Article BPM Case Study 0904

8/13/2019 Article BPM Case Study 0904

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McQueen Consulting LLC 2004

Business PerformanceManagement Case Study -Health Insurance Company

This article reviews how a Health Insurance Companyachieved success. Three phases of change manylessons learned and five major opportunities forfuture improvement are described.

Imagine yourself as the CEO of multi-billion dollarhealth insurance organization. You have been

promoted to that position at a time when pooroperating performance and a volatile market haveimpacted the organizations financial stability, almostto the point where regulatory oversight could betriggered.

Your tasks are to address the acute financialsituation, then to determine how to ensure future

performance. You have a broad vision for the monthsand years ahead, but have concerns about thecorporate culture and its ability to implement large

projects on time and on budget. It may even be thatyour management bench-strength is insufficient tomake your vision a reality.

Move ahead four years. Revenue has doubled, netincome has hit more than $300 million, andmembership has jumped almost 30%.

This is the story of how a Health Insurance Company(HIC) successfully turned a challenging financialthreat into an opportunity to create long-term,sustainable improvement.

HIC Operating Performance

(Cumulative % Growth)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004

0%

5%

10%

15%

20%

25%

30%

Revenue Membership


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Business Performance Management Case StudyHealth Insurance Company

McQueen Consulting LLC 2004 Page 2 of 9

STAGES OF THE TURNAROUND

Early in 2000, poor financial performance at HICbegan to generate concern. Investment income had

buffered three consecutive years of operating lossesand the underlying financial health of the organizationwas not strong.

By 2001, reserves had fallen to the point where it wasnot clear that investments needed by the businesscould be made.

The key drivers of poor performance were uncertain.However, many unsettling facts were evidentincluding:

Latency in the actuarial model meant actualoperating performance was not known for up tonine months.

Lack of pricing discipline by competitors in themarket was putting downward pressure onmargins.

The organization had not reduced administrativecosts as quickly as competitors.

HIC was slow to adjust to change due largely toIT and capital constraints, as well as a lack ofmanagement tools and processes.

The CEO and COO reviewed performance andidentified opportunities for change - they came tobelieve their two greatest challenges were the lack ofa performance-based culture and outdated

management processes and tools. It wasimmediately apparent that extensive effort would berequired to address these issues. Over time theydeveloped a strategic phased approach to guide theirwork (see Figure 3).

In the first phase Turnaround leadership tookimmediate action in key operational areas to ensurestability. The length of this phase was approximatelynine months. The goal of the second phase BuildPerformance Infrastructure was to create thebasic building blocks that would enhance and sustainperformance. This would be the foundation on whichstrategic change could be pursued more quickly. The

length of this phase was set between three and fiveyears, to overlap with the third phase. In 2004, HICentered Phase 3, Strategic Alignment. The goal ofthe third phase is to better align products and theprovider network with market demands and therealities of HICs competitive position. This phase willentail significant structural and business processchanges.

Phase 1: Drive Turnaround

This phase was built upon two key tactics:

Create Turnaround Teams. This tactic addressedHICs most pressing need, to address short-term gapsin setting rates (pricing) and administrative costcontrol. Teams in each critical business area werearmed with broad authority to implement change.They distinguished themselves as highly motivatedand able to move with a sense of urgency, gettingresults by:

Remaining small and reporting directly to HICleadership

Using a disciplined set of metrics to trackprogress

Holding each other accountable by sharingresults across the teams

Within six months, HIC made progress towardreducing administrative costs, addressing pricinggaps in the market and stabilizing the level ofreserves.

Focus on Administrative Cost Management andPricing Rigor.Administrative costs and pricing

.

Evaluate senior staffDevelop actionable dataTransform management processesUpgrade project management capabilitiesImprove senior team leadership skillsAddress key functionsAplayers

Differentiate based on public policy

Create Turnaround TeamsFocus on pricing and administrative cost management

Phase 2Build PerformanceInfrastructure

Phase 1Drive Turnaround

Figure 3HICs performance turnaround consisted ofthree major phases.

Phase 3Create StrategicAlignment

Develop corporate strategyAlign product portfolio to market needsBuild competitive intelligence


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decisions were two major factors over which HIC heldsignificant control. While the Turnaround Teams

generated some immediate and significant impact inthese areas, continued discipline was critical to HICscontinued operating success.

By 2000, despite several years of efforts to reduceexpense, administrative costs were not competitive.In the turnaround phase, administrative cost becamea focus of management and of the organization as awhole. Administrative cost targets were incorporatedinto performance expectations and regularly reported(see Figure 4).

Figure 4Admin Expense and Net Income %

17.1

13.4 13.712 12

0.11.4

3.1

5.24.4

2000 2001 2002 2003 2004*

Admin Exp Net Income

At the same time, a flat per member per month(PMPM) administrative cost guideline wasincorporated into the budgeting process. Since the

targets were first set, managers have been requiredto reduce costs in their area each year in order toovercome rising inflation.

Finally, leadership encouraged reductions inadministrative costs by providing a disproportionateamount of strategic project funds to those cost areas.

To address pricing, HIC determined that existingmethodologies were solid but could be made moresophisticated and competitive:

First, the data input process for pricing decisions wasimproved. HIC used more timely data and increaseduse of client-specific data to improve accuracy.

Second, HIC reduced the pricing cycle on severallines of business from semi-annual to quarterly tomatch its competitors and to more accurately price itsproducts.

Finally, HIC redesigned its underwriting model andapproach, changing from pooled risk to individualcase underwriting. Methods of predicting cost trends

were revised, and tracking systems developed toensure greater accuracy and accountability.

Phase 2: Build PerformanceInfrastructure

Phase 2 was designed to ensure that HIC did nothave to go through another turnaround in the future.The goal was to ensure HIC did not backslide butrather continued to build a performance-based cultureand management infrastructure. This has involvedmany activities rolling out over more than two yearsand has established a foundation for the Phase 3strategies. Highlights of the second phase include:

Evaluate Senior Staff. Turnaround Team successesdemonstrated the need for different types of leadersand managers. It became clear that top performers inthe old culture would not necessarily excel in a newenvironment which required:

Commitment to a sense of mission

Dedication to objective, data driven problem-solving

Focus on performance and results

Focus on execution.

HIC started at the top. Fourteen months later, elevenof twenty-one HIC leaders would be new to theirpositions. While some changes came from naturalattrition, most changes were initiated to introducemissing skills and capabilities (see Figure 5).

Changes in the senior management team providedmany benefits to the organization - balancingexperience with fresh and diverse talent. The result

was an increased management capacity, a new levelof energy and a willingness to challenge the statusquo.

Figure 5BSC Leadership Team Composition End 2003

14%

38%

48%

Promoted New to Position Same Position

Transform Management Processes. Before 2001,HIC had 12 different planning processes andnumerous review committees often covering similartopics. The result was wasted management time andoverly subjective decision-making.


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HIC created an integrated planning process thatreinforced accountability through rigorous andtransparent performance tracking. At the helm werefive high-level workgroups coordinating strategy andinitiative planning across similar business units. Theworkgroups cut across organizational boundaries,reduced planning silos and created transparency

about performance.

Operational planning was improved. Previously, eachbusiness unit submitted multiple plans for strategicplanning, budgeting and resource planning. Theseefforts were not coordinated, consolidated, norevaluated against HICs strategic objectives. Mostplans gathered dust while business unit leadersbattled day-to-day issues and concerns.

Improvements were made, from consolidation ofplanning documents and deadlines, to development ofa structured planning tool to consolidate and reviewall plans. This allowed HIC to adjust plans prior tofinalization, resulting in realistic and achievable goals.

The results were striking. The number of projects andinitiatives fell from more than three hundred to justsixty, with focus on twelve critical projects. Newlyestablished monthly business reviews shifted fromdebates about data to problem solving of businessissues. The cultural impact of candidly owning andsharing performance issues has been significant.

Upgrade Project Management Capabilities. Anumber of core capabilities were targeted forimprovements in efficiency. Staff responsible forproject management, competitive intelligence andquality management needed to be able to do more,

more quickly.

By upgrading project management talent, tools andmethodologies, HIC is on track to demonstrate bestpractice in project management, with greater capacity,successful completion of more complex projects, anddecreased reliance on outside contractors. Goals for2005 include a 3% increase in portfolio ROI, 90% Aplayers in project management roles, career pathand training for project managers, establishment of aproject management center of excellence and anoverall 25% increase in project execution capacity.

Build Leadership Skills. Strong leadership was avital element to Phase 1 Turnaround Teamsuccesses. In Phase 2, HIC established leadershipprinciples and behaviors to be expected at theDirector level and above in the organization.Led personally by the CEO, the HIC managementteam defined the meaning of personal leadershipwithin HIC and identified how outstanding leadershipcan help be used to meet business challenges.Designed to provide greater decision-makingefficiency, improved decision effectiveness and

ultimately, better performance, the team establishedthe seven Principles of Leadership.

The challenge then came in incorporating theseprinciples into the culture and daily life of HIC. Theorganization launched an effort focused on leadershipdevelopment, consisting of four elements:

Commitment of resources to training Proactive management of the leadership pipeline

Measurement of progress toward program goals

Links to the performance management system

The human resources organization took responsibilityfor evaluating all new positions and hires according tothe principles, and incorporated the principles into theperformance review process. Executive developmentprograms were implemented for senior executivesand director-level leaders.

Critical to the leadership pipeline was a formalizedsuccession planning process. Potential successorsfor key positions were identified and their capabilities

measured against expectations. The processidentified critical gaps in the leadership talent pooland required senior staff to plan to address thesegaps.

Improve Key Functions. Once the new seniormanagement team was stabilized, HIC launched whatwas called the Key Functions project. Throughinterviews and by reviewing three-year businessplans, some 50 critical, non-senior managementpositions were identified as key to the success of theorganization.

Figure 6As-is "A player" distribution of key functions

60%

10%

30%

Assigned Development Plans "A" players Released

Individuals in these key functions went through arigorous evaluation. Those with poor evaluationswere placed in development programs or werereassigned or released (see Figure 6). The project ison track to have A Players in all key functions by theend of 2004.


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Phase 3: Create Strategic Alignment

HIC has entered the third phase of its performanceturnaround, aligning the product portfolio and provider

network with the demands of the market andcompetitive pressures. Where the changes in Phase2 were primarily internally focused, Phase 3 changesare driven by customers, competitors and broaderindustry forces, prompting three immediate tasks.

Create Corporate Strategy. Phases 1 and 2focused on raising operational standards to a level ofexcellence, with great success. However, as thecompany evolved and basic organizational andprocess changes were made, it became clear that topush forward would require a more comprehensivecorporate strategy.

Given internal competition for resources and an arrayof challenges to prioritize, a significant push has beenmade to evolve the existing strategy of operatingexcellence. HIC has developed a broad corporatestrategy appropriate for todays organization andmarket conditions.

The new corporate strategy acknowledges that thehealthcare environment will get tougher as themarketplace continues to consolidate, resulting incontinued strong competition and rising healthcarecosts. Further, HIC must act quickly to prioritizeactions that will achieve market leadership in the nearterm.

The refocused strategy has several immediateimplications including the refocusing of 2004 and2005 work to emphasize internal capabilities and linesof business with the greatest opportunities.

Define Product Portfolio. HIC is better aligning theproduct portfolio to the demands of the market. Thishas involved complex analysis to understand wherethe greatest opportunities exist to profitably increaseoverall market share. A number of segmentationstrategies are available including designating lines ofbusiness by aggressive growth, opportunistic growthand steady state development.

Distribution channel enhancements are also important this could involve a renewed focus on enhancedchannel support, building relationships through betterservice capabilities (access, education and tools) pluscompensation plans and incentives aimed at growingdesired segments.

Build Competitive Intelligence. HIC is working onbetter understanding how to compete. Two key

elements are market-focused strategies andcompetitive intelligence. HIC is investing to improveits competitive data gathering and analysis to help

decision makers manage and work ahead of trends.

Competitive intelligence is being used to test existingstrategies for competitive vulnerability. It is expectedthat competitive intelligence will also be used to drivethe development of line of business strategies.

LESSONS LEARNED

Many lessons have been learned in retrospect it isnow clear that some actions should have been donequite differently. The following is a selection of our

personal learnings from the last three years.

What worked.

A. Dont Wait for StrategyDuring Phase 1 and early in Phase 2 it was sufficientfor HIC to focus on simple blocking and tackling:restructuring basic management processes andfunctions to improve efficiency. We believed we didnot have time or the need to develop an overarchingbusiness strategy.

However, while the pragmatic approach avoidedorganizational distraction, a time was reached whenstrategy development not only could but should

have been initiated.

Toward the middle of Phase 2 the list of easy wins topursue began to diminish. Without a strategy it wasnot clear where to focus resources and managementattention next. As a result, the business units beganto ask questions about focus we were not able toanswer. In retrospect, HIC would have achievedgreater traction at an earlier date if the formalbusiness strategy development had started during theearlier stages of Phase 2, rather than waiting forevents to make the need for such strategy moreobvious.

B. Take Actionable, Incremental StepsHIC resisted the temptation to swing for home runsand instead focused on taking actionable, incrementalsteps. Looking back, actions with the greatestimmediate impact simplified execution and effectivelyincreased implementation capacity.

For example, HIC eliminated information systemcomponents from the scope of several reengineeringefforts, maintaining the focus on process and people


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before implementing enabling technology. While thisreduced some of the projects expected benefits, it

ensured positive steps toward the desired outcome.Ultimately, this approach created confidence,momentum and quick returns.

C. Go Ahead, Take RisksHIC proceeded with several high risk initiatives withfew adverse consequences. For example, HICreplaced a significant number of its senior leadersover a very short period of time. By making dramaticchange quickly, organizational disruption associatedwith the moves was minimized.

HICs old perceptions of risk were based on pastexperiences under different leaders. However, asnew leaders from other industries were introduced,the appetite for taking calculated business risksincreased.

D. Solve People Problems FirstHIC took time to ensure the right people were on theleadership team and in other key positions to tacklethe challenges ahead. The rationale was simple theright individuals with the right know-how andexperience make subsequent problem-solving easier.

At HIC, senior leadership was willing to make anhonest evaluation of its team members. HIC madesignificant leadership changes starting at the top ofthe organization. While difficult, these changes madeit easier to address future problems.

In some situations, decisions were delayed oravoided. However, in time, it became clear that itwould have been far better to make change earlierand more aggressively in almost all of these cases.

E. Delay IT InvestmentsHIC consciously delayed or scaled-down many ITprojects during Phase 1 and 2. Why? IT projectswere typically high-dollar, high-risk and had narrowlydefined benefit streams. By delaying the investments,HICs employees focused on better understanding theroot cause of the issues. Eventually, several projectswere modified to focus on improving people skills andbusiness processes rather than improving ITcapabilities. HIC developed both quick, tacticalsolutions for the interim and a better understanding ofappropriate IT solutions.

This approach did have limits. First, all IT work couldnot be expected to cease. HIC worked to determinewhich projects were a foundation for future ITimprovements, and which were potential distractions.The establishment of a centralized ProjectManagement Office (PMO) reporting to the COO

helped streamline decisions and focus the projectportfolio.

Second, it was agreed up front that limiting the ITportfolio was only an interim solution. At some pointoperational and competitive pressures would requireHIC to increase spending on infrastructure andapplications, but the key was in the timing.

F. Let Internal Resources Drive the ImprovementsHIC avoided the temptation to bring in teams ofoutside consultants to accelerate organizationalimprovement. Internal resources were given theauthority and accountability to lead the turnaround.HIC explicitly accepted the trade-off between thegreater potential speed of a consultancy and the needto allow the organization to create solutions that

would benefit from buy-in and ownership.

This approach was especially appropriate due to acultural bias against outside consultants caused bythe failure of a large project. Consultants were notcompletely avoided, either, but utilized for specificprojects and unique content issues. In essence, theexperiences, perspective and horsepower ofconsultants were seen as a supplementto theorganizations turnaround needs, not driving factors inmaking it possible.

G. Leverage Strategic Investments byRedeploying Operating Budgets

Unable to invest in the business at the desired rate,HIC used operating budgets to fund more strategicinvestments. Analysis to identify the highest and bestuse of resources lead to a) identification of low-valueactivities which could be eliminated, and b) effectiveredeployment of baseline (operating) funds. Thiscontroversial approach reduced capital requirementsand increased capacity to improve the business.

In one case, rather than provide new funding to salesand marketing projects, HIC redeployed over severalmillions of dollars of existing department resourcestoward more favorable geographies and producttypes. This approach helped to produce the resultsthe business units sought without increasing capitalbudgets.

H. Look for Points of LeverageAs projects were implemented, it was clear there werecapacity constraints; PMO data confirmed that HICwas unable to invest in its business at the speed anddepth it would have liked. The challenge became toidentify points of leverage to address theseconstraints.


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Of three constraints identified people, capital andtechnology it was initially thought that capital was

the biggest constraint. However, as operatingperformance improved and project resourcesincreased, it became clear that it was people who

were the real constraint to investing in the business.

We learned that managers did not have enough time,and often were missing critical skills, to lead newwork. HIC launched initiatives to increaseimplementation capacity by upgrading projectmanagement talent, teaching analytical skills,leveraging insights from the PMO and introducing

quality management techniques all skills that keepgiving back as the management team moves into thefuture.

What we could have done better

I. Identify a Change Catalyst and Change DriverHIC created a group to be accountable for driving thechange effort. Once the Turnaround Teams hadcompleted their tasks, a Vice President for BusinessPerformance Management (BPM) was appointed,reporting directly to the COO and working closely withthe CEO to continue the performance turnaroundwork. The role integrates several important functions:

Business planning, competitive intelligence andstrategy development

Portfolio analysis, PMO and project managementcenter of excellence

Measurement, dashboards and performancereporting

Capital allocation process

Management venues design and facilitation

Internal consulting

HIC could have seen earlier and stronger gains fromthis function by better clarifying and communicating itspurpose to management across the organization atthe time it was established. Confusion about rolesand accountability for performance improvementcreated challenges that needed to be overcomebefore progress could begin. Those issues wereeventually addressed, however, and BPM has provencritical in supporting the organization through Phases2 and 3.

J. Understand the Organizations TerminalVelocity of Change

At times, HIC reached its terminal velocity of change a point where the organization was not able toabsorb the pace of change without realizing it.These periods of friction could be identified easily inhindsight, characterized by a high level of noise,agitation by staff, and even some pushback fromexecutives. These periods were generallycounterproductive to the transformation effort.

HIC would have benefited from an upfrontacknowledgement that the organization did have

limits on the rate at which it could change. Amechanism was needed to identify this terminalvelocity more quickly.

At points where the terminal velocity was reached, itwould have been helpful to have more dialogue abouthow to moderate the pace of change until theorganization had regained its footing and was readyto push for the next milestone.

K. Automate Management ProcessesRapid improvement of HICs management processes(such as business planning and measurementsystems) created many manually-intensiveprocesses. While the organization was careful in itsIT investments, there were opportunities missed whenit came to supporting the automation of essential

processes, especially those that supported decision-making.

For example, even as HIC improved and expanded itsdata collection and analysis functions, executiveswere expected to support these new processes withexisting tools and staff. Executive time was spentmanually compiling and drilling through data activities that could have been automated, savingtime and building capacity to address more complexaspects of the change effort.


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GREATNESS IS A JOURNEY NOT ASTATE MANY CHALLENGESREMAIN FOR HIC

HIC has enjoyed tremendous progress. It has

upgraded management practices and talent to a newstandard a standard that recognizes the need formore than competitive parity. It has become morerigorous about its business methodology and hasbeen willing to concentrate on a handful of actionsthat will truly deliver benefits. In three years, HIC hasgone from needing Turnaround Teams to deliveringthe best operating profit performance in its history.

However, HIC still must overcome challenges toremain a viable competitor in the marketplace.

Address rising health care costsHealth care costs are expected to continue to rise atalarming rates. Over the last several years, average

annual premium increases for employers have rangedfrom 10% to 15%. Since 2000, national healthexpenditures have increased from 13% of the GDP toapproximately 15% and this rate of increase isexpected to continue through 2012 (see Figure 8).

Successful health plans must find innovative meansto control rising costs and provide purchasers withaffordable health care. The challenge to HIC is tostay current in its understanding of the complexities ofthese pressures and to introduce innovative productsto address purchasers concerns.

Lower administrative cost structureOver the past several years, HIC has been able tolower administrative costs and achieve parity with itscompetitors. However, maintainingcompetitiveparity will be more difficult for HIC than achievingit inthe first place. Cost reduction options today are lessobvious and have more significant trade-offs than inthe past three years. HIC must adopt rigorousbusiness improvement methodologies, such asQuality Management, to enable the organization toproperly identify and evaluate alternatives.

Maintain pricing disciplineMaintaining pricing discipline is a significant driver ofprofitability and is critical to successful operatingperformance. HIC must continue to improve its

ability to develop accurate projections of industry andcompetitor trends. Focus and resources will beneeded to build greater expertise in understandingunit cost behavior, actuarial modeling and competitivebehavior.

Continue to build leadership capabilitiesHIC is just beginning to institutionalize leadershipdevelopment initiatives. It will take several cycles andmuch persistence to ensure these principles areincorporated into the daily life of all employees.

Improve core capabilitiesThe health care industry is facing a tumultuous futureas it addresses rising health care costs and shifts inpurchaser demands. This is a tougher environmentthan any HIC has encountered and it demands a clearresponse.

First, HIC must continue to identify, prioritize andimplement upgrades of a targeted list of corecapabilities.

Second, HIC must be sure to finish the initiatives ithas started before moving on. Successfully

implementing current projects such as moving to Aplayers in key functions, upgrading projectmanagement and actuarial analysis is important toestablishing credibility and a track record of projectexecution.

Third, HIC must be prepared to keep making thetough decisions about what should be included in anoptimal portfolio of products as well as how toaddress underperforming talent.

This process has no ending.

2000 2002 2004 2006

National Health Expenditures

Figure 8 . The cost of health care is expected to continueincreasing at an almost unsustainable rate. This and otherindustry trends creates many challenges for HIC and thehealth care industry.

$5,440

13.3%

14.9%

15.5%

16.0%

$4,670

$6,167$6,972

2008

16.7%

$7,928

Source: Centers for Medicare & Medicaid Services, Office of

Actuary

NHE per Capita

% of GDP


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About the Author

Christopher McQueenPrincipal, McQueen ConsultingFormer Vice President of Business PerformanceManagement, HIC

McQueen Consulting is a partner to business leadersseeking significant improvement in businessperformance.

At HIC, Mr. McQueen worked with the CEO and COOto design and drive the change process. In 2002, HICasked Mr. McQueen to build and lead its BusinessPerformance Management organization.

Mr. McQueen has held operating positions andprovided advisory services strategy, operations andchange management - to Fortune 100, startup andmid-stage companies. These firms represent leadersin the healthcare, energy and technology industries.

[email protected]

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Article BPM Case Study 0904