A client enthusiastically drew my attention to an article about operational innovation as a way to change a company. This article is so full of down-to-earth common sense that I would like to share some of its ideas with all my clients.
Michael Hammer, author of Deep Change – How Operational Innovation Can Transform a Company (Harvard Business Review, April 2004), provided an example in the USA auto insurance business which might also intrigue you. All South Africans will have noted what our insurance companies have been doing over the past five years. We have all seen a series of insurance ads on TV. You may even have experienced a better service. It would appear that some SA insurance companies had taken note of what Progressive Insurance did. Although you may not in the insurance industry, what could you consider doing with reference to this example?
Now what did a few top companies do to become so successful? Were they positioned in a high-growth industry? Did they diversify? Did they go global? Did they grow through clever marketing?
“No” to all these questions.
They simply “outoperated” their competition. Some offered lower prices and better service than their rivals. And they did it through “operational innovation, the invention and deployment of new ways of doing work”. They came up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that companies usually perform.
Each company fundamentally rethought how to do work in its industry.
We all know that Wal-Mart, Toyata and Dell have each fundamentally rethought how to do work in their industries. They gladly show outsiders around. Why worry about being copied? Who can copy them?
Operational innovation is rare. No more than 10% of enterprises have made a serious and successful effort at it. All the more reason why you should be doing it!
Let’s take a closer at Progressive Insurance. It could not compete against larger players on a level playing field. So it changed the rules. It reinvented claims processing to lower its costs and boost customer satisfaction and retention. The proof lies in its combined ratio (expenses plus claims payouts, divided by premiums), the measure of the financial performance in the insurance industry. In an industry where companies run a 2% loss on their underwriting activities and where they have to recover the loss with investment income, Progressive’s combined ratio beat the industry and it became the USA’s third largest auto insurer.
Progressive introduced Immediate Response claims handling. Involved in an accident? Call them anytime, 24/7. A claims adjuster will be quickly at the scene as they work from mobile vans – not out of offices. Progressive reduced the seven to ten days it took to inspect your vehicle to not more than nine hours. On arrival the adjuster speeds up the claiming process. He makes an on-site estimate of damage and, if possible, writes a cheque on the spot. This leads to a reduction in the size of payouts. Would you not be willing to accept less money if it is given sooner and with less hassle?
The benefits for you and for them? You get faster service without effort – which translates into loyalty. The shortened cycle time reduces Progressive’s cost dramatically. The cost of storing a damaged car for up to nine days is saved and multiplied by the 10 000 claims which Progressive handles daily. Speedy arrival on the accident scene means an improved ability to detect fraud – before the evidence has faded. Fever people involved in handling a claim translates into lower operating cost.
Call their number or visit Progressive’s website to easily compare their rates against those of other insurance companies. They use an automated credit risk profile process. Their computers check you out with credit agencies resulting in more accurate pricing.
Lastly, Progressive negotiates a two-hour window for selecting the right adjuster who has the experience that matches your type of accident. It also offers a concierge approach to certain types of claims handling. If you can, bring your car to a Progressive claims facility and they will take it from there, give you a car on loan and return your fixed car to you.
How does your company’s operational efficiency compare? Do you have an impressive story to tell?
Operational innovation affects time, cost, and customer satisfaction. It is reliable and low in cost. So why don’t more companies embrace it? Especially when industries are struggling with low growth, stagnant markets, overcapacity, and fierce competition?
Virtually all product and service offerings have become commodities. In this environment, one way to grow is to take market share from competitors by running rings around them: by operating at lower costs that can be turned into lower prices and by providing extraordinary levels of quality and service.
Note, that mere operational improvements are not enough. You need to execute in a totally different way – that is, through operational innovation. This means a departure from familiar norms. It requires major changes in how business units (BUs) and people conduct their work and relate to each other. It is truly deep change, affecting the very essence of a company: how its work is done. It affects measures, reward systems, job designs, organisational structures and managerial roles.
Operational innovation will never get off the ground without executive leadership. In large companies this type of innovation is rarely perceived as an important endeavour. It simply is not glamorous. In the minds of executives, finance and strategy are at the top, marketing and sales occupy the middle tier, and operations are at the bottom.
Fortunately this post is addressed at MDs of small and medium-sized companies, where the MD is usually the centre of everything. However, such MDs also have to ensure that they in their budget and planning processes explicitly look for process breakthroughs.
Do not loose the distinction between “improvement” and “innovation”. Reimagine current processes.
Operational innovation is worth pursuing. It requires that you and your team members have to focus your efforts. Change is by nature disruptive. Concentrate on those activities which will have the greatest impact on your strategic direction. Rethink you goals and decide which areas will benefit most. Where do you need to focus? On client acquisition, on new product development, on process development, on post-sales customer support, lower direct costs, more added value, simplified processes, stronger client relationships, etc?
Limit you innovation programme to two or three major efforts at a time. To undertake more would consume too many resources and create too much organisational disruption.
Then set stretch performance goals and ensure that they are clearly unattainable through exiting modes of operations – as they have to stimulate radical thinking and a willingness to overturn tradition. Progressive ensured that claims could be initiated in 9 hours. “Inventing a new way of operating that achieves stretch targets is not simply a matter of crossing your fingers and hoping for inspiration”.
New thinking
• Look for role models outside your industry – as benchmarking within your industry is unlikely to uncover breakthrough concepts. For instance, Taco Bell transformed its restaurant operations by thinking about them in manufacturing rather than in fast-food terms. Food is prepared away from their premises, delivered and assembled in their kitchens. Harvard Pilgrim Health Care applied marketing segmentation techniques common in the consumer good area and identified patients most likely to have a medical crisis and to intervene before a crisis occurs.
• Identify and defy a constraining assumption. Cross docking trucks and loading from one into the other negates the assumption that goods need to be stored. Built-to-order that goods should be produced based on forecasts. Zoom in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it.
• Make the special case the norm. Companies often achieve extraordinary levels of performance under extraordinary conditions. Turn this into the norm.
• Rethink critical dimensions of work. Designing operations entails making choices in seven areas. It requires specifying …what results are to be produced, who should perform the necessary activities, where it should be performed, and when. It also involves deciding whether each of the activities should be or should not be performed, what information should be made available to the performers, and how thoroughly or intensively each activity needs to be performed.
Getting implementation right
Companies that follow traditional implementation methodologies inevitably take too long. There is so much to be done, and so much that must be integrated, that months can pass before the innovation is implemented and the benefits start to flow. Create a sense of urgency.
As every proposed major change is invariably greeted with a chorus of “it will never work”, a lengthy implementation period gives opponents an extended opportunity to campaign against it. As more time passes and more money is spent without the innovation or its payoffs seeing the light of day, organisational support leaks away.
It is difficult getting everything right from the start. Ideas that look good on paper don’t always work well in practice. That’s normal. It’s impossible to get everything right from the outset. Only when a concept is tried does one learn what it should really have been in the first place. Learn as you go.
You need to adopt a new approach to implementing operational innovations. Follow an iterative, evolutionary approach. Begin with the best estimate of innovation, build the first version, try it out with customers or users and feed the knowledge gained from tests into a fast-cycle iteration of the next version.
Do not try to implement an innovation all at once. Break large-scale implementation into a series of limited releases. This creates momentum, dispels scepticism and anxiety, and delivers a powerful rejoinder to carping critics.
Operational innovation moves a company to an entirely new level. Once there, focus on additional changes and refinements that will keep you ahead of the pack. Make operational innovation a way of life. Develop a reputation with clients and customers for relentlessly improving performance
If you want to deliver new, superior performance, and do it with integrity in an environment in which there is an overdose of hype, and in one in which the customer rules, operational innovativeness might just be what you need to seriously establish your brand – and put you ahead.
Albert
PS. ABPLAN’s Built for Results Programme covers this approach and more.
