is tuned to budget, or customer experience, or compliance, or they may be under the influence of consultants whose expensive goggles are tuned to detect opportunities for large scale disruptive/destructive process innovation or transformation in your operation.  On the basis of that narrow view they just might conclude that things need to change, that new operating models need to be explored. Whether you agree or disagree, hopefully your evidence-based information will be of some value in framing and joining the debate.

Will we ever see virtualized claims operations?  Sure.  There are many specialized claims service providers operating in the marketplace right now that can perform claims value chain processes faster, cheaper and better than many insurance companies can perform them. The technology exists to integrate multiple provider data inputs and create a performance dashboard. And there are a few large insurance company claims organizations pursuing this angle vigorously right now.  I fully expect the companies who rethink and retool their claims value chains to take full advantage of integration of supply chain capabilities will begin to generate improved performance metrics and claim outcomes, ultimately creating competitive advantage for themselves.  Does that mean it is time for you to rethink your claims value chain?  I think the best way to find out is to put on your “innovation” goggles and take a look!

Dean K. Harring, CPCU, CIC is a retired Chief Claims Officer and an expert and advisor on Property Casualty insurance claims and operations. He can be reached at dean.harring@theclm.org or through www.linkedin.com/in/deanharring/








Monday, February 3, 2014

Innovate or Die. Really?

I have been thinking and reading about innovation recently, and I must say there certainly is no shortage of material on the topic—much of it with a critical slant.  That may surprise you, since no matter where you work I am sure your organization talks about innovation, believes it is already innovative, or at least plans to become innovative. Why?  Innovation is a trendy concept, it sounds cool, cutting-edge and entrepreneurial. Business schools have embraced it, and consultants have built practices around it. More importantly, many people believe the phrase “innovate or die” is absolutely true and that it applies to all businesses. So, as Dennis Berman points out in the Wall Street Journal: “Most CEOs now spray the word "innovation" as if it were an air freshener.”

William Taylor, co-founder of Fast Company magazine and blogger on the Harvard Business Review Blog Network, described it this way in his 12/6/13 blog Stop Me Before I “Innovate” Again:
“Words matter — in business and in life. I’ve always found that companies that aspire to do extraordinary things, leaders who aim to challenge the limits of what’s possible in their fields, develop a “vocabulary of competition” that captures the impact they’re trying to have, the difference they’re trying to make, the future they’re hoping to create. Almost none of these companies and leaders use the word “innovation” to describe their strategy — implicitly or explicitly, they understand that it has been sapped of all substance. Instead, they offer rich and vivid descriptions of what they hope to do, where they hope to get, and why it matters.”
Ginanpiero Pteriglieri, an associate professor of organizational behavior at Insead, puts an even sharper point on it in remarks quoted in The Experts blog in the Wall Street Journal:
“Innovation is a strong contender for the crown of business buzzword of the decade. The term has all it takes. It is ubiquitous, mysterious and, like its acolyte "leadership," it works alone and pairs well with many adjectives. Is there a problem that transformational leadership and disruptive innovation aren't invoked to solve? Is there a company whose failure is not explained by a lack of both?”
Business buzzword of the decade? Wow. In that race, the competition is steep, and the contenders are many.  By the way, a great place to check out a good collection of the “jargon monoxide” (a term coined by Polly LaBarre) contenders is The Ridiculous Business Jargon Dictionary where you can browse terms ranging from “above board” to “zero-zero split.” 

Whether or not you believe it is appropriate or well deserved, the property-casualty insurance industry isn’t often described as innovative.  Complacent and risk-averse, stolid, stodgy, and conservative are descriptors more commonly used. But let’s step back a minute—what is innovation, and how critical is it to the success of a property-casualty insurance company?

Innovation is often described as the implementation of something new—a product, a service, a process, an alliance, a market, or an experience—that creates value. So while the innovation process may begin with big ideas, it takes execution and results before it qualifies as innovation. Or, as Dr. Lewis Duncan, president of Rollins College, put it: “Innovation is the ability to convert ideas into invoices.” 

Of course, there are also other flavors of value out there to be harvested through innovation—lower costs, higher margins, new or more attractive products or services, more engaged employees, new customers, new distribution channels, happier customers, more loyal customers, enhanced reputation, etc.  Yet for property-casualty insurers who believe they are operating in essentially closed markets characterized by a high level of maturity and stability, the decision about innovating often turns on their competitive situation.  If they believe they are competing successfully (however they define that term), they may elect to avoid the costs of innovation and to focus instead on engineering incremental operating improvements, tweaking their products and operations and processes so they can continue to function competitively.

But if a company is not competing successfully, or if they aspire to grow and be profitable but that just isn’t happening, they need to step back and analyze what isn’t working, why, and what needs to be done to improve results. That’s an opportunity for innovation, for sure, but it also offers a convenient excuse to avoid or abandon any initiative or process that is new (or unwelcome or costly) and to “get back to basics.”  Getting back to basics means different things to different people, of course, but it usually involves a return to a time-tested and proven method of doing something, like implementation of well-established and widely understood industry methods and best practices. You might characterize it as the converse of innovation. Truth be told--it is much easier and more comfortable to get back to basics than it is to get innovative and develop something new to create value. And it just might be enough for an insurance company to get things back on track if their inability to compete had its roots in substandard or underperforming products, practices, services, or operations.

I do always wonder, when an insurance company goes public with its plans to embark upon an ambitious, multi-year program of operational transformation (first cousin of innovation), just how long it will take before they lose their nerve and push the “back to basics” button. I have experienced it, and I have watched others go through it, and it isn’t really that unexpected.  Innovation is often a costly undertaking that generates uncomfortable, disruptive change with no guarantee of success,  That is particularly true when the “value” that is expected to result is difficult to measure and demonstrate convincingly since it arises from something other than “invoices.”  If you have lived through any type of claims-related transformation or innovation, you know exactly what I mean.

Still, I am not convinced that all property-casualty insurance companies are necessarily entangled in an “innovate or die” predicament, at least not yet. Plenty of companies manage to stick to the basics, focus on execution, play around the edges with incremental improvements, and the market allows them to survive and sometimes even prosper.  Yet we all know there are insurance companies out there who are constantly pushing the envelope and doing whatever it takes to create value—they just don’t spend a lot of time bragging about how innovative they are or broadcasting what they are doing. Instead, they are busy trying to create distinctive marketplace advantages that resonate with customers and to give themselves an edge in pricing, costs, products or services.  Why? So they can operate with higher profit margins and grow by attracting customers away from their competitors. So even though innovation for property casualty insurers probably isn’t really a matter of life and death today, it can impact an insurer’s quality of life and general well being. Kind of like diet and exercise can for humans, I suppose.

Narrow the focus to property casualty claims operations, however, and I think the “innovate or die” predicament becomes a bit more pressing and complicated; but that’s a tale for another day.

Dean K. Harring, CPCU, CIC is a retired Chief Claims Officer and an expert and advisor on Property Casualty insurance claims and operations. He can be reached at dean.harring@theclm.org or through www.linkedin.com/in/deanharring/