A Return to Fundamentals

Based on ongoing conversations, by and large, most industry executives are becoming a more optimistic group. As optimists, the growing belief is that moving forward from 2012 there will be gradual improvements presenting market opportunities built on a more certain—yet still fast-paced—business-operating environment.

What this should mean to senior executives, and operations leadership in particular, is a need to expand focus from market-share retention and maintenance of static or incrementally lower expense ratios to include a more aggressive, comprehensive approach to achieving operational excellence. That value proposition has elements formally or informally embraced by nearly all companies, but its comprehensive adoption has become more urgent for all companies. This is because of the painstakingly slow pace of the economic recovery.

As you prepare to again make optimal use of your managerial muscles, exploring the development or purchase of market-differentiating capabilities, it's worthwhile to pause briefly and consider the state of your operations' fundamentals. Sustained excellence in nearly every field—sports, construction, the arts and the military, to name a few—necessitates sound fundamentals before higher-order expertise and capabilities can be developed. Business operations, whether in property/casualty, healthcare or banking, are no different. There are three questions to ask:

1. Do we have a clear, universally understood, consistently utilized process to improve operations?

2. Do we know what relative benefits to expect from the economic elements of the improvement process?

3. Have we subjected our key functional operations to this process to ensure that any new capabilities are built upon a solid, efficient and effective foundation and that contemplated new capabilities cannot be developed internally on a more cost-effective basis?

One approach to answering those questions in the affirmative is a 10-step, continuous operations-improvement process. The process begins with vigorous value analysis, exercised under the overarching guidance of clear customer identification, strategies to satisfy customer needs and exceed their service expectations, and an unqualified statement of each function's essential purpose and value proposition—a distilled declaration of why the function exists and a statement of the function's approach to executing its essential purpose, respectively.

The process appears straightforward. Yet, as we all know from management experiences, straightforward does not always mean simple. To assist those charged with managing this process, there are four rules that, if knowledgeably applied, will provide some discipline to the effort and, usually, optimize results.

1. Settle upon the correct essential purpose for the function under discussion. If this brief declaration of the reason for the existence of the function (a noun-verb phrase or short, single-sentence statement) is not accurate, results from the succeeding improvement process steps will be sub-optimal.

2. Thoroughly execute each step of the process—even the difficult ones. Consistent, thorough execution of the entire process helps to institutionalize it as "standard operating procedure" within the organization and provides a common process-improvement vocabulary.

3. Execute improvement process steps in the order illustrated, resisting the temptation to jump to what may appear to be obvious technical or structural solutions to business problems.

4. Recognize that most business challenges require multi-faceted solutions and that all elements of the solution are not created equal with regard to their impact on quality, timeliness and expense.

It's easy to grasp the likelihood of multi-faceted solutions for complex business problems; however, quantifying the sources of benefits and managing expectations are thornier challenges. A useful approach to managing expectations for a generic, multi-issue operations improvement effort is displayed below, highlighting four typical improvement sources and their relative value, assuming an improvement target of 20 percent.

• Process Redesign: Provides the lion's share of the total benefit because this source addresses the high-cost elements of any operations division: its human resources. This source also forms the foundation for benefit flow from the remaining three sources.

• IT Overlay: Bringing automation to bear on redesigned processes offers important benefit opportunities; limiting or removing the need for manual intervention for comparatively less complex tasks and service transactions. While the volume of these tasks/transactions may be high, the aggregate economic gain from their automation is disproportionately lower because the time required to complete them in a manual environment is short.

• Staffing Analysis: Once the redesign step is complete, the organization will have a well-quantified understanding of how existing gross-resource expenditures are allocated across those tasks/transactions to be performed in the redesigned environment. Staffing analysis brings increased understanding of the skill sets and number of people required in the new environment.

• Organization Redesign: This is a two-dimensional view. The first (horizontal view) is to ensure effective spans of control for supervisors, managers, directors and executives. The second (vertical view) optimizes the number of organizational layers from the front-line associate to the executive.

Although there is little doubt that change will continue to be a companion, there are good reasons supporting a cautiously bright outlook. As you develop your improvement plans, be sure to target high-opportunity areas and achievement approaches.

Dave Edwards is a senior consultant for the Robert E. Nolan Company, a management consulting firm specializing in the insurance industry.

Readers are encouraged to respond to Dave using the “Add Your Comments” box below. He can also be reached dave_edwards@renolan.com.

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