Tag Archives: peter drucker

Moving Beyond ‘Greed Is Good’

Last month marked the 50th anniversary of Milton Friedman’s defining essay on the role of the corporation, which concluded that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”

That conclusion has been taken to such extremes — think, “Greed is good,” the signature line from the movie “Wall Street” — that a backlash has been developing. I think the insurance industry can support what might be thought of as a “beyond greed” movement, and even ride it. Doing so would help our public image, while benefiting the customer and — dare I say it? — perhaps even increasing industry profits.

Now, there’s lots of power to Friedman’s argument. Otherwise, it wouldn’t have guided business for so long. Businesses need to generate profits to keep investing and improving in ways that benefit us, the customers — think of all the things that Amazon has been able to deliver cheaply and quickly to you since the start of the pandemic because of Jeff Bezos’ ferocious investments in his business. (Who knew I even needed eight sets of chopsticks, an air fryer and 63 plants?) Profits also provide feedback that help businesses get better at serving us. If a company is generating lots of earnings, the market is telling the company that it’s doing well. If not, the company needs to try something different.

My old friend Andy Kessler notes in a column in the Wall Street Journal this week that Friedman specified that a company focusing solely on profits must “stay within the rules of the game, which is to say, engage in open and free competition without deception fraud.” Andy says that, within the right structure, Friedman’s focus on profits produces huge benefits for society.

But cracks have been appearing in that structure. For instance, tobacco companies lied for decades about the dangers of smoking, and oil and gas companies likewise hid what they knew about greenhouse gases and climate change. Profits thrived. But did the companies show social responsibility? Not so much.

More recently, social tensions have heightened about income inequality, which can be traced in part to the laser focus on profits. That focus has certainly pushed the upper end of corporate pay far higher by creating a vicious circle (a virtuous circle if you’re one of the senior executives benefiting). The circle looks something like this:

To encourage the CEO to drive profits and nothing but profits, his or her pay is tied to the stock price — boost earnings, giving the stock price a kick, and you win big. CEOs are then evaluated against a peer group and are slotted into a quartile. They are paid like others in that grouping. Sounds fair enough, right? But who wants to tell the CEO that he or she is below average? In fact, in the chumminess of the board room, CEOs are almost all stars. That means they are paid above average — which raises the average, again and again and again, for each annual review cycle. Add in the potential for big gains on stock options, and the system looks increasingly unfair to anyone not fortunate enough to be at the high (and always getting higher) end of the scale.

Meanwhile, wages have been stagnant in the lower ranks of businesses. In the past, gains from productivity tended to be shared with workers, in the form of higher wages. In recent decades, almost all the gains have been captured by companies feeling pressure to produce maximum profits.

With the sense building that the pursuit of profits and nothing but profits has taken us too far to the greed end of the scale, the Business Roundtable released a statement in August 2019 signed by 181 CEOs “who commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

Such an approach, known as “stakeholder capitalism,” turns out to be easier to articulate than to execute. For instance, Marc Benioff, CEO of Salesforce, who was one of the champions of the Business Roundtable statement, declared a “victory for stakeholder capitalism” in late August when he reported quarterly sales exceeding $5 billion — then announced the next day that he was cutting 1,000 jobs. He argued that the cuts weren’t inconsistent with a pledge to benefit all stakeholders, but the 1,000 people losing their jobs surely felt differently.

A study looking at all the companies whose CEOs signed the “stakeholder capitalism” statement found, a year later, that they hadn’t followed through. I’m not especially surprised. You may value your employees greatly, but, if you’re Walmart, you’re not going to suddenly start paying clerks $15 or $20 an hour unless you know that your competitors will, too. Otherwise, you’d cede an advantage to them. So, I don’t think much will change until there is some kind of public pledge by all companies to do a series of very specific things for employees, communities, etc. or until government mandates something such as an increase in the minimum wage.

But the sentiment is there. There is a movement afoot to get businesses to look beyond profits and focus on broader issues, and it sounds to me a lot like what insurance is all about: We’re here to help clients reduce their risks and to recover quickly when the inevitable losses occur. We don’t sell widgets; we help people in their time of need. Who better to lead a “beyond greed” approach to business?

Back in the early days of the personal computer, when I was covering technology for the Wall Street Journal, the CEO of a successful software company told me his strategy consisted of trying to spot a parade. He didn’t have to organize the parade. He just had to put on a drum major costume, jump in front of it and lead it somewhere.

The more-than-profits movement seems like a parade that could — or even should — be led by insurers.

My suggestion would be less “stakeholder capitalism” as the starting point and more Peter Drucker. Drucker, the management guru whom I had the privilege of interviewing twice, began with the customer. Rather than the diffuse focus of “stakeholder capitalism” or the harsh emphasis on profits that Friedman advocated, Drucker argued that “the purpose of business is to create and keep a customer.”

That focus on the customer not only fits the historic ethos of the industry but seems to be where we’re heading. I’ve never seen an industry talk so much about the customer experience or the customer journey. And I’ve started to see the industry’s focus shift to what customers really want: to avoid losses, rather than to be reimbursed after they occur. Just in the past couple of weeks, Travelers announced that it was using artificial intelligence to help clients survey their workplaces and spot ergonomic issues that could cause injuries, and CSAA announced a pilot program to provide fire retardant that Californians can spray on brush surrounding their homes as a wildfire approaches. The list could go on.

Focusing on the customer could lead as far as insurers wanted to go into the “stakeholder capitalism” movement, with its emphasis on communities, employees and suppliers, as well as customers and shareholders. After all, clients live in communities that would welcome fewer car accidents, a reduction in home invasions and theft and other benefits that insurers could facilitate. Insurers will invest in employees and relations with suppliers as part of caring for customers. And if Drucker was right — he almost always was — focusing on creating and keeping a customer will make the profits flow, keeping those shareholders happy.

In fact, I’d argue that the industry is at a point where attaching to the hip of the customer could lead in all sorts of interesting directions and new revenue streams. Why just focus on serving a client after a car accident? Why not begin the relationship way upstream, installing a camera that watches both the road and the driver and uses AI to make sure the driver is paying attention as he heads into a known danger spot like a blind intersection? Why not continue the relationship way downstream, helping a client run errands via Uber or Lyft while waiting for a car to be repaired?

When I hear complaints about capitalism, I think of the line concerning democracy that is generally attributed to Winston Churchill, that “democracy is the worst system of government — except for all the others.” I’d agree that capitalism is the worst economic system — except for all the others. Capitalism, while messy, drives an extraordinary amount of innovation and has been the engine driving the progress of civilization for centuries now.

But maybe it can be a little better. And maybe the insurance industry can help lead the way.

Stay safe.

Paul

P.S. Here are the six articles I’d like to highlight from the past week:

A New Boom for Life Insurance?

Life insurance can move past the 250-year-old, risk-focused transaction and become a core component within a life, wealth and health ecosystem.

Keys to Limiting Litigation Liability

Risks associated with GL and AU claims can be managed, even with “social inflation,” “nuclear verdicts” and tough jurisdictions.

How Analytics Can Tame ‘Social Inflation’

Claims data within insurance companies is being increasingly seen as a key asset, not a byproduct of the claims process.

P&C Insurers Shift Course in Pandemic

In 2021, there looks to be a major increase in overall tech spending and a rapid acceleration of digital transformation plans.

Insurtechs’ Role in Transformation

Insurtechs are important for the development of the industry — but as tools. Incumbents must still get the real transformation done.

State of Diversity, Inclusion in Insurance

Organizations that adhere to a rigid hierarchy throw up roadblocks to diversity & inclusion due to preconceived notions.

Wisdom From Some Very Smart People

I’d bet that most of you would be excited to learn that the factory of the future was being built in your hometown. Probably your enthusiasm would be driven by your knowledge of factories of the past. Unfortunately, the difference between the factory of the past and the factory of the future is change – TRANSFORMATIONAL CHANGE.

Warren Bennis (a very smart man) offered the following observation in “New Work Habits for a Radically Changing World” in 1994: “The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.”

From an insurance standpoint, my first questions on the new risks associated with the factory of the future would be:

  1. What is the workers’ comp rate on a dog feeder and a watchdog?
  2. Can you afford to insure this type of new risk?
  3. Is Bennis right about the factory of the future?
  4. What are you doing to prepare to be a profitable agent insuring risks of the future?

Before you call me crazy, remember the travel agents, bookstores and video stores that are no more because they kept admiring their past success in the mirror of yesterday and did not consider the horizon of TRANSFORMATIONAL CHANGE THAT IS TECHNOLOGY.

The bad news is that TRANSFORMATIONAL CHANGE is coming (and in some cases is already here). The good news is the buyers and sellers in our industry who leverage this TRANSFORMATION can be big winners if they TRANSFORM with it or allow themselves to be TRANSFORMED by it.

Recently, I received an e-mail from a very creative industry leader, Ryan Collier, chief digital officer of Risk Placement Services, celebrating innovation/TRANSFORMATION:

“Trying to live the ‘eThink Insurance’ mantra every day. A fun side note for you – the platform that we have developed started offering a ‘friction free’ cyber buying experience officially in 2015. It literally takes a company about one minute (four questions) to buy cyber insurance. Since we have launched it we have taken our proprietary/partner insurance carrier (BCS Insurance) from ZERO premium up to the sixth-largest cyber insurance carrier by premium and third by policy count in the U. S. – all by completely redesigning the process. For me, it is all about the process – and tailoring that process toward the buyer and not the carrier. This is a nascent product that needs to be bought – not sold. We now have 12 products that can be quoted/bound/issued in a moment, which has been a boatload of fun and an extreme amount of work as this old industry doesn’t like to change.”

I call this intimacy being “client-defined and client-driven.” Ryan is a very innovative industry leader, a rare resource in a “me, too” world. We’re more copycats and fat cats than lean and mean innovators. Casual Friday is not innovation.

Our industry will be TRANSFORMED from without – not from within.

See also: 3 Ways to an Easier Digital Transformation  

To reinforce this opinion, I offer the following from an insurance industry leader, Paul Carroll, who from his Innovator’s Edge platform asked: “Will Apple enter insurance? Google? Microsoft? Amazon?” He said, “Apple’s market value crested $1 trillion last week, and its big tech brethren Google, Microsoft and Amazon aren’t far behind; all are valued north of $800 billion.”

I wasn’t shocked until he said, “All have extensive data about customers. And all have the size to tackle mind-bending problems that insurance faces – by contrast, you’d have to combine AIG, Prudential and Allstate just to surpass $100 billion in market value.”

Now that I have your attention: Consider the comments that follow from Peter Drucker and Theodore Levitt, who were TRANSFORMATIONAL leaders in a world that did not voluntarily embrace change.

Levitt – “We habitually celebrate him [Henry Ford] for the wrong reason, his production genius. His real genius was marketing. We think that he was able to cut price and therefore sell millions of $500 cars because his invention of the assembly line had reduced the costs. Actually, he invented the assembly line because he had concluded that at $500 he could sell millions of cars. Mass production was the result, not the cause, of his low prices.”

Peter Drucker, in a Wall Street Journal article titled “The Five Deadly Business Sins” (Oct. 21, 1993), explains the need for a new paradigm in all of our operations:

“The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most Americans and practically all European companies arrive at their prices by adding up all costs and then putting a profit on top. And then, as soon as they have introduced the product, they have to start cutting the price, have to redesign the product at enormous expense, have to take losses – and often have to drop a perfectly good product because it is priced incorrectly. Their argument – ‘we have to recover our costs and make a profit.’ This is true but irrelevant: CUSTOMERS DO NOT SEE IT AS THEIR JOB TO ENSURE MANUFACTURERS A PROFIT.”

Drucker further states, “Cost-driven pricing is the reason there is no American consumer electronics industry any more.”

When I started in the agency business (1975), we were paid 25% commission on homeowners insurance. Agents boldly stated, “I won’t sell homeowners for less than that.” They were wrong. I believe, in my lifetime (and I’m old), insurance will be quoted net of commission or with full disclosure of commission. That will ensure TRANSFORMATIONAL CHANGE.

See also: Core Transformation Is Not Negotiable  

Want to be here tomorrow? Heed Drucker’s advice: “There are only two functions in business, marketing and innovation.” Our world is transforming because the people and the global marketplace are changing. They now enjoy unlimited options.

Consider the following simple outline of the marketing process:

  1. Who is your customer (prospect) base? As a niche of one, customers can shop anywhere.
  2. What are their wants and needs? Do not limit your research based on just what you sell.
  3. What products/services and client intimacy must you offer to meet these wants and needs?
  4. How will these be priced to sell?
  5. How will you anticipate these needs and deliver a solution to customers at a profit?

Plan to innovate everything: people, process, products, pricing, performance (expectations), places, etc. Try “everything,” and, if something doesn’t work, go back to what did. Your marketplace will be the judge and arbiter of what is good and what is not so good!

If this article starts making you sing “Crazy” – I like the Patsy Cline version best – consider how much online banking you do now and know that Capital Bank is now opening “branch cafes” in lieu of branch banks!

Existential Threat to Agents

It was 1975. While completing an application for malpractice insurance, a dentist told me his address was 12345 Main St. I commented on how simple it was. He shot back, “So simple even insurance agents can understand it.”

In 1994, while speaking about managed care to a conference for librarians, I mentioned the rising cost of healthcare. There were about 250 in attendance. The audience was engaged. Suddenly, someone in the back of the room screamed, “Read the Golden Stethoscope and see what those bastards are doing to us!” I was shocked by this apparent “nut” in the crowd. Looking around, I realized the majority of attendees were nodding in agreement with the “nut.”

A few months later, working as the executive director of the Louisiana Managed Healthcare Association, I was at my office. Don, one of my board members, called to say I needed to come to his office right away because two federal agents wanted to talk to us.

I did what any of you would have done. I threw up in my garbage can, then went to Don’s office. We met with these two agents for about four hours. They were investigating physicians in two parishes who were allegedly colluding with a hospital to drive patients to their institutions. What they were doing was illegal.

Later that week, I spoke to the medical society in one of these parishes. One hundred doctors were in attendance. The doctors had just concluded a meeting that celebrated their leadership in funding a physician-owned HMO. This was a priority because no one was going to tell them what they could or couldn’t do in the practice of medicine.

See also: How to Earn Consumers’ Trust  

Once introduced as the executive director of the Louisiana Managed Healthcare Association, I began my presentation on Managed Care 101. Ninety-eight of the doctors were polite hosts and a respectful audience. The two other doctors operated in full attack mode.

Toward the end of the program, one screamed at me from the back of the room, “I don’t think insurance companies and HMOs should make money in healthcare.” I explained that many people felt doctors were making plenty of money in healthcare and that premiums were too high.

I will never forget one doctor’s response. He said, “We’re just getting by.”

Ninety-eight of his colleagues bowed their heads in embarrassment. Later, I was told he was grossing $2 million a year. (I wanted to yell, “The Feds are going to get you,” but I didn’t.)

A November 2012 Gallup survey ranked 23 professions based on the public’s perception of their ethics. Agents rank seventh FROM THE BOTTOM – between legislators and attorneys.

Not everyone loves us as much as we love ourselves. The dentist, the librarians, the physicians and the participants in the ethics survey all have their opinions. I’m assuming most see themselves in a positive light but are often suspect of others. This brings me to the point of the story.

On TV in 1954, Robert Young played Jim Anderson, an insurance agent, in Father Knows Best. Those were simpler times, and insurance was not the expense that it is today. We now see ourselves as the Main Street agent (adviser), a trusted choice, “like a good neighbor” and other “feel good” personifications.

But more and more consumers I talk with are “mad as hell and won’t take it any more” with the cost of insurance. Premium costs, rate increases, larger deductibles and co-pays are breaking our clients. The worst is yet to come. When the National Flood Insurance Program must finally demand actuarially sound rates, and the adverse selection of the ACA finally takes its toll, voters will rebel, and government will gladly welcome the chance to further expand its failed involvement in our industry.

See also: Why More Don’t Go Direct-to-Consumer  

We can explain all we want. Consumers don’t care. All they want is relief. In my opinion, if we don’t aggressively work to solve the cost problems because we believe nothing can be done, we will lose our industry and agency system as we know it.

Peter Drucker stated this clearly in 1993, when he said, “Customers do not see it as their job to ensure manufacturers a profit.”

Peter Drucker was a very wise man. Video stores, book stores, travel agents, solo practitioner doctors, full service gas stations, etc. were dumb, fat and happy, and now most are gone. The consumers no longer saw their value.

How might consumers spell relief? A – M – A – Z – O – N, or W – A – T – S – O – N or A – I or some other innovation that we can’t even imagine.

America’s agents need to wake up before it’s too late!

To Predict the Future, Try Creating It

Backed with new capital, powered by digital technology and using decentralized administration, a new model for transparent, simple and customer-focused life insurance couldn’t be easier to visualize. And competition from newcomers means existing providers must innovate. But what can traditional insurers do specifically to — to paraphrase management theorist Peter Drucker — predict the future by creating it?

Today’s insurance market is a customer-centric, buyer’s arena that reflects a palpable shift in power from the producer to the consumer. Insurers’ service offerings need enhancement. If it is felt little value is added to consumers’ daily lives, customers often fail to see the relevance of the importance of cover. Technology can help insurers to innovate and address this gap and deliver enhanced services.

By striving for simplicity, insurers can also increase transparency. That said, no matter how simple the front end is made for the customer, acquiring cover remains an intricate process. Advice, compliance and regulation can clog the process but offer important protection to consumers. There is a delicate balance to achieve.

See also: 7 Steps for Inventing the Future  

Letting people engage in the ways they want is crucial. Trust and advice seem somehow less important to people than before. Today, people make emotional decisions with far fewer facts, and for many a community-based recommendation will do. This combination suggests that social brokering will only grow in importance and that demand for automation with robo-advice will increase.

Consider the disintermediation — the reduction in intermediaries – that transformed High Street banking. An appointment with the manager is no longer needed to set straight one’s personal financial affairs. We fend for ourselves by banking online and using mobile-first apps to view statements, to set up transactions and to move money about. Customers now have similar expectations of life insurance.

To provide more flexibility, insurers can offer products that work in a completely modular way — products that can be built up or down and switched on and off to reflect much better how life’s risks ebb and flow. It’s likely the silo-based approach to the design and sale of line-of-business products is not sustainable. Product fragmentation with more diverse offerings will offer tailored products that fit with the way people live their lives.

Personalization gives insurers the opportunity to transform the services they offer and take a real stake in the future health of their policyholders. One way is to shift from risk identification to risk prevention that is based on knowledge of behavioral change. While using data from wearables is a start, more support can be provided — not just to the fittest customers — by developing apps and technology that engage their unique health needs.

Data from health apps, for example, is just one source that will give insurers access to a real-time view from which to assess risk, instead of relying on past data. However, continual engagement requires transformational change in the industry. To achieve this, insurers can — and are — engaging with experts and companies outside the sector. As the boundaries between insurance and adjacent businesses fade, roles and skill sets within insurance will also change, resulting in a need for more diverse recruitment.

See also: How to Build ‘Cities of the Future’  

Much is being said about big data, in particular how better use of the insights can make insurers’ operations leaner. But analysis of large datasets gives established corporates and newcomers to the industry identical insight. While agility of execution may favor startups, it’s industry knowledge that puts insurers in a strong position to turn data into actionable insights.

For more perspective on how technology is changing life insurance, click here.

Change Management Is Not About Change!

In 1993, my business cards included the tagline: Risk, Insurance and Change Management. When asked for a definition of change management, I would explain that change was the transition from today through tomorrows (the “s” on “tomorrow” suggested it is a process not an event). Management was about solving problems and capitalizing on opportunities as you worked through the process. More and more people now claim to manage change. I no longer do.

See also: 3 Main Mistakes in Change Management  

As the term became over- and misused, I moved to “change architect.” The tagline chosen was a quote from Peter Drucker, “The best way to predict the future is to create it.” I even copyrighted and added the term “carpe mañana.” (Seize tomorrow.)

Early in the process, I heard a speaker state correctly, “Change isn’t progress. Change is the price we pay for progress.” How true it is.

Today as I was struggling to address an issue of resistance to change, I had an “aha moment.” I realized that, in most organizations and most cultures, change management is not about the change; it’s all about the management (control of change). It is not about making the future better. It is about protecting and preserving the status quo – the individual and collective comfort zones.

If you are serious about the future, don’t stand in today and look back to the good old days. Instead, turn your back on yesterday and look boldly to the horizon and design and build your own tomorrow – your future.

See also: Is It Time for Un-Change Management?  

Remember, “The greatest risk is not taking one.” (AIG Annual Report).