Tag Archives: peter drucker

5 Steps to Profitable Risk Taking

The really bad thing about risks is that they almost never lead to a loss. Why would that be bad? Because risk aversion is responsible for so much lost opportunity. Risk aversion allows us to shoot down ideas faster than we build them up. It is easier to cite a risk that a project or change effort will fail than to undertake it.

But getting ahead means change, and change means risk. Those who prosper in business, take risks. The list of leaders who wouldn’t take risks is a very short one.

The biggest risk is not taking any risk… In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks. – Mark Zuckerberg

In other blogs, we’ve written about the price you pay by not adapting. It’s not a question of whether you should take risks, but how to do it well. Nearly all great advances come through leaders’ appreciating an opportunity and understanding how to manage its risks. So often in our discussions with companies, we encounter leaders who acknowledge the opportunity we present, but who are stymied by perceived obstacles to acting on it. The focus turns too heavily to what lies in the way rather than the path. These obstacles become risks – “unknowns” – that inhibit desired transformation.

See also: 4 Steps to Integrate Risk Management  

Risks are an integral, essential part of improvement. They force us to think, to adapt, to learn. Companies that advance don’t do so by avoiding risk. They don’t do so in spite of risk. They do so in conjunction with risk. The question is not how to avoid risk, but how to embrace it. Leaders love risk as a thing to be conquered, not feared. Here’s how they do this.

Define your goals in detail before you define your risks.

It’s easy to get sidetracked by anxiety. The mention of a potential goal is more often met by caveats about it than by building out the path to the goal. Leaders focus first on the goal and the value of achieving it.

Act on risks constructively.

Draw up a list of risks that could materialize on your way to your goal. Define each risk (what it is), what impact the risk can have, the probability that it will occur and what should be done to manage it. Most often, the risk is much smaller than you imagine. For example, if we more aggressively negotiate medical cost reductions, we might generate more litigation. That might cost us $2,500 per case. This might happen on 10% of the cases.

Don’t stop there….compare your risks to your upside – Our plan will result in reductions of more than $1,800 on 80% of all cases…..The upside is positive. Keep moving forward.

Enlist people in problem solving…not problem identification.

When engaging with others on a project or change effort, dwelling on risks leads to managing against a fear of failure. Get people involved in answering this question: “How can we achieve [name the goal]?” – rather than “what do you think of [name the goal]?” For example, how might we successfully achieve medical-cost reductions without generating litigation?”

Plan for success and manage your way there.

Managing risk doesn’t mean playing defense against potential disaster. On the contrary, it means keeping a clear eye on what you want. When we implement with a client, we have a detailed list of action items to be accomplished by our customers and us. Tedious? Not really. Critical to success? Absolutely. We know the critical success factors and we plan for and execute on them.

Use risk to learn.

We all know that stuff happens. Recognize it. Learn from it. Move on. Peter Drucker, the famous management guru, said it best…..

“People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.”

See also: Are Portfolios Taking Too Much Risk?  

If you’re feeling hemmed in by risks, take a different approach. Embrace it. It’s the only way to master it.

A Blueprint for Casualty 2.0

Casualty 2.0 is a claims management blueprint for bringing together technology, data, skill development and process to control loss costs in measurable, strategic ways. It is also a path to building strategies for operating expert casualty organizations.

The property and casualty industry pays out more than an estimated $100 billion a year to resolve personal injury claims. Numerous factors affecting the investigation, evaluation and resolution of these claims have been changing, making them more complex and more expensive. These factors include inflation in medical costs driven by higher pricing, more services and complications in evaluating pain and suffering, driven by multiple injury diagnoses. New laws and legal doctrines create nuances for adjusters and managers to consider. Containing the cost of settlements is not getting easier.

In the midst of this rapidly evolving environment, leaders operate without effective reporting and measurement, with aging and disjointed technology, in the absence of formal training and proven practices. Casualty organizations are falling behind. Casualty 2.0 combines four disciplines that must work together for effective containment of settlement value. These disciplines are data and reporting, technology, process and adjusting skill.

See also: Examining Potential of Peer-to-Peer Insurers  

Data and Reporting: Build data for measuring “what” and “why”

Most casualty organizations are confined to very limited and not-so-useful data. Measurement, when it is available, is confined to items like average payment, average cycle time and counts of new and closed claims. These measures are starting points but leave so much unanswered that they are poor guides for improving performance. For example, if average payments have gone down….is that an indication that accuracy has improved? Or that easier cases are settling, leaving the more difficult and expensive cases in inventory?

Peter Drucker, the famous management expert, put it succinctly when he said, “You can’t manage what you can’t measure.” Without measures, the management process is reduced to focus on one case at a time. Strategic insight cannot be developed from this level of information.

In Casualty 2.0, we examine the core data and measures that every company needs to lead.

Technology: Use technology to build and resolve a holistic, integrated case

Technology is the window into data and the mechanism for aligning process. It is also a means to developing skill. Casualty organizations are significantly challenged in using technology this way as they work in a fractured environment of point solutions. They use a combination of core claim systems, document management systems, Word documents or Excel files and other ancillary applications like ISO’s claims indexing. In some cases, medical bill review systems are also used. This mixture tends to generate activity about the parts of a claim without building a picture of the whole claim.

The result is claim information residing in many different applications. The sum of these parts doesn’t add up to the whole. It is not possible to systematically evaluate performance by looking at claims investigation, evaluation and negotiation holistically. For example, what do you pay in settlements for medical bills and why? Pain and suffering? How frequently does liability play a factor? How much variance is there? Which adjusters produce the best results and why?

Not only is it difficult to use the data your adjusters have spent so much time compiling, but the current approach also mandates “processing” activity over “adjusting decisions.” The use of “unstructured” data like claim notes not only harms data insight but also is not useful in managing process.

Casualty 2.0 moves technology from documentation and data collection exercises to supporting judgments in a single, integrated solution. Creating a holistic and integrated view of liability, pain and suffering, medical, etc. isn’t convenient, but it’s necessary to controlling the overall settlement value AND building adjusting expertise.

Process: Work from a core skill set

Casualty organizations look for adjusters who are experienced in casualty handling. Training is seen as beneficial, but most organizations lack the budget to build effective programs. The result is skills that are developed “on the job.”

The lack of structured training makes tenure attractive. But tenure is not a standard of skill. Tenure, in our experience, is far from a guarantee of a good result. Most claims leaders we speak with agree. With tenure comes a mix of adjusting approaches as well as knowledge of uncertain origin, not a consistently reliable claim outcome.

See also: One Foot In Healthcare: Property And Casualty Payer Integration  

Some standards for knowledge and skill are needed. For example, in an industry more and more driven by medical inflation, demonstrated knowledge of the process and guidelines for assessing and treating a patient are “must haves.” (Also see our blog on “Injury Evaluation Tips.”) We’ll be writing about the core casualty skill set and how to turn this knowledge into real cost containment.

Adjusting Skills: Implement practices with proven impact on controlling settlement costs

In the thick of multiple applications and demanding productivity expectations, adjusters end up “processing” claims rather than “adjusting” them. Procedures are developed that outline the tasks that should lead to a good solution. Each procedure makes sense in its own right, but they often don’t lead to effective decisions that contain settlement value.

Best practices are not just “logical,” they are practical and measurable. For example, checking ISO for prior
claims and challenging the legitimacy of an injury in low-impact cases are good practices. The practices that convert this information into measurable cost containment are the best practices.

Standards and practices that produce the best results are developed by addressing how judgment should be applied, capturing the use of this judgment and using it to demonstrate, through data, that it produces better results. Standards are not a matter of design, but of demonstration. Casualty 2.0 uses proven practices as best practices.

ERM Blurs Lines for Nonprofits

I will never forget a frustrated Peter Drucker lamenting years ago, in his heavy German accent, the use of the term “nonprofit” when “the fact remains that profitability is vital to our sustainability?” To this point, I’ve been so impressed with the tools of technology (and equally with recent management appointments in nonprofits) that I’ve been encouraging nonprofits to raise their game relative to risk retention. This can be achieved with a more sophisticated form of reinsuring their liabilities and operations — captive, risk retention group — so that nonprofits’ efforts are rewarded through an ROI on their capital (i.e., a surplus), generating a “profit center” for mission protection.

I believe the time has come for a more holistic view of how we manage, whether it’s our company, our organization or our household. (Interestingly, the word “economics” comes from two Greek words — oikos and nomia — whose earliest origins relate to taking stock of the affairs of the home.) I believe this blurring is manifest in much of what I am witnessing:

  • For-profit executives leaving a life of “success,” corporately, for a life of “significance” in a mission-based organization (Bob Buford’s theory) at a mid-point in their lives;
  • For-profit executives sitting on non-profit boards advocating for more enterprise risk management (ERM), a more sophisticated form of risk management; and
  • A tidal wave of interest among emerging generations in the nonprofit sector — for careers, volunteerism and engagement.

Another concept of this blurring relates to the need for nonprofits to see resources, talent, contribution and solutions in their nonprofit, community-based neighbors. In fact, it appears that risk management is no longer an “organization issue,” per se; you can have the best-laid plans, but if you aren’t aligned with your community, you risk vulnerability.

Additionally, so many recent security breaches point to the need for community-based solutions that are global, not just U.S.-centric.

Below is a diagram I raised with a faith-based nonprofit to demonstrate how its approach to risk might, more effectively, be to find greater impact through alignments within the local community.

Screen Shot 2016-01-25 at 1.41.00 PM

Engaging your community

Perhaps now is the time for “nonprofits” to change the semantics of their sector to a broader, community-based organization (CBO) concept. In fact, one idea that has emerged is an alternative label for a nonprofit: CBO.

Perhaps — as CBOs — we will more effectively live out our missions, starting with a positive, inclusive approach rather than a negative (“non”) dynamic. And, no doubt, we’ll better manage risk through these alignments.

Ultimately, we’re better off with collaboration!

Getting to 2020: Redefining the Culture (Part 3)

This is the third in a series of four articles that offer a “road less traveled” to Agency 2020. The first article focused on your agency in the marketplace’s current reality. The second article considered the world as it might be in 2020. Today, we address the processes necessary to ensure you have the “seed corn” to grow the culture and structure necessary to produce Agency 2020 and win in the marketplace of tomorrow.

Mohan Nair, in his book, Strategic Business Transformation, diagrams a world of yesterday where 80% of change was incremental/cyclical and 20% was structural/transformational. Today, he says, “When the unknown are threatening every variable we have counted on, 80% of the variables that shift are structural while 20% are predictable. We cannot use the strategic data used in the past to find our ‘true north.’”

Your successful organization today is driven by its culture: “the house rules,” “what’s tolerated.” This organization and culture were created for the world of yesterday (“Daddy, may I?”) and today (“What do our carriers say?”). If you believe the world of 2020 will be different, you must create a culture appropriate for that new world.

The Gospel of Mark (3:25) and then Abraham Lincoln stated that “a house divided cannot stand.” This was true in their world of incremental change. Theirs was a world that moved at the pace of a tortoise. Tomorrow’s world will move at the pace of the hare (but never stop for a coffee break).  As has been said: “It’s not the big that eat the small. It’s the fast that eat the slow!”

Most people are reluctant to change. As Maxine puts it, “Change is good as long as I don’t have to do anything different!” In your organization, most folks are comfortable in their jobs, see the world as it is and are terrified that things will change. A minority of folks who are enthusiastic about the new, virtual world and global economy see the world as it will be and are terrified that your organization won’t change.

Your house is already divided.  What you need to do is merely focus each segment on the role right for them.

Both groups are necessary for success, but you must answer one question for each group and each individual. WIIFM? – What’s in it for me?

Do this, and they’ll embrace your plan; ignore WIIFM, and they’ll sabotage your future. Be respectful of all. Understand that there are different “tolerances” for risk and that people discover, learn and adapt at different speeds.

Gather your team. Put them at ease. Make the environment safe for them. Explain that you want to structure change to give every contributor an opportunity to continue their success today and find the right fit in the world of tomorrow. Celebrate your past and thank them for their participation. Clearly articulate your embrace of the inevitable change necessary for tomorrow and your commitment to your team’s success in the future.

Announce your plans to begin an Agency 2020 initiative. Explain that to build a foundation for success you need two teams. This process will not be instead of their existing roles but as an extracurricular activity. This initiative is about assuring a future with opportunities for each other. This is about each voice being heard.

The first group will immediately focus on the existing organization – making it more efficient and effective to create the “seed corn” (profits) necessary to finance tomorrow. The group’s task will be to create an operational “to do list” defining and acting on what is necessary for enhanced success today and to quit doing those things carried forward from yesterday but no longer needed today – “we’ve always done it this way.”

The “tomorrow team” will be the young at thought and the young at heart. They will be your pioneers. They will be charged with discovering tomorrow as it will be and creating a blueprint to build your organization as it must be to fit in 2020. This process is not intended to exclude the traditionalists. Both teams will be encouraged to share their discoveries and enthusiasms – to create excitement about today’s improvements and refinements and tomorrow’s innovations.

Don’t create competition between the teams – encourage collaboration so that respect and trust will build. This will work because each group is focusing where “they live” – their comfort zone — and you are not forcing them, at this time, to go to where they don’t want to be. Assure all team members that, as the blueprint for 2020 is designed and new roles are defined, each person on staff will have the right to be considered for jobs right for them and your organization. Promise them the training necessary for success. If they can’t or won’t fit into the world of 2020, facilitate their exit. Make it as painless as possible.

For the Today Team, some ideas to consider and questions to ask (there are more):

  1. Focus – take out the microscope and study every function you perform.
  2. If “we’ve always done it this way” – it can be changed for the better.
  3. What are five things we do today that no longer need to be done?
  4. What are five things we do today that remain important and can be improved?
  5. What are the jobs skills that remain important today? How do we improve these?
  6. What are skills no longer needed in the world of today? How do we let them go?
  7. Do we have the technology (systems and social media) needed for today?
  8. What and how can we maximize our results from this technology?
  9. Does our “client experience” differentiate us, or are we “the same old same old?”
  10. Are we capturing the data available and converting this to actionable knowledge?
  11. Where must we invest our time and energy?
  12. What must we leave behind?

Please remember – the Today Team is about updating (remodeling) the organization you have. Its role is small steps – process improvement.

Think outside of the box. Remember the words of Einstein – insanity is “continuing to do what you’ve always done and expecting a different result.” The world has changed more in the past 10 years than the previous 50, yet most agencies continue to do what they’ve always done. Don’t be crazy. Discover and do what needs to be done today to prepare for tomorrow.

The Tomorrow Team is about designing a blueprint and facilitating the building of the organization and culture you’ll need for the future. The team’s role is “giant leaps” – innovation. You are moving from the mechanical processes of yesterday to a new “living” system for tomorrow. Be bold. Don’t be afraid to fall – just do it, and learn from the experience.

For the Tomorrow Team, some directions and innovations to consider (there are more):

  1. Scan the horizon of the world and technology. Look outside your comfort zone.
  2. Determine if “place” will matter — where you, your employees and clients are.
  3. Determine if “time” will matter? Is “Working 9 – 5” only right for Dolly Parton?
  4. Determine the role of cultures and generations for buyers and those who influence decisions.
  5. What are the talents needed? Prioritize communication, technology, insurance, etc.
  6. What will be client needs? How can you deliver solutions profitably?
  7. Shift your focus from products sold in the past – to client needs in the future.
  8. What will be the demographics and psychographics of the populations served?
  9. What will be the industries/market niches in collapse/decline? Avoid them.
  10. What will be the industries/market niches in ascendancy? Focus on these.
  11. How do you manage in a “virtual” (no time, place and more non-verbal) world?
  12. What will be the role of big data? What will be your ability to use it effectively

The questions are offered as a starting point for discovery. You have many more questions to ask and answer. Yours is a world yet to be – not a world that is. Nonetheless, the better you ponder and plan, the better your head start on the future – the New World of 2020 – will be.

Learn from the great change architect Peter Drucker, who said, “The best way to predict the future is to create it.”

3-Point Plan for an Innovation Portfolio

One lament I often hear when I advise large company executives on the need to “Think Big” is that their biggest innovation challenge is not thinking big—it is thinking too much. Purportedly great ideas come from the front lines where the organization interacts with products and customers. They come from technology or marketing wizards keeping a sharp eye on disruptive market trends. They come from executives and board members grappling with questions at the organization’s strategic horizon. The challenge is that organizations are overwhelmed with more ideas than they can sort out, much less pursue. Perhaps the best advice on how to deal with the challenge of too many ideas comes from Peter Drucker, who offered this general principle:

Innovation begins with the analysis of opportunities. The search has to be organized, and must be done on a regular, systematic basis.” Don’t subscribe to romantic theories of innovation that depend on “flashes of genius.”

Rather than relying on randomness or organizational influence to dictate which ideas find a receptive ear, here is a three-point plan for initiating a systematic process for uncovering, assessing and scaling the best ideas. 1. Inventory Opportunities Start by casting a wide net. For example, sponsor a series of innovation contests and workshops to educate, build alignment and uncover potentially good ideas. Hold scenario planning sessions with senior executives and board members to explore both incremental and disruptive future business scenarios. Questions to ask might include:

  • Can you augment your customer interfaces to reveal customer preferences and to customize the customer experience, as Amazon and Netflix do?
  • Are there opportunities to better utilize the big data being generated by your business processes, including customer, operational or performance data, for innovation?
  • How might you reimagine key business, customer, and competitive issues if you could start with a clean sheet of paper?
  • How do the six disruptive technologies affecting other information intensive companies apply to you?
  • What extreme competitive threats, i.e., doomsday scenarios, might new entrants wielding these disruptive technologies pose to your organization?

Opportunities should include both continuous and discontinuous innovations. Continuous innovations offer incremental or faster, better, cheaper-type optimizations, such as shedding costs, reducing cycle times and generating incremental revenue. Discontinuous innovations are those that rise to the level of game-changing potential. 2. Develop a Holistic View Using an Innovation Portfolio Next, assess each opportunity based on competitive impact and investment type using the portfolio analysis framework as shown in Figure 1. Figure 1 Figure 1: Portfolio Analysis Framework Competitive impact measures differentiation against what competitors might deploy by the time an idea is launched. Remember Wayne Gretzky (who famously said he skates to where the puck is going, not to where it is)! A key mistake is evaluating an idea against one’s current internal capabilities, as opposed to where the competition is going. This dimension forces an explicit calculation of an idea’s future potential competitive impact. Investments can be one of three types:

  • Stay in Business investments (SIB) are for basic infrastructure or non-discretionary government mandates. SIB investments should be assessed on how adequately they meet regulatory or technical requirements while minimizing risk and cost.
  • Return on Investment opportunities (ROI) are pursued for predictable, near-term financial returns. Standard measures, such as net present value (NPV), return on equity (ROE) or other well-understood metrics are applicable here.
  • Option-Creating Investments (OCI) are pursued to create business options that might yield killer-app-type opportunities in the future. OCI investments do not yield financial returns directly.  Instead, they build capabilities and learnings that can be translated into future ROI opportunities. Like financial options, OCIs should exhibit high risk and offer tremendously high returns.

After arraying opportunities in the framework, eliminate those that fall outside of acceptable boundaries. For example, companies should not pursue opportunities that, once completed, are already at a disadvantage against the competition. For the remaining opportunities, develop an initial sizing of investment levels and potential benefits according to each investment category. Filter as appropriate. For example, eliminate ROI opportunities that do not meet standard corporate hurdles rates. Eliminate OCI opportunities that do not exhibit extraordinary option value. Eliminate SIB ideas that do not adequately minimize cost and risk—be very skeptical of SIB opportunities aimed at providing ROI or OCI benefits. Such opportunities should be judged directly as those investments types.  Figure 2 illustrates how the analysis might look at the end of this stage. Figure 2 Figure 2: Portfolio Analysis Results 3. Balance the Innovation Portfolio In personal investment portfolios, it is important to not place all hopes in one or two investments. The same is true for corporate innovation portfolios. To ensure competitiveness in the near term and in the future, they should include a mix of incremental and disruptive innovations. The right balance and prioritization depends on a company’s investment capabilities and competitive circumstances. For example, as shown in Figure 3, a market leader might field a portfolio geared toward aggressive growth by enhancing its infrastructure, investing heavily in near-term profitable opportunities and developing a small number of killer app options for sustaining its competitive advantage.  (My experience is that the right number of such options is on the low end of the magic 7, plus or minus two. That is because the limiting factor is senior executive attention, which is very limited, not investment dollars. Market leaders have lots of money to waste, but no project with true killer app potential can succeed without significant senior executive attention.) Figure 3 Figure 3: A Market Leader’s Balanced Portfolio Other illustrative portfolio profiles are shown in Figure 4. Commodity businesses tend to minimize SIB and OCI investments. Companies that are retooling might emphasize infrastructure and near-term investments and make only minimal investments in future options. Underperforming companies tend to invest in programs that barely achieve competitive parity, or worse, and do little to prepare for the future in any of the three investment categories. Figure 4 Figure 4: Illustrative Portfolio Profiles

* * *

By adopting appropriate financial and competitive metrics and measures for each type of investment, companies avoid planning theatrics where guesses are disguised as rigorous forecasts. This can happen, for example, when infrastructure and other SIB investments are required to demonstrate explicit returns on investment. Or, it can happen when advocates of OCI efforts are required to calculate net present value of very uncertain long-term initiatives. Such forecasts can, of course, be made by  savvy proponents. But the analyses are better testaments to rhetorical and spreadsheet skills than certainties about the future. At the end of this three-step process, companies should have a prioritized and staged investment plan that represents a coordinated enterprise innovation strategy and follows the think big, start small and learn fast innovation road map. Achieving an adequate understanding of the entire landscape of possibilities facilitates and encourages thinking big. Continuing management of the innovation portfolio provides clear criteria for evaluating other big ideas as they come up. It also demands the discipline of starting small and learning fast in the pursuit of disruptive innovations that will shape the company’s future strategic prospects.