Today's article is written by Matthew May and is from the HBR (article link) and it deals with the concept of less is more as a way to optimize innovation.
This article provided three ways to promote innovation, the first was elegance, the second was "loose reins", and the third was meditation. Of the three, elegance was the one that spoke to me most powerfully so I will focus on that, it is also the topic most strongly tied to entrepreneurship.
Elegance
Elegant has a few definitions but they all basically lead to a sort of refined excellence. This is close but not quite what the author means, as the author is using it more in line with how Mark Rosewater uses it in his seminal article on the topic (Article). The objective of elegance in design is in essence maximizing the impact while simplifying the delivery. This sounds simple and yet it can be extremely difficult to achieve, especially in an environment where inspiration leads to ideas leads to feature creep, bloat, and an eventual loss of clarity/purpose.
In an extremely competitive business landscape the temptation to add features and functionality seemingly ad nauseum in an effort to differentiate or maximize consumer perceived value is almost irresistible. Yet it is those who are able to resist this proverbial siren's call that actually get to market. Think of some of the biggest launches in recent history, how many of them are "elegant" versus "all-encompassing"? Instagram (mentioned in the article) does one thing and does it well, the iPad only performs certain computer functions but not others, the iPod originally only played mp3s, and so on. These services and devices did not attempt to be all things to all people, or to bombard the potential users with functionality. Sure you could conceivably add an email-like client to Instagram, perhaps add a real time instant messaging function, add video sharing support, and so on, but when you do so you dilute the product. The iPad does not come with productivity software, sure one could probably view documents and presentations but why would you want to do complex spreadsheet design or type out a 10 page paper on a tablet.
The Connection to Entrepreneurship
If entrepreneurship is about solving problems, then elegance is about making your solution focus on the problem you want to solve in a way that does not overwhelm customers. As the author states, elegance allows your value proposition to shine most clearly. If you continue to bury your value proposition under value adds that may or may not be germane to the problem you are solving, how will your customers find the value proposition? If your customers can not easily identify your value proposition, how do you convert them into patrons and users? Elegance is in the delivery, you want maximum punch with the optimal amount of leanness. Perceiving the problem is the first step, designing the solution is the second step, and delivering that solution in a succinct form that highlights your value proposition, that is elegance, and that is the crucial third step to entrepreneurial success.
Tuesday, October 23, 2012
Wednesday, October 3, 2012
Big Companies Can Totally Innovate!!!! (Article Analysis)
The last post dealt with an article that stated that big companies can not innovate. In my previous post I argued against this thesis along a few axes and this blog post adds some fuel to the argument. This article is also from the HBR and was written by Ron Ashkenas and can be found here (http://blogs.hbr.org/ashkenas/2012/10/kill-your-business-model-befor.html) the title of the article is "Kill Your Business Model Before it Kills You" or liberally translated as "innovate or die".
Innovate or Die?:
While the US Postal Service is a complex creature to analyze to support a thesis of "innovate or die", the article thankfully provides more examples of companies that missed the innovation boat and subsequently crashed and burned. Kodak is an excellent example of such an enterprise, rather than use their photography expertise to work with or take over digital camera and photo printing they stayed entrenched. Perhaps their shareholders did not want precious cash in hand being diverted to R&D and (ironically, like I said before) their short-sightedness may have cost them future share growth and dividends. This is contrasted with IBM, a colossal firm, that innovated in a big way (selling off its PC unit, switching to services) and ultimately succeeded in a big way, after what I am sure was a bit of a rocky period on the street. Had IBM stayed in its proverbial comfort zone it may have faltered or struggled like HP and Dell do today. The innovated and survived, Kodak did not innovate and have all but officially died.
Does Size Matter?:
IBM has been regarded as big almost as long as it has existed, yet it successfully innovated. CVS was big before it merged with Caremark (also big) and has successfully innovated and continues to do so. There are two simple examples of innovative big companies that have thrived as a result of their innovative endeavors. Apple was down to ~$50 per share when Steve Jobs returned and had several years of tremendous innovations (iPod, iTunes, iPhone, etc) and are now worth over $670 per share a mere 3-4 years later. That kind of growth is incredible, and has landed it a spot in the Fortune 20 for 2012. Staples innovated in its marketing strategies, using the internet and targeted catalogs to drive both top and bottom line growth, Staples is king of the hill while Office Max and Office Depot are but memories. All large companies, those that innovated grew and survived, those that were complacent died.
Tie in to Course Material:
An alternative way to read this article to see changing an established business plan/model as a pivot! Persevere, Pivot, and Perish do not have to be delegated to lean start ups, hypothesis driven management and strategy can be just as valuable to a blue chip multi-national as it is to a 2 man start up operating in someone's garage.
Bottom Line:
Innovate or die; if you do not innovate you do not move forward. A lack of progression is regression in an environment as competitive as business. This is the natural Darwinism of capitalism. Entrepreneurs' creations live and die by their innovation, the solutions to society's problems are born from innovation, after all if the solutions could be found without innovation they would exist already! Embrace innovation, embrace agile thinking and ideas can become solutions, solutions can become start ups, and start ups can becomes successful enterprises.
Innovate or Die?:
While the US Postal Service is a complex creature to analyze to support a thesis of "innovate or die", the article thankfully provides more examples of companies that missed the innovation boat and subsequently crashed and burned. Kodak is an excellent example of such an enterprise, rather than use their photography expertise to work with or take over digital camera and photo printing they stayed entrenched. Perhaps their shareholders did not want precious cash in hand being diverted to R&D and (ironically, like I said before) their short-sightedness may have cost them future share growth and dividends. This is contrasted with IBM, a colossal firm, that innovated in a big way (selling off its PC unit, switching to services) and ultimately succeeded in a big way, after what I am sure was a bit of a rocky period on the street. Had IBM stayed in its proverbial comfort zone it may have faltered or struggled like HP and Dell do today. The innovated and survived, Kodak did not innovate and have all but officially died.
Does Size Matter?:
IBM has been regarded as big almost as long as it has existed, yet it successfully innovated. CVS was big before it merged with Caremark (also big) and has successfully innovated and continues to do so. There are two simple examples of innovative big companies that have thrived as a result of their innovative endeavors. Apple was down to ~$50 per share when Steve Jobs returned and had several years of tremendous innovations (iPod, iTunes, iPhone, etc) and are now worth over $670 per share a mere 3-4 years later. That kind of growth is incredible, and has landed it a spot in the Fortune 20 for 2012. Staples innovated in its marketing strategies, using the internet and targeted catalogs to drive both top and bottom line growth, Staples is king of the hill while Office Max and Office Depot are but memories. All large companies, those that innovated grew and survived, those that were complacent died.
Tie in to Course Material:
An alternative way to read this article to see changing an established business plan/model as a pivot! Persevere, Pivot, and Perish do not have to be delegated to lean start ups, hypothesis driven management and strategy can be just as valuable to a blue chip multi-national as it is to a 2 man start up operating in someone's garage.
Bottom Line:
Innovate or die; if you do not innovate you do not move forward. A lack of progression is regression in an environment as competitive as business. This is the natural Darwinism of capitalism. Entrepreneurs' creations live and die by their innovation, the solutions to society's problems are born from innovation, after all if the solutions could be found without innovation they would exist already! Embrace innovation, embrace agile thinking and ideas can become solutions, solutions can become start ups, and start ups can becomes successful enterprises.
Why Big Companies Can't Innovate (Article Analysis)
Today's blog post grapples with Maxwell Wessel's HBR article "Why Big Companies Can't Innovate", available here (http://blogs.hbr.org/cs/2012/09/why_big_companies_cant_innovate.html).
The Irony:
When reading the article I had a few observations that could best be summed up as "ironic". A big company, due to its size should be in a superior position to innovate relative to a start up. What they lack in agility they most certainly can make up for with pure firepower. A large company would have more cash, more talent, more means of production, more distribution channels, more branding, more advertising, and all of the other things anyone could ever need to detect a problem, engineer a solution, and bring it to fruition. So they most certainly CAN innovate, they are just told not to, and this only compounds the irony. The shareholders and "the street" want large companies to stay safe, to grow revenue, protect/grow margins, and generate earnings per share. The reason this is ironic is that the population [uniquely] positioned to reap the biggest rewards from innovation are actually the shareholders who are discouraging it. This reinforces the argument made in a Whole Foods article that I analyzed earlier about customer focus. Whole Foods has gotten away from "shareholder focus" and embraced "stakeholder focus", with customers as a key stakeholders and the highest priority. If firms were less beholden to "the street" then they could conceivably usher in new growth opportunities once their investments start to yield returns. One of the tenants of American Capitalism is that it takes money to make money, and innovation usually takes money, so why not use the money to make more of it?
The Flawed Premise:
Part of the allure of the article's thesis is that it is extremely seductive to our intuition and dare I say to our naivete. There is a tremendous amount of appeal to the notion of a scrappy underdog overcoming the odds and growing into a powerhouse. Alternatively, one may view a start up as "untainted" by "the street" and able to perceive actual problems beyond the annual report to shareholders. Last but not least, also appealing is the intuitive notion that a young and small firm can be more adaptive and more experimental in its approach and as a result more innovative. All of these are valid reasons why a small firm or a start up may be innovative, but the most compelling reason is also the simplest; a start has to be innovative in order to survive and eventually thrive. Amazon, Apple, Google, Oracle, Microsoft, Facebook, and so many more companies that are inspirational to start ups and entrepreneurs were once small shops that perceived a problem and proposed a solution (the core of entrepreneurship). If you do not have the critical innovation necessary to entice venture capitalists and take your target market by storm how in the world does your business plan ever become a multi-national blue chip on the Fortune 500? Barring anomalous circumstances, a start up can not hope to compete (and win) based upon price so it must offer something that competitors can not, especially new entrants into established industries. That something that the competition does not have is the fruit of innovation.
So if small companies innovate because they must not because they can where does that leave big companies that want to innovate? Mr. Wessel used a single example (Gerber) to forge his axiom so I will use a single example to not only counter it but also demonstrate how a company can succeed if it surmounts the resistance generated by the irony explained above. My employer, CVS Caremark, is by most definitions a big company, and yet it is an innovative one. Back in 2007/2008 CVS Retail merged with Caremark a PBM to create the world's first retail pharmacy-pharmacy benefits management hybrid company. This was a grand experiment and until recently "the street" was no fond of the conglomerate and encouraged it to revert back into two distinct enterprises. The street was only concerned with financials and metrics, it was not interested in new pharmacy benefits and synergies like "Pharmacy Advisor", "90 Day At Retail", "Maintenance Choice", and so on. The street was transfixed on comparing CVS Caremark to Express Scripts or Walgreens, not realizing that neither comparison was valid, since CVS Caremark could do things that neither of those companies could hope to accomplish, as we like to say, "CVS Caremark is an industry of one". In short the street was more concerned with next quarter's cash flow instead of the long term prospects and ROI for this risky (innovative) venture. Now the shareholders are excited and now the street wants to see what we do next as we continue to innovate pharmacy and healthcare, as we continue to "help people on their path to better health". Tom Ryan (former CEO) once said in a speech that he eventually wanted people to look at CVS Caremark and say that "CVS 'gets' pharmacy, that CVS 'gets' healthcare", it's taken about 4 years but I think people are starting to finally say that.
CVS is currently in high gear for innovation. The entire company has been challenged by our current CEO, Larry Merlo to innovate. So here is CVS, 18th on the Fortune 500 with innovation not being considered a nice pet project, but an integral component of its multi-year strategy. That is just a single example, but there are more all the way up and down the Fortune 500 and beyond.
Gerber and the Entrepreneurial Lesson:
Gerber's innovation did not fail because Gerber is a huge company, Gerber's innovation failed because it did not innovate hard enough. You can not pour baby food into a larger jar and call it adult food, that is not even innovation that is laziness. Had Gerber attacked the adult food market with actual adult food it could have leveraged its massive resources to go toe to toe with Swanson in the pre-made dinners market. Gerber would have been known for wholesome and nutritious, after all who would feed their baby nutritionally void garbage right? If Gerber was good enough for your child it would certainly be good enough for you. Instead of making real adult food Gerber made bigger jars of baby food, completely missing the point of both products. Babies do not have refined palettes or teeth so they need liquified food, adults have teeth and refined palettes so they do not want mush, this is so obvious it is painful to type. I have no idea why the author decided to use this as the for why large companies can not innovate, this is a much better piece of evidence for do not innovate lazily.
While the author's point about bureaucracy, infrastructure, and "the street" can certainly add inertia and friction to innovation one example of one failure at one company does not an axiom make. I am going to take this thesis in a completely different direction and apply to entrepreneurism; go big or go home. Gerber is a warning about failed innovation not because Gerber was big but because Gerber was simply not innovative enough. Aspiring entrepreneurs try solve problems, successful entrepreneurs solve them with viable and desirable solutions. Gerber perceived the problem but delivered a terrible solution, so the axiom that I would extract from the Gerber story is to innovate thoroughly and deliver a desirable solution. Do not give the market more baby food and call it adult food; get out of your comfort zone, get outside of the box, shift those paradigms and solve problems the market has with solutions it actually wants! That is the axiom here; that is the lesson for entrepreneurs, the lesson is not that big companies can not innovate. Not only are they perfectly capable of doing so, but they are extremely well equipped to do so.
The Irony:
When reading the article I had a few observations that could best be summed up as "ironic". A big company, due to its size should be in a superior position to innovate relative to a start up. What they lack in agility they most certainly can make up for with pure firepower. A large company would have more cash, more talent, more means of production, more distribution channels, more branding, more advertising, and all of the other things anyone could ever need to detect a problem, engineer a solution, and bring it to fruition. So they most certainly CAN innovate, they are just told not to, and this only compounds the irony. The shareholders and "the street" want large companies to stay safe, to grow revenue, protect/grow margins, and generate earnings per share. The reason this is ironic is that the population [uniquely] positioned to reap the biggest rewards from innovation are actually the shareholders who are discouraging it. This reinforces the argument made in a Whole Foods article that I analyzed earlier about customer focus. Whole Foods has gotten away from "shareholder focus" and embraced "stakeholder focus", with customers as a key stakeholders and the highest priority. If firms were less beholden to "the street" then they could conceivably usher in new growth opportunities once their investments start to yield returns. One of the tenants of American Capitalism is that it takes money to make money, and innovation usually takes money, so why not use the money to make more of it?
The Flawed Premise:
Part of the allure of the article's thesis is that it is extremely seductive to our intuition and dare I say to our naivete. There is a tremendous amount of appeal to the notion of a scrappy underdog overcoming the odds and growing into a powerhouse. Alternatively, one may view a start up as "untainted" by "the street" and able to perceive actual problems beyond the annual report to shareholders. Last but not least, also appealing is the intuitive notion that a young and small firm can be more adaptive and more experimental in its approach and as a result more innovative. All of these are valid reasons why a small firm or a start up may be innovative, but the most compelling reason is also the simplest; a start has to be innovative in order to survive and eventually thrive. Amazon, Apple, Google, Oracle, Microsoft, Facebook, and so many more companies that are inspirational to start ups and entrepreneurs were once small shops that perceived a problem and proposed a solution (the core of entrepreneurship). If you do not have the critical innovation necessary to entice venture capitalists and take your target market by storm how in the world does your business plan ever become a multi-national blue chip on the Fortune 500? Barring anomalous circumstances, a start up can not hope to compete (and win) based upon price so it must offer something that competitors can not, especially new entrants into established industries. That something that the competition does not have is the fruit of innovation.
So if small companies innovate because they must not because they can where does that leave big companies that want to innovate? Mr. Wessel used a single example (Gerber) to forge his axiom so I will use a single example to not only counter it but also demonstrate how a company can succeed if it surmounts the resistance generated by the irony explained above. My employer, CVS Caremark, is by most definitions a big company, and yet it is an innovative one. Back in 2007/2008 CVS Retail merged with Caremark a PBM to create the world's first retail pharmacy-pharmacy benefits management hybrid company. This was a grand experiment and until recently "the street" was no fond of the conglomerate and encouraged it to revert back into two distinct enterprises. The street was only concerned with financials and metrics, it was not interested in new pharmacy benefits and synergies like "Pharmacy Advisor", "90 Day At Retail", "Maintenance Choice", and so on. The street was transfixed on comparing CVS Caremark to Express Scripts or Walgreens, not realizing that neither comparison was valid, since CVS Caremark could do things that neither of those companies could hope to accomplish, as we like to say, "CVS Caremark is an industry of one". In short the street was more concerned with next quarter's cash flow instead of the long term prospects and ROI for this risky (innovative) venture. Now the shareholders are excited and now the street wants to see what we do next as we continue to innovate pharmacy and healthcare, as we continue to "help people on their path to better health". Tom Ryan (former CEO) once said in a speech that he eventually wanted people to look at CVS Caremark and say that "CVS 'gets' pharmacy, that CVS 'gets' healthcare", it's taken about 4 years but I think people are starting to finally say that.
CVS is currently in high gear for innovation. The entire company has been challenged by our current CEO, Larry Merlo to innovate. So here is CVS, 18th on the Fortune 500 with innovation not being considered a nice pet project, but an integral component of its multi-year strategy. That is just a single example, but there are more all the way up and down the Fortune 500 and beyond.
Gerber and the Entrepreneurial Lesson:
Gerber's innovation did not fail because Gerber is a huge company, Gerber's innovation failed because it did not innovate hard enough. You can not pour baby food into a larger jar and call it adult food, that is not even innovation that is laziness. Had Gerber attacked the adult food market with actual adult food it could have leveraged its massive resources to go toe to toe with Swanson in the pre-made dinners market. Gerber would have been known for wholesome and nutritious, after all who would feed their baby nutritionally void garbage right? If Gerber was good enough for your child it would certainly be good enough for you. Instead of making real adult food Gerber made bigger jars of baby food, completely missing the point of both products. Babies do not have refined palettes or teeth so they need liquified food, adults have teeth and refined palettes so they do not want mush, this is so obvious it is painful to type. I have no idea why the author decided to use this as the for why large companies can not innovate, this is a much better piece of evidence for do not innovate lazily.
While the author's point about bureaucracy, infrastructure, and "the street" can certainly add inertia and friction to innovation one example of one failure at one company does not an axiom make. I am going to take this thesis in a completely different direction and apply to entrepreneurism; go big or go home. Gerber is a warning about failed innovation not because Gerber was big but because Gerber was simply not innovative enough. Aspiring entrepreneurs try solve problems, successful entrepreneurs solve them with viable and desirable solutions. Gerber perceived the problem but delivered a terrible solution, so the axiom that I would extract from the Gerber story is to innovate thoroughly and deliver a desirable solution. Do not give the market more baby food and call it adult food; get out of your comfort zone, get outside of the box, shift those paradigms and solve problems the market has with solutions it actually wants! That is the axiom here; that is the lesson for entrepreneurs, the lesson is not that big companies can not innovate. Not only are they perfectly capable of doing so, but they are extremely well equipped to do so.
Saturday, September 29, 2012
Pain is Weakness Leaving Your Value Proposition (Persona Pain/Gain)
Today's blog post is Persona Pain/Gain Analysis from the perspective of a health insurance company (e.g. Aetna, United Health, etc) and how my business plan group's product "The One Goal Console" may affect them. Since the insurance company would be paying medical bills related to services performed at hospitals that may or may not use the console they are affected indirectly, however, as I will show below they can persuade hospitals to purchase or reject our product so they are an important market for us to engage.
What Does a Bad Day Look Like?
For a health insurance company a bad day can vary but the most common kind of bad day is one where a lot of cash is paid out (this is intuitive). However, the worst kind of bad day is most likely one where a lot of cash is paid out for services that could have been mitigated or avoided had an alternative provider or alternative clinical intervention been utilized.
What is Their Fear?
A health insurance company, like most insurance companies, has one complex and multi-faceted threat which is insolvency. When an insurance company is insolvent it means that its liabilities exceed its ability to pay. While a properly underwritten and risk pooled insurance company should be able to avoid this, it is possible to have operational loss ratios (i.e. losses/premiums) decay over time, especially if underwriting and pricing methodology is not up to date. A prior employer of mine used to follow a business model that allowed for operational loss ratios over 100% (i.e. they paid more in claims than premiums) and could sustain this due to a very bullish stock market and very high return on investments. When the market tanked in late 2008 so did the comprehensive loss ratio (i.e. losses/total income) and the company suffered. Most successful insurance companies run at a 85% or better operational loss ratio since the stock crash in the 1980s to help reduce the dependency on investments to remain solvent. Insolvency for an insurance company is essentially a death blow to the organization so that is a very serious and very real fear for any insurance company. Tying this back to health insurance, an anomalous number of "shock losses" (single cases over $100K is the typical threshold) can cause an insurance company to fold. Examples of shock losses are premature babies, organ transplants, renal failure, and readmission (i.e. someone having 2 or more hospital stays within 30-90 days).
What is Their Responsibility?
A health insurance company's responsibility to their members is to pay for services as outlined in the contract that the plan lays out. A health insurance company's responsibility to its network providers is to pay for services rendered at the rates agreed upon by both parties. In some cases, the insurance company is also responsible to its share holders to return a profit (i.e. a good loss ratio). There has been some growing tension in the public regarding the responsibility to shareholders as adversarial to the responsibility to members and providers. This is intuitive since covering more procedures at more generous costs cuts into profits. Part of this tension is addressed by PPACA (aka "Obamacare"), and is a tangent unto itself. This blog post simply lays out the 3 responsibilities.
What are the Obstacles?
Aside from the tension that arises due to responsibility to shareholders being at odds at times with responsibilities to members and providers the biggest obstacle to an health insurance company is cost containment. Leaving out the legislative impact of PPACA on health insurance companies and focusing on how things have been there are many drivers of healthcare cost that insurance companies have to confront. A population that has a large aging component (baby boomers), a population that is growing progressively unhealthier due to poor diet and lack of exercise, continued inappropriate use of emergency rooms, delayed pregnancies (i.e. older mothers), and medical R&D all contribute to escalating medical costs. This is further exacerbated by the risk of fraud, whether bill for unperformed services or performing useless services, and societal pressure to cover more and more procedures and expenses at little to no cost to the members. In addition the sluggish economy places extra strain on insurance company revenue since investment income (a very large and important component of revenue stream) is hamstrung relative to growth several years ago. All of these factors assault the company's operational and comprehensive loss ratios and make satisfying their 3 responsibilities more difficult.
What are Their Wants and Aspirations?
While it might seem naive to say that they want a healthy and productive population, that is not logically far off from the truth. A healthy population consumes fewer services which improves operational loss ratios and returns to shareholders. A health insurance company should want the best clinical outcomes for their members (i.e. the highest level of health possible) for the best price, or in other words, they want the maximum value for their healthcare expenditures. Value is defined as healthiness of membership.
How is Success Measured?
Loss ratios measure underwriting performance. Charlson Co-Morbidity Index and Verisk Health Risk Score measure the healthiness of a population. Earnings per share measures return to shareholders. Membership and provider satisfaction can be extrapolated from participation. If a lot of providers stop participating in network than the responsibility to providers has not been satisfied, if a lot of members leave for other providers than the responsibility to members has not been satisfied.
What Do We Offer?
The One Goal Console is a product that is sold to hospitals, not insurance companies, so how do we help insurance companies. First a quick aside on lesser known relationship between hospitals and insurance companies. Most large insurance companies designate specific hospitals as centers of excellence (or some synonym) for specific conditions. When a hospital is designated a center of excellence several important consequences emerge. First, the hospital gets a slightly better compensation rate (for example they may get $11,000 for a broken leg instead of $10,000) but in addition they also get a lot more traffic from the membership of that insurance company. Most surgical intervention has a pre-authorization requirement to ensure that it is medically necessary, during pre-authorization, a case manager or other insurance company employee has an opportunity to recommend an alternative doctor or alternative hospital. For example, in Rhode Island, a prospective knee surgery patient may be referred to Miriam Hospital instead of Memorial Hospital. This leads to Miriam Hospital getting more traffic, more surgeries, and more revenue per surgery. For the health insurance company they want to steer members to centers of excellence because the designation is earned through clinical excellence. If Miriam hospital costs $11,000 for a knee surgery that almost never requires further intervention but Memorial hospital costs $10,000 for a knee surgery that has a 5% complication rate (and complications can be extremely costly) then it would behoove the insurance company to send its knee surgery candidates to Miriam since in the long run it is more profitable (good for shareholders) but it also means better health outcomes for the members (good for members). In essence, when a health insurance company steers members to centers of excellence it is ameliorating the tension between its two "dueling" responsibilities.
What the One Goal Console offers is a way for hospitals to improve clinical outcomes for admitted patients. Faster updates allow nurses to intervene during a crisis sooner, fewer beeps and wires mean less patient stress (affects outcomes/recovery), better recording/tracking reduces medical error, and so on. Conceivably this product could be a key differentiator for hospitals that want to either attain or maintain their center of excellence rating with insurance companies. Insurance companies, always sensitive to cost and clinical outcomes, may pressure network hospitals to adopt this technology once it is shown to signigficantly improve clinical outcomes. Ultimately while our customers are medical providers and hospitals, the value of our product permeates the entire medical and healthcare industry. Center of excellence designation increases hospital revenue and profitability, it leads to better clinical outcomes which leads to better loss ratios for insurance companies and better health outcomes for members, healthier members further improve medical insurance loss ratios and eventually shareholder value. This is the value of the One Goal Console, and this is what we offer to insurance companies, a way to improve health outcomes of their membership and financial outcomes of their operations.
What Does a Bad Day Look Like?
For a health insurance company a bad day can vary but the most common kind of bad day is one where a lot of cash is paid out (this is intuitive). However, the worst kind of bad day is most likely one where a lot of cash is paid out for services that could have been mitigated or avoided had an alternative provider or alternative clinical intervention been utilized.
What is Their Fear?
A health insurance company, like most insurance companies, has one complex and multi-faceted threat which is insolvency. When an insurance company is insolvent it means that its liabilities exceed its ability to pay. While a properly underwritten and risk pooled insurance company should be able to avoid this, it is possible to have operational loss ratios (i.e. losses/premiums) decay over time, especially if underwriting and pricing methodology is not up to date. A prior employer of mine used to follow a business model that allowed for operational loss ratios over 100% (i.e. they paid more in claims than premiums) and could sustain this due to a very bullish stock market and very high return on investments. When the market tanked in late 2008 so did the comprehensive loss ratio (i.e. losses/total income) and the company suffered. Most successful insurance companies run at a 85% or better operational loss ratio since the stock crash in the 1980s to help reduce the dependency on investments to remain solvent. Insolvency for an insurance company is essentially a death blow to the organization so that is a very serious and very real fear for any insurance company. Tying this back to health insurance, an anomalous number of "shock losses" (single cases over $100K is the typical threshold) can cause an insurance company to fold. Examples of shock losses are premature babies, organ transplants, renal failure, and readmission (i.e. someone having 2 or more hospital stays within 30-90 days).
What is Their Responsibility?
A health insurance company's responsibility to their members is to pay for services as outlined in the contract that the plan lays out. A health insurance company's responsibility to its network providers is to pay for services rendered at the rates agreed upon by both parties. In some cases, the insurance company is also responsible to its share holders to return a profit (i.e. a good loss ratio). There has been some growing tension in the public regarding the responsibility to shareholders as adversarial to the responsibility to members and providers. This is intuitive since covering more procedures at more generous costs cuts into profits. Part of this tension is addressed by PPACA (aka "Obamacare"), and is a tangent unto itself. This blog post simply lays out the 3 responsibilities.
What are the Obstacles?
Aside from the tension that arises due to responsibility to shareholders being at odds at times with responsibilities to members and providers the biggest obstacle to an health insurance company is cost containment. Leaving out the legislative impact of PPACA on health insurance companies and focusing on how things have been there are many drivers of healthcare cost that insurance companies have to confront. A population that has a large aging component (baby boomers), a population that is growing progressively unhealthier due to poor diet and lack of exercise, continued inappropriate use of emergency rooms, delayed pregnancies (i.e. older mothers), and medical R&D all contribute to escalating medical costs. This is further exacerbated by the risk of fraud, whether bill for unperformed services or performing useless services, and societal pressure to cover more and more procedures and expenses at little to no cost to the members. In addition the sluggish economy places extra strain on insurance company revenue since investment income (a very large and important component of revenue stream) is hamstrung relative to growth several years ago. All of these factors assault the company's operational and comprehensive loss ratios and make satisfying their 3 responsibilities more difficult.
What are Their Wants and Aspirations?
While it might seem naive to say that they want a healthy and productive population, that is not logically far off from the truth. A healthy population consumes fewer services which improves operational loss ratios and returns to shareholders. A health insurance company should want the best clinical outcomes for their members (i.e. the highest level of health possible) for the best price, or in other words, they want the maximum value for their healthcare expenditures. Value is defined as healthiness of membership.
How is Success Measured?
Loss ratios measure underwriting performance. Charlson Co-Morbidity Index and Verisk Health Risk Score measure the healthiness of a population. Earnings per share measures return to shareholders. Membership and provider satisfaction can be extrapolated from participation. If a lot of providers stop participating in network than the responsibility to providers has not been satisfied, if a lot of members leave for other providers than the responsibility to members has not been satisfied.
What Do We Offer?
The One Goal Console is a product that is sold to hospitals, not insurance companies, so how do we help insurance companies. First a quick aside on lesser known relationship between hospitals and insurance companies. Most large insurance companies designate specific hospitals as centers of excellence (or some synonym) for specific conditions. When a hospital is designated a center of excellence several important consequences emerge. First, the hospital gets a slightly better compensation rate (for example they may get $11,000 for a broken leg instead of $10,000) but in addition they also get a lot more traffic from the membership of that insurance company. Most surgical intervention has a pre-authorization requirement to ensure that it is medically necessary, during pre-authorization, a case manager or other insurance company employee has an opportunity to recommend an alternative doctor or alternative hospital. For example, in Rhode Island, a prospective knee surgery patient may be referred to Miriam Hospital instead of Memorial Hospital. This leads to Miriam Hospital getting more traffic, more surgeries, and more revenue per surgery. For the health insurance company they want to steer members to centers of excellence because the designation is earned through clinical excellence. If Miriam hospital costs $11,000 for a knee surgery that almost never requires further intervention but Memorial hospital costs $10,000 for a knee surgery that has a 5% complication rate (and complications can be extremely costly) then it would behoove the insurance company to send its knee surgery candidates to Miriam since in the long run it is more profitable (good for shareholders) but it also means better health outcomes for the members (good for members). In essence, when a health insurance company steers members to centers of excellence it is ameliorating the tension between its two "dueling" responsibilities.
What the One Goal Console offers is a way for hospitals to improve clinical outcomes for admitted patients. Faster updates allow nurses to intervene during a crisis sooner, fewer beeps and wires mean less patient stress (affects outcomes/recovery), better recording/tracking reduces medical error, and so on. Conceivably this product could be a key differentiator for hospitals that want to either attain or maintain their center of excellence rating with insurance companies. Insurance companies, always sensitive to cost and clinical outcomes, may pressure network hospitals to adopt this technology once it is shown to signigficantly improve clinical outcomes. Ultimately while our customers are medical providers and hospitals, the value of our product permeates the entire medical and healthcare industry. Center of excellence designation increases hospital revenue and profitability, it leads to better clinical outcomes which leads to better loss ratios for insurance companies and better health outcomes for members, healthier members further improve medical insurance loss ratios and eventually shareholder value. This is the value of the One Goal Console, and this is what we offer to insurance companies, a way to improve health outcomes of their membership and financial outcomes of their operations.
Wednesday, September 26, 2012
The Power of Defining The Problem (Article Analysis)
My latest article analysis comes today from the Harvard Business Review. The article is called "The Power of Defining the Problem" and it was written by Dwayne Spradlin, here's the link (http://blogs.hbr.org/cs/2012/09/the_power_of_defining_the_prob.html).
So What's the Problem Man?
In a previous post I defined entrepreneurship as problem solving at its most fundamental level. With this as my thesis it seems obvious why today's article was relevant. As a clinical researcher and statistician this topic also hits very close to home for me outside of the classroom. Defining the problem before you start to work at a solution is so straight forward it is almost taken for granted, and yet I see poorly defined problems being tackled by poorly designed methodologies on a somewhat regular basis. This could be a major reason why start ups falter, to borrow from fellow ETR500 blogger John Levin, you can not start with a solution and back into a problem. There are plenty of examples of this behavior; developing a product then trying to "create" its market, presupposing that a clinical intervention works before you start doing an actual ROI analysis, or inventing an entire new footwear paradigm that nobody was looking for (Timberland case). These are examples of solutions that either failed to address a real problem, or facilitated poor problem solving with questionable methodologies. How can someone arrive at a destination without first ensuring that the destination is a real place and then determining the logistics for getting there?
Your Problem is Finding Your Problem!
Now that we appreciate the value of a well-defined problem, how do you define it. The article highlights 3 examples of simply asking the right question. Rather than say "we need a way to handle this frozen oil" Exxon said "we need a way to move work with extremely viscous liquids". I do this at work quite a bit, whether it is converting a business question into a data question, or finding additional insights within the data for management (the mythical unasked question). For example, I recently conducted research on racial disparity in healthcare; the question from management was a very open, very vague "do we have any disparities" however, that is a poorly defined problem. To make the problem more tangible I isolated several key metrics that would be reflective of racial disparities and then investigated those and reported results. So not only does management get a simple "yes, there are disparities", which should have been expected given the research by Johns Hopkins University, but now they know what specific disparities exist, how to mitigate them, and where to focus their efforts. That is like the Exxon problem; we knew something needed to change, however, through refinement we were able to pinpoint not only what needs to change but also how to change it.
So Do I Still Have a Problem After I Define My Problem?
One of the biggest pitfalls in research is bad experiment design. While this topic is probably worthy of its own blog post, I will touch on it briefly. Experiment design is so important my master's program at Northeastern dedicated an entire course to it, to put it in perspective. A good experiment, a good investigation, has to be freed from bias. For example, when you conduct an ROI analysis motivated by the question "so how big was our ROI" instead of "did we produce an ROI at all" the mentality of the analyst is going to be different. This is a very easy trap to fall into and there are several logical fallacies that address and attempt to combat this. For brevity I will distill experiment design to a single nugget; a good control group is the absolute most important thing for a good experiment. It does not matter how sophisticated your statistical tools, or how many best practices you want to leverage, if the control group is bad or even worse, non-existent, then your problem-solving methodology has a very serious problem.
Bottom Line For Entrepreneurs:
Without a clearly defined problem, you can not solve it. If you are not solving problems as an entrepreneur then what are you doing? The nature of entrepreneurship is to solve problems, sloppily defined problems get sloppily designed solutions, but how many people are in the market for sloppy? If you want to succeed your mission, your motivation, your raison d'etre has to be clearly defined. You can not win at step 10 if you botched step 0, step 0 is clearly defining your problem. Once the problem is defined, the methodology can emerge, and the solution can reach fruition. Problem-solving does not have to be problematic.
So What's the Problem Man?
In a previous post I defined entrepreneurship as problem solving at its most fundamental level. With this as my thesis it seems obvious why today's article was relevant. As a clinical researcher and statistician this topic also hits very close to home for me outside of the classroom. Defining the problem before you start to work at a solution is so straight forward it is almost taken for granted, and yet I see poorly defined problems being tackled by poorly designed methodologies on a somewhat regular basis. This could be a major reason why start ups falter, to borrow from fellow ETR500 blogger John Levin, you can not start with a solution and back into a problem. There are plenty of examples of this behavior; developing a product then trying to "create" its market, presupposing that a clinical intervention works before you start doing an actual ROI analysis, or inventing an entire new footwear paradigm that nobody was looking for (Timberland case). These are examples of solutions that either failed to address a real problem, or facilitated poor problem solving with questionable methodologies. How can someone arrive at a destination without first ensuring that the destination is a real place and then determining the logistics for getting there?
Your Problem is Finding Your Problem!
Now that we appreciate the value of a well-defined problem, how do you define it. The article highlights 3 examples of simply asking the right question. Rather than say "we need a way to handle this frozen oil" Exxon said "we need a way to move work with extremely viscous liquids". I do this at work quite a bit, whether it is converting a business question into a data question, or finding additional insights within the data for management (the mythical unasked question). For example, I recently conducted research on racial disparity in healthcare; the question from management was a very open, very vague "do we have any disparities" however, that is a poorly defined problem. To make the problem more tangible I isolated several key metrics that would be reflective of racial disparities and then investigated those and reported results. So not only does management get a simple "yes, there are disparities", which should have been expected given the research by Johns Hopkins University, but now they know what specific disparities exist, how to mitigate them, and where to focus their efforts. That is like the Exxon problem; we knew something needed to change, however, through refinement we were able to pinpoint not only what needs to change but also how to change it.
So Do I Still Have a Problem After I Define My Problem?
One of the biggest pitfalls in research is bad experiment design. While this topic is probably worthy of its own blog post, I will touch on it briefly. Experiment design is so important my master's program at Northeastern dedicated an entire course to it, to put it in perspective. A good experiment, a good investigation, has to be freed from bias. For example, when you conduct an ROI analysis motivated by the question "so how big was our ROI" instead of "did we produce an ROI at all" the mentality of the analyst is going to be different. This is a very easy trap to fall into and there are several logical fallacies that address and attempt to combat this. For brevity I will distill experiment design to a single nugget; a good control group is the absolute most important thing for a good experiment. It does not matter how sophisticated your statistical tools, or how many best practices you want to leverage, if the control group is bad or even worse, non-existent, then your problem-solving methodology has a very serious problem.
Bottom Line For Entrepreneurs:
Without a clearly defined problem, you can not solve it. If you are not solving problems as an entrepreneur then what are you doing? The nature of entrepreneurship is to solve problems, sloppily defined problems get sloppily designed solutions, but how many people are in the market for sloppy? If you want to succeed your mission, your motivation, your raison d'etre has to be clearly defined. You can not win at step 10 if you botched step 0, step 0 is clearly defining your problem. Once the problem is defined, the methodology can emerge, and the solution can reach fruition. Problem-solving does not have to be problematic.
Thursday, September 20, 2012
A3 Report for Healthcare Strategy
For this week's formal assignment I decided to do an A3 Report as if my elevator pitch were rolled out to a single company. My elevator pitch was for a company idea called "Invigorate Health Strategy" and below is the essential framework that would be applied to a client company faced with progressively increasing healthcare costs. The perceived problem/challenge is the healthcare costs and deteriorating wellness associated with the current healthcare system. The proposed solution is to switch paradigms away from "repairing the sick" to "keeping the healthy people healthy". Given that the vast majority of people are healthy from birth, that most chronic (and costly) conditions are preventable, and that it costs far less to prevent a condition than to treat it, this radically different approach should have tremendous ROI and much better outcomes in terms of quality of life and productivity. I do not have the nifty graphics from the MIT Sloan article, but the objective is similar.
Essentially the objective of this proposed framework is to restructure health and wellness strategies around keeping healthy people healthy instead of treating the sick as cheaply as possible. My strategy was heavily inspired by Dr. Dee Eddington of the University of Michigan and his research on public health, health strategy, and healthcare cost management. This strategy was adapted from his book "Zero Percent Trend" and most the credit behind framing the problem and seeing the path towards the solution belongs to him. To say his work has been inspirational for me in my capacity as a healthcare and clinical program analyst would be a serious understatement. The aforementioned book "Zero Percent Trend" has shown me the possibilities and opportunities within the healthcare industry and gave me a huge boost to motivation and enthusiasm to try to make a difference, in all honesty it may have helped me find my true calling/vocation.
Essentially the objective of this proposed framework is to restructure health and wellness strategies around keeping healthy people healthy instead of treating the sick as cheaply as possible. My strategy was heavily inspired by Dr. Dee Eddington of the University of Michigan and his research on public health, health strategy, and healthcare cost management. This strategy was adapted from his book "Zero Percent Trend" and most the credit behind framing the problem and seeing the path towards the solution belongs to him. To say his work has been inspirational for me in my capacity as a healthcare and clinical program analyst would be a serious understatement. The aforementioned book "Zero Percent Trend" has shown me the possibilities and opportunities within the healthcare industry and gave me a huge boost to motivation and enthusiasm to try to make a difference, in all honesty it may have helped me find my true calling/vocation.
Wednesday, September 19, 2012
Who Doesn't Love Data? (Article Analysis)
I stumbled upon this gem today on Harvard Business Review's site (http://blogs.hbr.org/cs/2012/09/will_big_data_kill_all_but_the.html?cm_mmc=SocialHub-_-3271-_--_-6807223796479021584). The article focuses on my area of expertise, business intelligence and data mining. To be very blunt it's a great time to be a math person. To be honest, I think the author is making a lot of fuss about something that is not particularly fuss worthy, the commenter Simon Karpen actually had the best observation, in my opinion, which was basically that if a retailer does nothing but sell stuff, it will lose to Amazon. My employer and a previous employer both use extensive data mining to match customers to products and help drive bigger basket sizes/orders/etc. Ultimately however, if a retailer does not provide something besides the widget in my basket, I am probably just going to order it off of Amazon, unless I need it now.
All of those key tags and club cards that every single retailer wants you to sign up for is basically a way to suck data into a database for mining. This mining goes beyond circulars and emails and starts to get into individualized coupons and other specials. For example, if a customer is consistently hovering around a $20 basket, most retailers will start hitting them with $5 off of $25 in an effort to try to force the basket size to drift up and stabilize at a new higher equilibrium point. These approaches to marketing eliminate the proverbial cherry picker and also help minimize cannibalization. Why give $5 off of $25 to the shopper that consistently hits a $25 basket when you could give them $10 off of $40?
The author seems to believe that "big data" will give big retailers even bigger advantages over small retailers and ultimately squash them. While small retailers can not directly compete with big retailers, since by the nature of the size difference the data would be more robust for large retailers, they can be fast followers in many cases. Since retail margins are very narrow, if the smaller (and usually more agile) little guys can successfully play the role of the fast follower they can emulate or recreate the insights provided by the big retailers data bases without having to foot the bill for the data gathering or analyzing. Furthermore, as stated above, if the only differentiation is price, then the lowest price merchant will usually win the business in the end anyway. Smaller retailers already have trouble competing on price anyway so it's not like the insights from data will widen the gulf between the huge retailers and the small retailers or add new axes upon which to compete.
What data can not do however is provide a different customer experience, and this is where smaller retailers can still attack the big guys, especially for goods that are less price driven. While Walmart, Krogers, Target, et al may be able to give me a $5 off of $25 coupon to entice me to buy more their staff can not provide the same level of service that smaller niche retailers can. Your local tailor can take the time to help you pick out a matching tie for your new shirt, the staff at Whole Foods will drop whatever they are doing to help you find exactly what you are looking for, the local bicycle shop will take the time to fit you for a bike and help you navigate the options, and so on. These are the kinds of user experience differentiators that larger and by consequence, more austere and impersonal retailers can not provide.
Take Away For Entrepreneurs:
This is a little bit of a stretch to tie into start ups, since a new company most likely will not have access to "big data" however, it does provide some perspective. The first is that the article touches upon the power of data and data-mining. Considering we just discussed Lean Start Up and the need to contemplate "pivot, perish, or persevere" being able to understand and utilize data effectively is invaluable. This article reinforces that notion, but from a different angle, as these firms are not necessarily facing "P-P-P". However the lesson to use data to add insights and solve problems is still here. The second lesson from the article is more so an awareness of the threat/advantage that large firms possess in their ability to acquire and mine enormous data sets. A start up, by its very nature, can not compete along that axis as the resources and infrastructure will just not be in place. This places an even greater need for sufficient differentiation from established firms, and while this article focuses on retail it is not a stretch to take this lesson into other markets and industries. It is this lesson that is most important to take away from the article. Since the course focuses on innovation, and difficult to copy strategies, value propositions, etc are all part and parcel to innovation and by extension differentiation, this article just reinforced how important these qualities are for start ups trying to get off the ground.
All of those key tags and club cards that every single retailer wants you to sign up for is basically a way to suck data into a database for mining. This mining goes beyond circulars and emails and starts to get into individualized coupons and other specials. For example, if a customer is consistently hovering around a $20 basket, most retailers will start hitting them with $5 off of $25 in an effort to try to force the basket size to drift up and stabilize at a new higher equilibrium point. These approaches to marketing eliminate the proverbial cherry picker and also help minimize cannibalization. Why give $5 off of $25 to the shopper that consistently hits a $25 basket when you could give them $10 off of $40?
The author seems to believe that "big data" will give big retailers even bigger advantages over small retailers and ultimately squash them. While small retailers can not directly compete with big retailers, since by the nature of the size difference the data would be more robust for large retailers, they can be fast followers in many cases. Since retail margins are very narrow, if the smaller (and usually more agile) little guys can successfully play the role of the fast follower they can emulate or recreate the insights provided by the big retailers data bases without having to foot the bill for the data gathering or analyzing. Furthermore, as stated above, if the only differentiation is price, then the lowest price merchant will usually win the business in the end anyway. Smaller retailers already have trouble competing on price anyway so it's not like the insights from data will widen the gulf between the huge retailers and the small retailers or add new axes upon which to compete.
What data can not do however is provide a different customer experience, and this is where smaller retailers can still attack the big guys, especially for goods that are less price driven. While Walmart, Krogers, Target, et al may be able to give me a $5 off of $25 coupon to entice me to buy more their staff can not provide the same level of service that smaller niche retailers can. Your local tailor can take the time to help you pick out a matching tie for your new shirt, the staff at Whole Foods will drop whatever they are doing to help you find exactly what you are looking for, the local bicycle shop will take the time to fit you for a bike and help you navigate the options, and so on. These are the kinds of user experience differentiators that larger and by consequence, more austere and impersonal retailers can not provide.
Take Away For Entrepreneurs:
This is a little bit of a stretch to tie into start ups, since a new company most likely will not have access to "big data" however, it does provide some perspective. The first is that the article touches upon the power of data and data-mining. Considering we just discussed Lean Start Up and the need to contemplate "pivot, perish, or persevere" being able to understand and utilize data effectively is invaluable. This article reinforces that notion, but from a different angle, as these firms are not necessarily facing "P-P-P". However the lesson to use data to add insights and solve problems is still here. The second lesson from the article is more so an awareness of the threat/advantage that large firms possess in their ability to acquire and mine enormous data sets. A start up, by its very nature, can not compete along that axis as the resources and infrastructure will just not be in place. This places an even greater need for sufficient differentiation from established firms, and while this article focuses on retail it is not a stretch to take this lesson into other markets and industries. It is this lesson that is most important to take away from the article. Since the course focuses on innovation, and difficult to copy strategies, value propositions, etc are all part and parcel to innovation and by extension differentiation, this article just reinforced how important these qualities are for start ups trying to get off the ground.
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