You have an obligation to clearly communicate your organizations’ intended value to the marketplace.  This allows customers to choose your organization as the best alternative.  The fact is customers have a choice to come to you or go to one of your competitors, so it is up to you to clearly articulate and demonstrate what it is about your company that makes you their best choice. 

A clearly defined Value Proposition is the vehicle to articulate what it is about your organization that should lead customers to choose you. The initial step in crafting that Value Proposition is gaining alignment internally on the primary Value Discipline that an organization will use to guide both strategic and tactical decision making.  No sound Value Proposition can be created without first obtaining this alignment.

In this issue of News You Can Use, we will share with you the alternative Value Disciplines available to organizations and how, once identified and agreed upon, this information can be used in crafting and publishing that Value Proposition. 

What is the Value Discipline Model and how does it affect an organizations’ Value Proposition? 

The Value Discipline model is an overarching strategic direction your company decides to take describing the type of value you want to provide to your customers or potential customers.  A Value Proposition is a marketing statement that describes this Value Discipline in a way that will make it clear to your customers how you are unique.  Few companies can reach their fullest potential in today’s market by attempting to be all things to all people.  This process of determine your Value Discipline and then articulating it through a clear and concise Value Proposition is critical to long term success.   

Value Discipline Model ¹

These are the three options when selecting a Value Discipline as defined by Treacy and Wiersma in “The Discipline of Market Leaders”; Operational Excellence, Product Leadership, and Customer Intimacy. Organizations use Operational Excellence as a value discipline to provide clients with the lowest price with hassle free service.  Product Leadership describes the offering of products that push performance boundaries.  Customer Intimacy is a value disciple when your company means to deliver services to one or a small few high-value customer niches.

WARNING: An organization can select one and only one of these disciplines to be their primary area of focus.  It is true that every organization must do all three of these disciplines at some minimum baseline standard, but there must be one chosen as the over-arching strategic and tactical beacon in the context of which all corporate decisions should be weighed.

^{1 Value Discipline model information – “The Discipline of Market Leaders” written by Michael Treacy & Fred Wiersema (1997).}

Below is a more detailed description of each of the Value Disciplines.

Operational Excellence:  Best Cost

The first value discipline is Operational Excellence, which is an approach to the market dedicated to providing the lowest cost goods and services, using efficient processes and technologies, while at the same time minimizing problems for the customer. This discipline bases its success on several key principles:

• The efficient management of people
• The management of transactions efficiently
• The dedication to metrics and measurements
• The management of customer expectations

Product Leadership: Best Product

The second value discipline is Product Leadership, which is dedicated to providing the best possible product from the perspective of the features and benefits offered to the customer.  Product leadership is based upon the following principles:

• The encouragement of innovation
• A risk-oriented management style
• A recognition that the company’s current success and future prospects lie in its product design team and those who support them
• A recognition of the need to educate and lead the market regarding the use and benefits of new products

Customer Intimacy: Best Solution

The third value discipline is Customer Intimacy which involves the selection of one or a few high-value customers, followed by an obsessive effort at getting knowing the customers in detail. This requires anticipating the target customer’s needs to continually shape products and services to fit their customers’ specific needs. Sometimes this even includes the sharing of risks with the customer when the development of new products or services are required or offered. The operating principles of this value discipline include:

• Having a full range of services available to serve customers upon demand
• A corporate philosophy and resulting business practices that encourage deep customer insight and breakthrough thinking about how to materially improve the client’s business are essential

Although all three disciplines are important, only one can be the true strategic focus for an organization.  Where does your company excel?  What is your Value Discipline?

Once you have determined the Value Discipline that best reflects your organizations unique place in the market, you are ready to craft your Value Proposition.

Crafting a Value Proposition

Crafting a Value Proposition is a formal process of gathering input from senior leadership on the needs of your customers and the ability for your organization to meet those needs.  Remember that your Value Proposition is a marketing statement describing your Value Discipline in a way that makes it clear to your customer how you are unique.  The team should discuss:

• What do your customers and potential customers want that you can provide?
• How does what you currently provide reflect your chosen Value Discipline?
• How do you want to be perceived by your customers and how can you articulate these concepts to the market:
  • Lowest cost?
  • Most innovative?
  • Most customer-friendly?
  • What do your current customers value most about your organization?
  • How does your organization need to change to fully embrace your chosen Value Discipline?

What follows then is an iterative process to further refine and define the language that will become your Value Proposition.  This can take several iterations or interactions with time allowed for ideas and concepts to percolate and solidify.  Keep in mind that the clearest Value Propositions are those that have been so refined that it can be articulated in one sentence.

Once defined, this Value Proposition should be communicated internally and become the governing theme for all external marketing and communication consistently reinforcing your brand and image to  your current and potential customers.

A defined Value Discipline combined with a well articulated Value Proposition is the foundation on which all strategic and tactical discussion-making can rely.   Doing these two things effectively will lead your organization into becoming a more competitive market leader.

For additional information on this topic or to learn how Himes Consulting Group can help you determine which Value Discipline is best for your company, please contact us at INFO@HIMESCONSULTING.COM

About Himes Consulting Group

Himes Consulting Group (HCG) is a Business Optimization Company dedicated to helping organizations ensure the basic business essentials are in place to repeatedly deliver predictable results.  HCG provides consulting and sourcing advisory services combining industry expertise and operational improvement experience at an affordable rate.  With a primary focus on strategic and tactical fundamentals HCG is able to improve knowledge worker productivity by up to 50%.

Business Process Management is a standard approach to process and technology development and implementation.  This overview will:

• Define what is Business Process Management
• Summarize how it can help your organization
• Explain how Business Process Management in different than traditional Business Process Redesign
• Highlight what an organization may need to get started

We welcome any comments at the conclusion of the information!

What is BPM?

Business Process Management (BPM) means different things depending on the background of the person speaking about it.  In truth, BPM is a generic term that encompasses the techniques, structured methods, and means to streamline operations, increase efficiency, and increase profitability.  These techniques and methods enable organizations to identify and modify existing processes to align them with a desired future state. 

Himes Consulting Group (HCG) believes that Business Process Management is a business process methodology that uses a structured approach to study, identify, change, and monitor a business process.  We think of BPM as a framework to design, model, execute, monitor, and optimize your process.

How can BPM help your organization?

There are a variety of ways that utilizing BPM can help your organization:

• Organizations are likely to increase the success of process changes and implementations by using BPM.  Projects utilizing a BPM methodology have a 90% success rate and offer the lowest risk solution.
• Companies that use BPM create business process models that identify process redundancies, hidden costs and avoidable risks.
• Applying BPM methods enables process visibility and allows for better collaboration among the activities being performed.
• BPM acts as a communication conduit between the business and the IT organization.
• Compliance is often another burden for struggling companies. BPM is well-suited to drive costs out of compliance and regulatory work.
• Using BPM practices for your organization’s philosophy and approach creates a foundation for future simulation and continuous improvements.

How is BPM similar or different to traditional business process redesign?

Have you or your company used Business Process Redesign (BPR) as a methodology for improving your organization in the past?  If so, then you may already know that BPR is a systematic, disciplined improvement approach that critically examines, rethinks, redesigns from scratch, and implements the redesigned processes of an organization. BPR’s goal is to achieve dramatic improvements in performance.  BPR was in its prime in the 1990’s.  The main focus was to eliminate manual efforts but the overall idea of BPR is a “wipe the slate clean” approach.  For most businesses, then and now, this approach is simply too difficult, too radical, too comprehensive, and not always needed.  The impact on employees, on facilities, on existing investments in systems, and even on the organizational culture is too extreme.

Business Process Management (BPM) is an inside job!  The focus of BPM is to:

• Improve productivity of the workers you already have in your organization
• Make it easier to roll out new business processes or new products to take advantage of existing IT systems
• Assist with recognizing that change is to be the constant
• Make a change that delivers incremental improvements

This less radical, more tolerant approach for mid-course corrections provides time for your organization to assimilate process improvements and learn new management disciplines.

Like BPR, BPM starts with process modeling to understand workflows and identify manual and systems automated tasks. However, the objective of the BPM process analysis is not simply to eliminate manual efforts.  Rather, the objective is to understand the interactions and dependencies among the people, the systems they rely on, and the information they require to do their tasks best.

For a detailed printable comparison between BPR and BPM, click here.

What is needed to execute BPM?

Because BPM was designed for long-term business success as well as management assistance for ever-evolving environments, the requirements needed are the right combination of an effective approach, a robust set of technology tools, and the proper organizational support.

Approach

As mentioned in this article, BPM uses a structured approach to study, identify, change, and monitor a business process.  The cause for many successful implementations of BPM technology tools comes back to the proper rigor used to setup, manage and monitor the overall project during its execution.  Using a proven methodology (either internally developed or externally tested) to execute your BPM initiative will increase your likelihood for success.

Tools

The BPM approach can be supported or enabled through technology to ensure the practicality of the approach in times of change.  This technology is key to integrate an ongoing “change capability” within an organization, both human and technological, by easily re-running scenarios to locate the most efficient design without implementing into production. 

Some of the specific tools used in BPM projects include:

• Use of Business Process Management Notation (BPMN) for documentation using a universal nomenclature.
• Business Process Management Suites (BPMS) to allow for process specific scenarios to be run and re-run.
• Enterprise Application Integration Software (EAI) to integrate a set of applications to make information systems work together.

Organizational Support

A standard in today’s highly competitive business world is a constantly changing work environment.   The way an organization communicates to its employees during times of major change is critical. To this end, BPM initiatives require organizational support from the most senior levels in the organization on down to be successful.  Launching a BPM initiative without buy-in and support from the leadership in all the participating business units plus the IT group will result in a failed long-term execution and adoption.  In support of the overall project approach, solid sponsorship and support are critical pre-project set up activities.

Conclusion

BPM is a successful improvement philosophy that is being embraced across multiple industries with significant positive results.  Keep in mind three key things that are needed to execute an effective BPM initiative:

• Approach
• Tools
• Organization Support

About Himes Consulting Group

Himes Consulting Group (HCG) is a Business Optimization Company dedicated to helping organizations ensure the basic business essentials are in place to repeatedly deliver predictable results.  HCG provides consulting and sourcing advisory services combining industry expertise and operational improvement experience at an affordable rate.  With a primary focus on strategic and tactical fundamentals HCG is able to improve knowledge worker productivity by up to 50%.

HCG’s focus is not about “completely transforming” your business.  In most cases, that’s not necessary!  What is necessary is the relentless execution of core blocking and tackling to consistently produce results.  Our advantage is over 20 years in helping all size organizations across multiple industries achieve measurable results.

Himes Consulting has deep industry knowledge in specific industries to immediately focus on SOLVING YOUR PROBLEM not learning the industry.  HCG has certified Business Process Management practitioners available on staff to ensure BPM standards are adhered to.   For more information please visit www.himesconsulting.com or send an email to: info@himesconsulting.com

For more information about this topic please contact the authors at:

Rob Himes, Managing Partner

robhimes@himesconsulting.com

Samantha McCarthy, Senior Consultant

samanthamccarthy@himesconsulting.com

Traditional subrogation and arbitration teams are leaving over 20% of potential savings on the table each year. 

That additional 20% equates to millions of lost recovery and defense dollars, yet insurance carriers across the nation continue to struggle with unlocking those potential savings trapped in their subrogation and arbitration processes.  A study conducted by the National Association of Subrogation Professionals (NASP) has stated that successful subrogation processes are able to recover up to 25% of paid losses but very few companies actually achieve that level of success. 

What barriers are inhibiting these companies from achieving their true subrogation potential?  The primary causes are linked to three root issues:

1. Incorrect personnel doing the work
2. Lack of a sound and disciplined process
3. Lack of corporate strategic support

Let’s talk through each of these primary barriers and offer alternatives to effectively eliminate them.

1.  Incorrect Personnel

The most significant barrier to successful subrogation and arbitration is the personnel enlisted to pursue those interests.  Traditionally, the insurance industry has viewed subrogation as nothing more than an insignificant offshoot of the claims function, staffing the team with underperformers or worse yet, new employees unfamiliar with subrogation and arbitration.  This approach simply does not generate satisfactory results.    While it may seem like a logical way to address the company’s needs given claims adjusters’ intricate knowledge of the claims process, their involvement actually creates some fundamental shortcomings that negatively affect the subrogation and arbitration processes’ success.

• The mindset of a successful claims adjuster is fundamentally different than the mindset of a successful subrogation or arbitration specialist.  The lists below demonstrate the key differences.

The fundamental challenge is switching a defense-minded claims adjuster to an offense-minded subrogation specialist.  By failing to realign their outlook away from the classic claims mentality, the claims adjuster ultimately limits subrogation and arbitration potential by failing to recognize, pursue, or properly negotiate legitimate recovery and defense opportunities.

• While claims adjusters possess the claims knowledge needed to pursue subrogation and arbitration claims, claims adjusters often lack the other skill sets needed to be truly successful in those endeavors.  Subrogation and Arbitration goes far beyond collection activities.  Specific skills needed to be successful include:
  • Sound legal knowledge and research
  • An advanced level of persuasive writing
  • Superior negotiation skills
  • Strategic thinking
  • Creative problem solving
  • Relentless drive and persistence
  • The ability to work and thrive in conflict 

Without a team having the proper skills to be successful, subrogation and arbitration results will never be anything more than average.  While definitely not a place for underperformers and new employees, companies should think critically to ensure their subrogation resources have the right skills. 

2.  Inefficient Subrogation and Arbitration Processes

The second most significant barrier to subrogation and arbitration success is the lack of sound and disciplined processes around those business functions.  The subrogation and arbitration processes are two of the most neglected processes within the insurance industry and have notorious reputations for being manually intensive, inefficient, redundant, and filled with missteps.  The situation is then typically exacerbated by a complete lack of tracking, reporting, and analysis of the processes. 

3.  Lack of Corporate Strategic Support

If subrogation is able to recoup 25% of paid losses, why are the subrogation and arbitration processes not receiving more attention?  The fact of the matter is that while subrogation can make a significant impact on a company’s profitability, the needs of the subrogation and arbitration processes are simply outweighed by the needs of the company’s core competencies: Marketing, Underwriting, Investment and Claims Adjusting.  These processes monopolize the majority of insurance dollars along with the executive mind share and the result is subrogation and arbitration processes that are underfunded, underdeveloped, and underperforming.  This lack of strategic support further manifests itself in a lack of tools to support the processes, low salaries, and a lack of incentives to attract, retain, and motivate talented individuals in those areas.  It is a perpetual cycle of underperformance leading to undervaluation leading to underinvestment. 

What is the solution to overcoming these barriers?

Driving success in the subrogation and arbitration processes requires a shift in the corporate culture regarding these functions.  Companies will not begin to see significant performance from these processes until subrogation and arbitration are seen as significant contributors to the organization’s financial goals.  Once subrogation and arbitration are elevated beyond a cursory thought in the claims process, there are three approaches that can be utilized to drive performance:

1. The Internal Approach – The carrier segregates their subrogation and arbitration processes from the claims department, staffs experienced subrogation and arbitration experts (not claims adjusters), re-engineers their subrogation and arbitration processes, and invests in productivity tools needed to drive efficiency in those pursuits.
   • Pros – Maximizes recovery for the company, retains control of the processes in-house
   • Cons – Requires a complete cultural transformation regarding subrogation and arbitration, considerable up-front investment in capital, time, and manpower, long time to realize the benefits, the company will inevitably experience a learning curve as the process is refined, company retains the costs associated with managing and executing those processes, distracts the organization from their core functions
2. The External Approach – The carrier outsources their subrogation and arbitration processes to an experienced subrogation and arbitration firm. 
   • Pros – Immediately gains proven and disciplined subrogation and arbitration processes with little out-of-pocket costs, higher recovery than the current processes, eliminates the costs associated with managing and performing these activities, no radical organizational changes are required, investment dollars and resources are not diverted from the company’s core functions, can be successfully implemented without a massive shift in corporate attitude toward subrogation and arbitration
   • Cons – A portion of the increase in recovery will be reduced by vendor contingency fees, decentralized workforce, possible political concerns, a vendor needs to be selected and selection can be difficult (company needs to focus on vendor results and service fees to ensure the vendor actually generates additional value)
3. The Hybrid Approach – The carrier partners with an experienced external resource to design and implement new subrogation and arbitration processes that will still be operated in-house. 
   • Pros – Internal resources are not consumed with the development and implementation of the processes, best practices are brought to the organization “pre-built”, improved recovery assuming the appropriate staff is acquired to execute the new processes, strategic functions remain in-house, less strategic functions are shifted to a lower cost operating model
   • Cons – Larger initial financial investment ( offset in the near term by better results), requires ongoing costs of managing and performing the subrogation and arbitration functions, company incurs the costs needed to attract and retain talented subrogation and arbitration specialists for strategic functions, requires a large culture shift regarding subrogation and arbitration

 Conclusion

The barriers inhibiting insurance companies’ subrogation and arbitration success are unfortunately self-inflicted.  In this current environment of “doing more with less”, there are too many competing needs within the company, internal resources are stretched too thin, and subrogation and arbitration have fallen by the way side.  As a result, the subrogation and arbitration processes suffer from incorrect personnel pursuing these interests, a lack of disciplined and effective processes, and an overall lack of corporate support.  These barriers must be overcome for companies to unlock the true value trapped in their subrogation and arbitration functions.  Consider each of these three options to improve your subrogation and arbitration results.

1. The Internal Approach
2. The External Approach
3. The Hybrid Approach

Himes Consulting Group can help improve your subrogation and arbitration results guaranteed!  With our unique subrogation and arbitration services and our proven implementation experience, Himes Consulting Group can help you drive performance in these often overlooked processes.  To learn more about our subrogation experience, please contact Rob Himes at robhimes@himesconsulting.com or visit our website at www.himesconsulting.com. 

For more information about this topic please contact the authors at:

Rob Himes, Managing Partner

robhimes@himesconsulting.com

Clark Schoeder, Senior Consultant

clarkschoeder@himesconsulting.com

Did you know…

• It has been shown that companies that achieve superior operating results subrogate claims at about twice the rate of average companies.
• CFOs that view subrogation as an important business process report higher profits.
• An effective subrogation department can recover 5-25% of paid losses depending on the line of business.

Subrogation is one of the few processes that can generate revenue without being tied to investment performance, increased premiums, or cost reduction initiatives.  With the recent economic downturn, insurance companies need that ability more than ever.  Customers are disappearing, claims costs are escalating, and combined ratios are rising.   Carriers across the country are searching for ways to maintain corporate profitability but very few are reaping the full potential that can be found in their subrogation and arbitration processes.  Given subrogation’s ability to generate significant value in any kind of market, subrogation may be the key to surviving and thriving in our current market conditions.

How does subrogation impact your bottom line?

Subrogation impacts your profitability by recovering funds that were paid for a loss or injury caused by the negligence of another party.  By recouping these funds, the insurance company effectively negates a portion of their paid losses and inserts that value back into the company.

Why should you care?  Isn’t subrogation just another part of the claims process?

While subrogation is indeed part of the claim process, the importance of an effective and efficient subrogation and arbitration process should not be minimized.  By improving your subrogation processes, both property & casualty and healthcare insurance companies can realize substantial benefits such as:

1. Value Generation

• A single, skilled and knowledgeable subrogation specialist is able to save $2 to $3 million per year through effective subrogation recoveries.
• A successful subrogation department can recover between 5%-25% of paid losses depending on the line of business.

2. Competitive Advantage

• Effective subrogation differentiates good insurance companies from great insurance companies.
• Consider the following example where A & B are competitors with similar operations.

Through their more effective subrogation processes, Company A:

• Substantially lowers their paid claims.
• Transfers paid losses to their competition, thus increasing their competitors’ paid loss amounts.
• Gains operating flexibility  that allows them to lower premiums and attract larger market share.

3. Customer Satisfaction

• Successful subrogation saves the customer money by recovering their deductible and by keeping their premiums constant.

Subrogation PLUS: Maximizing subrogation recoveries by leveraging inter-company arbitration
Arbitration is a profitable extension of subrogation. It is a form of alternative dispute resolution used by insurance companies to resolve subrogation claims where liability or damages are in contention.

In order to participate in inter-company arbitration, your company must become a signatory member of an arbitration group such as Arbitration Forums, Inc. or NAMIC. As members of the arbitration group, each company agrees to forgo traditional litigation to resolve their disputes and instead, submit a legal brief pleading their case to an independent third party. That independent third party reviews the case and then makes a binding liability decision regarding which party must reimburse the other. The arbitration system creates some powerful advantages but the advantages must be carefully weighed against the disadvantages to determine if arbitration is right for your company.

Benefits of participating in inter-company arbitration:

1. Additional value generation above and beyond traditional subrogation recovery

• A skilled and knowledgeable arbitration specialist is able to recover over 90% of the funds they pursue and increase subrogation recovery by an additional 30%.
• Arbitration allows you to collect on claims that were previously unrecoverable by compelling non-cooperative carriers to pay through mandatory arbitration.
• Arbitration removes your need to negotiate reduced settlements for your subrogation claims. If your insured did not contribute to the loss, you can file arbitration to recover your full damages.

2. Reduces the costs associated with traditional subrogation litigation

• Arbitration replaces the traditional legal system and eliminates the costly attorney fees associated with pursuing and defending subrogation actions in court.

3. Faster claims resolution

• The subrogation recovery cycle is significantly shortened since many arbitration claims resolve in less than 90 days and payment is required within 30 days of the decision.

It’s not all good news, however. There are potential disadvantages to intercompany arbitration:

1.  Arbitration is a two-way street

• Just like you can pursue recovery against adverse parties, adverse parties can pursue their recovery against you.

2. Arbitration is more time consuming than traditional subrogation

• Subrogation specialists have to research, document, and draft arbitration pleadings to submit to the arbitration panel. These pleadings can be time consuming and require a specialized skillset to complete effectively. Traditional subrogation specialists are more equipped to focus on the “easy money” that only requires a phone call and quick negotiation.

3. You only get one chance to prove your case in arbitration

• The decision rendered in arbitration is final and legally binding with no opportunity for appeal. If you fail to prove your case and a decision is entered against you, your opportunity to recover your damages is lost. Your arbitration specialists need to be just that, specialists with a significant depth of experience in subrogation and arbitration to ensure that your recovery opportunities are not lost.

Conclusion
As discussed earlier, your subrogation and arbitration processes have the ability to produce dramatic results for your organization and help offset any market effects. By maximizing the effectiveness of your subrogation and arbitration processes, you can add significant value to your organization.

Don’t wait to gain that added value trapped in your subrogation group. With our unique subrogation and arbitration services and our proven implementation experience, Himes Consulting Group can help you drive performance in these often overlooked processes.

Contact Himes Consulting Group to learn more about our services by emailing Rob Himes at robhimes@himesconsulting.com.

For more information about this topic please contact the authors at:
Rob Himes, Managing Partner
robhimes@himesconsulting.com
Clark Schoeder, Senior Consultant
clarkschoeder@himesconsulting.com

Be sure to check out our other “News You Can Use” articles and be sure to check back for our next NYCU article about barriers to a successful subrogation process. If you would like to be added to our email list, please send an email to Clark Schoeder at clarkschoeder@himesconsulting.com.

As you may know, the International Classification of Disease (ICD) is a set of codes used to report healthcare diagnoses and procedures created by the World Health Organization (WHO), currently used worldwide.  The release of the 10^th revision (ICD-10) by the WHO has been in use by other countries since 1994 and the U.S. Department of Health and Human Services (HSS) ruled in favor for a U.S. implementation date of October 1, 2013.

As the last industrialized country to adopt ICD-10, you may already appreciate the danger of not migrating to this new code set: most importantly, we will not have compatible data to compare internationally.  As many other countries have already moved to ICD-10, the U.S. continues to capture morbidity data using the outdated classification system, ICD-9.  This has already and will continue to lead to problems identifying and tracking new, global health threats.

Why Think About ICD-10 Implementation Now?

Although the United States mandated compliance date is not until October 1, 2013, in order to deploy a successful implementation of ICD- 10 and receive the best possible return on investment, now is the time to begin planning your implementation strategy.  There are several specific reasons to begin your planning process today including:

• Changes to the coding sets will impact virtually every aspect of the business process and technology for all parties across the entire healthcare value chain.
• The extent of the impact of this change is projected to be as great as or greater than the implementation of the HIPAA standard transaction set implementation.
• Significant process assurance and technology testing will be required in advance of the deadline to ensure proper compliance.

CONTINUE READING (download .pdf)

What follows are some high-level overviews of different improvement philosophies that highlight the unique characteristics of each approach, its origin and its intended purpose to use as a guide in determining which approach best fits your organizational needs. The philosophies reviewed include:

• Activity Based Costing
• Six Sigma
• Lean
• ISO 9000
• Malcolm Baldrige National Quality Award (NQA)

Following these definitions is an At-A-Glance matrix that summarizes the key points of each measurement method. Key components of the At-A Glance include:

• The origin of the method
• Applicable service industries
• Pros and Cons to each improvement philosophy

Activity Based Costing

In a business organization, Activity-Based Costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. ABC helped to alleviate the arbitrary adding of broad expense percentages to all products (direct costs) to cover indirect costs. Unable to calculate the true costs of production at the product level, ABC was developed for manufacturing in the 70’s and 80’s. Instead of using broad, arbitrary percentages to allocate costs, ABC seeks to identify cause and affect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

CONTINUE READING (download .pdf)

• To highlight a particular function or issue
• To address or meet a regulatory requirement
• Industry tradition (i.e., that’s what we have always measured)
• Departmental or functional incentive(s)

Although all of these may be legitimate reasons for initiating a specific measurement, organizations quickly realize that employee behavior will adapt to whatever is being measured (…you will see that this is a good thing). As a result, current measures may
be creating behaviors in your organization, intentionally or unintentionally, that are inconsistent with the current strategic or tactical mission and may not be aligned throughout the value chain producing inconsistent results throughout the process.

Here are some specific examples of how to eliminate this misalignment of measures and update your current measures to ensure alignment with current strategies:

• Gain clarity on the current organizational or departmental strategies or tactical directions. Regardless of your current role, there is a direction that is being executed to, whether intentional or accidental. Understanding this and, if not written down, writing it down is a very critical first step in this process.

Example: Claims department has a tactical direction to improve its customer satisfaction rating by x points over the next 1 year as measured by the annual customer service survey.

• Identify behaviors that are required to achieve this outcome. Depending on the history of the organization or evolution of measures within the organization, current measurements may reflect a historical direction that has already served its purpose or is a left-over from a management team long displaced. After reviewing the strategic or tactical direction, list at least one behavior that will help achieve the stated outcome. It is most important to get specific about the exact behaviors that are relevant and required to achieve that specific, desired outcome.

Example: One key behavior for improved “satisfaction” is to ensure that Customer problems are resolved in as few interactions with the company as possible, zero being the ideal (i.e., proactive problem resolution)

• Identify supporting measures that will motivate these desired behaviors and determine where in the process these measures can be implemented to accurately capture proper activity.

Example: Depending on how your organization is measuring “satisfaction”, examples of key measures could include:

1. Increased usage of online support features
2. Number of issues resolved during first interaction with customer service (i.e., First Call Resolution (vs. the traditional measure of Avg. Handle Time)
3. Increase/decrease in claims backlog

• Understand the potential side-effects of implementing these measures because you know that behavior will change to improve the metrics supporting these measures. Implementing a specific measurement in your department may impact other parts of the organization due to changes in behavior. Recognizing these potential impacts and mitigating any negative outcomes will be key to the success of your overall measurement initiative.
• Implement these measures as part of a departmental plan or as part of a more holistic measurement model to begin modifying behaviors. Including the implementation of these measurements into the Manager performance plan is always a good way to ensure the new measurement program gets implemented.
• Evaluate the impact these (and all) measurements are having on overall service delivery and customer satisfaction. Measuring overall improvements needs to take into account the departmental and corporate value proposition (i.e., Product Innovators, Operationally Efficient or Customer Intimate1). Keeping the overall value proposition in the forefront will ensure that your measurement effort will take into account the long-term focus of the company and will reinforce the overall strategic mission and functional direction.

As part of an overall, holistic measurement strategy, this process should be completed for every function in the value chain and then again at the strategic level making sure that departmental measurements complement other department/functional measures as well as the overall strategic direction before being implemented.

Keep these tips in mind to help improve your probability for success in your optimization initiatives.

1 The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market Michael Treacy and Fred Wiersma

• Measure like voting in Chicago….early and often. Time invested early in the effort to quantify current metrics and establish measurements if they don’t currently exist will take the guess work out of measuring post-implementation success.

• Be sure to focus on the end-to-end process and eliminate the tendency to define the current state focused on people or functions – you may gather the facts by function, but identify all the touch points before and after that function so that you can create an end-to-end view (i.e., initial input through to value-created output). True optimization will be difficult, if not impossible without doing this.

• Redesign is not synonymous with “cripple the day-to-day business while you implement a new idea”.

• Think strategically about your redesign initiative so strategy and implementation can be done during a timeframe that keeps in mind business cycles, seasonal peaks or critical processing times when possible.

• Challenge every activity in the “ideal” process model to validate its need to be there. After defining the “future-state” operating model, test every activity making sure every, and I mean every activity/step does at least one of the following:

• Increases the value to the customer
• Improves quality of the product
• Is a regulatory requirement

If it doesn’t meet one of these criteria, the activity or step should not be in the new operating model.

Keep these tips in mind to help improve your probability for success in your optimization initiatives.