Six Sigma, a process improvement discipline that made headlines in the 1980s and 1990s, may no longer be in the spotlight, but it’s still thriving in the insurance industry, at least among some larger carriers. Given the potential savings, it’s no mystery why.
Douglas Mader, CEO of SigmaPro Inc., a Six Sigma training and consulting company in Fort Collins, Colo., says companies should expect net savings of $300,000 to $400,000 per project the first year.
Marla Friedman, VP for Allstate Insurance Co.’s Six Sigma Center of Expertise in Northbrook, Ill., says, “Certainly the amount of expense that we incur in Six Sigma is dwarfed by the financial benefits we have seen from the projects. On average, we see about a 30% improvement in process from the time we begin a Six Sigma project to the time the improvements are put in place for a particular process.”
Yet, the methodology so far has failed to penetrate the industry much beyond its largest companies. Mader believes conservative management among carriers may be the reason. Carrier managers “maybe are not so in tune with what goes on in the manufacturing world, which is, of course, where all this came from originally,” he says.
Six Sigma’s appeal may be greater among larger carriers, Mader suggests, because their processes are likelier to be more complex and in greater need of repair.
“It sounds facetious, but the results a company sees from Six Sigma are directly proportional to how screwed up it is before they start,” Mader says. “If a company is larger, it tends to have more opportunities because many smaller processes have fallen through the cracks.”
Smaller companies, by contrast, have fewer resources and are more likely to have streamlined their processes because of that. “I think the larger companies will see a bigger opportunity and, therefore, see a bigger return on investment simply because of that fact,” Mader says.
Smaller carriers may actually be using some elements of Six Sigma, but they’re likely to be buried in business process management (BPM) systems, says Cindy Maike, founder of Smallwood, Maike & Associates, industry consultants in Overland Park, Kan. “More insurance companies are focused on using some techniques and blending the process,” she says. “They may not actually call it Six Sigma, but they’re using balanced scorecard concepts along with process optimization, so it’s kind of a mixture of the two.”
Maike suggests it may be Six Sigma’s rigorous approach that scares smaller carriers. “Six Sigma comes with a persona of being a very disciplined approach,” she says. “It almost has a negative connotation when you say Six Sigma.”
THEN AND NOW
Six Sigma originated at Motorola Inc. in the mid-1980s as a manufacturing quality improvement technique. The name refers to a statistical measurement that works out to 3.4 defects per million opportunities. According to Mader, the methodology soon began spreading to other firms, notably GE—where President Jack Welch was a big proponent—and Allied Signal, now part of Honeywell.
“There were no transactional or service topics whatsoever,” Mader recalls. “In most of GE’s businesses, that was fine because that’s what they needed. But it was within GE Capital that they took the manufacturing program and shaped it to meet their needs.”
By the late 1990s, Six Sigma began spreading to other, non-manufacturing organizations. One of the earliest adopters in the insurance industry, Allstate, began using Six Sigma in 2001.
At Allstate, new Six Sigma projects begin at the director or officer level. Friedman, whose goal is to complete 130 projects in 2008, has a team that works with high-level personnel to determine whether the process is appropriate for Six Sigma.
“We always make sure that projects are approved by a high-level person, either a director or an officer, before the work starts,” she says. “It goes through a governance process because you need resources to work on the project.”
Among the resources needed at Allstate are a project leader who’s able to spend at least a third of his time on the effort, and a project champion who can manage those resources and support the project leader.
“It takes about six months to complete a project, so it’s a fairly big deal,” Friedman says. “We want to make sure it’s addressing key operating priorities. It’s got to be something that makes a difference—that has the interest of the director and the officer in that part of the organization.”
Some carriers may believe diminishing returns would eventually limit the value of Six Sigma and other BPM efforts. Once carriers optimize high-value processes, subsequent projects would deliver progressively lower returns until the marginal value of new projects falls below their cost.
But that turns out not to be the case, according to Friedman. “The business world keeps changing; customer requirements change,” she says. “New lines of business might call for fresh Six Sigma projects. So might new technologies that affect existing processes. And, though it hasn’t happened often, some Six Sigma projects get revisited to reduce process defects further.”
Such is the case at Cigna, which began its Six Sigma initiative in 2003 with a focus on improving customer service. By 2006 the model was being applied to all departments, all levels, for example, to establish provider data loading quality assurance and to improve claims accuracy and timeliness. Since 2003, the company estimates annualized hard savings to-date from the more than 70 completed Six Sigma projects has reached nearly $100M.
Mader notes that payoffs on Six Sigma projects do tend to drop off. Although initial returns typically are in the six-figure range per project, “maybe in a three-year timeframe, you’d be looking at multiple $75,000 projects,” he says. But Mader is reluctant to call that diminishing returns. “You are, in fact, solving the available opportunities. Returns start to shrink because there are fewer opportunities, which, in turn, requires fewer resources.”
Another way Six Sigma continues to pay off is in the creation of new processes, through a proactive application of the discipline called Design for Six Sigma.
“You actually use the methodologies to create a good process the first time, rather than having to correct whatever you did so you don’t have the customer defects,” says Allstate’s Friedman. “Usually, we use it in some new line of business, or with some type of new process and new technology we want to roll out.”
Friedman also uses Six Sigma to trim the fat out of existing processes that work well enough, but may have become bloated over the years. “The process may be working fine, but there are still too many steps,” she says. “We look for ways to make it leaner.”
Six Sigma also can prevent process design mistakes from being made in the first place.
Friedman recalls that one of Allstate’s business units was getting a lot of return mail, and conventional wisdom inferred this was caused by foreign addresses. The business unit considered updating administrative systems to deal with the problem, but application of Six Sigma techniques turned up the fact that only 1% of the returned mail was caused by foreign addresses, so the company avoided an expensive fix for a problem that didn’t really exist.
Mader believes there’s nothing to keep smaller carriers from implementing Six Sigma. “A larger company would have more resources they could potentially throw at it, but the resources that you would want to be involved in Six Sigma should be proportional to the size of the organization. Smaller companies could do it—it would just be on a smaller scale.”
Adds Friedman, “If you have 100 people in the organization, you might just have two or three people trained as black belts [highly trained, full-time Six Sigma practitioners], whereas in an organization like Allstate, we have, on average, maybe 140 people working on Six Sigma projects every year. Small versus large doesn’t really matter.”
Bob Mueller is a business writer based in Grand Beach, Mich.
To find out how Six Sigma is enhancing insurers’ BPO efforts, please visit www.insurancenetworking.com and search “Insurers Outsourcing to Cut Costs.”
(c) 2008 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.
Six Sigma and IT
Six Sigma specifically, and process management generally, are not IT activities. That doesn’t mean, however, that there’s no IT involvement.
Marla Friedman, VP for Allstate Insurance Co.’s Six Sigma Center of Expertise, notes that at her company, IT is a client, just like other organizations in the firm. “We train people within IT on the Six Sigma methodology, just like we do in any other area within Allstate,” she says.
At Boston-based Liberty Mutual, Six Sigma was applied directly to IT, namely in its provisioning equipment, such as servers, PCs, PDAs, etc., resulting in the carrier winning a 2007 Global Six Sigma Summit & Industry Award. The company also employs Six Sigma to streamline processes for customer satisfaction, reduced cycle times and defects.
Sometimes there’s a technology component to an improved process, but within the broader process management bailiwick, there are computerized systems that help identify and correct sub-optimal processes and that incorporate Six Sigma techniques, which requires IT involvement. Global 360, a Dallas-based developer of business process management systems (BPMS), has seen a variety of situations among its insurance customers, ranging from some with no business process management experience, to some with Six Sigma training.
“There’s really a wide range of things that we’re seeing out there,” says Chris Skirde, the company’s product marketing manager.
Global 360’s product takes users through a cycle of design, simulation, modeling, implementation and monitoring. Often, part or all of the cycle is iterative. For example, the design and simulation phases may be rerun to mirror reality more closely, or the entire cycle may be repeated.
According to Skirde, BPMS implementation crosses organizational lines. “You want the business community involved, and you want the IT community involved,” he says. “We’re talking about automating processes, so there’s obviously a technology layer in play. And you want that IT involvement to make sure the technology melds with other technologies they’re using.
“You want the business user involved to make sure that we’re answering the right business questions, not just automating a process that’s not yet optimal,” Skirde continues. “That’s a question IT personnel can’t answer.”
Where do carriers apply business process management? Skirde’s seen a lot of activity in claims handling and customer service. That’s partly because those are areas where the cost of poor processes can be high, and partly because there’s a double payoff from improving processes: not just greater internal efficiency, but increased customer satisfaction as well, experts say.
(c) 2008 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.
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