When I got home from my mission I took on a temp job as an insurance claims processor for a medical company until school started up. If someone had both VA insurance and private insurance, medical costs were supposed to be covered by the private insurance first. Often people would use their government insurance instead. In that situation, my group was responsible for processing government reimbursement claims. Previously the company had only had employees work on these when they had spare time, so months of backlog had built up.
After training, my group did a great job of efficiently processing the VA claims, and we got done with the backlog well before the company expected. After the backlog was finished, there were only enough current VA claims coming in for a couple people, but since we had done so well, they wanted to keep us longer. Previously the company had also contracted to process Medicare reimbursement claims, but their previous attempts had resulted in many errors. They decided to train us for processing the Medicare claims with the goal of having 99% accuracy.
In this change for the department, I felt the company did well at the first four steps for leading change. They had a sense of urgency (the government was threatening fines since the backlog had grown so long), had formed a powerful coalition, created a vision, and communicated that vision. However, on the fifth step, empowering others to act on the vision, I feel the company struggled. The following are examples of how employees were not empowered.
1. Although they had worked on the processing system, it was still difficult to use. There was no processing manual because the last group in charge of processing Medicare claims had created the process and either not written it down or written it down on sticky notes. Because the company had relatively high turnover in the processing department, and these claims were processed in another state, information was difficult to come by. The company tried to remedy this by creating a training manual during training. Also, the couple weeks of training were run on a test platform to see what errors came up. Even with this work, unknown errors still surfaced, slowing processing.
2. The company wanted to make sure to keep the highest performing processors. Periodically they would pull a high performer out of our group and place them in full time employment somewhere else. This decreased both the staff and skills available for the project. Because they knew I was leaving for school, they never offered me full time employment, so I got to experience the entire process.
3. Despite the fact that there were numerous problems and the system was more difficult to use, they did not significantly reduce quotas. This made everyone stressed because they expected high quality. Most people except the highest performers were having a hard time consistently meeting the quota. At the same time, there was a certain type of claim that would be incorrectly rejected in the system. If a claim was identified as one of these in the system, we were told to set them aside, which was much quicker than completely processing a claim. These claims were often clumped together to make an entire batch. Some people began looking specifically for batches of these claims to pad their numbers, resulting in many claims that were set aside and fewer that were processed.
I left for school before the process was complete, but I know many of the employees ended up leaving before the project was over.
Friday, March 23, 2012
Friday, February 24, 2012
More on the Hedgehog Concept
Good thing I had written an extra post a couple weeks ago because last week I forgot. This will be my fourth post. I have thought the hedgehog concept was awesome since I learned about it, and I found an article that applies directly to it.
The article Pinterest's Right of Web Passage - Huge Traffic, No Revenue in the WSJ talked about a company which my wife loves, Pinterest. Essentially, it is an online website where you can "pin" different media that you have found on the internet. Essentially it is an online scrapbook. Pinterest's popularity is surging, especially among women, because it is a place where they can keep images of clothes, decorations, food, or whatever else they want. They can repost them to facebook, twitter, blogs, etc. without having to search the internet to find it again.
From what the article says, would say that Pinterest has two of the three hedgehog categories down. First, they have a passion for what they do. Everyone at Pinterest seems excited about the company and what they can give to the community. Second, they are the best at what they do. In fact, at the moment, they are the only online scrap booking website. Companies have stopped focusing on facebook and other online advertising. Instead they are trying to get their products on people's pinterests so they can cheaply advertise to all their friends.
On the third section, profitability, they are having problems. At the moment, although they are a huge success, they are not profitable. Additionally, they aren't sure how they will make any significant revenue. The way most online companies that are even remotely similar to Pinterest gain revenue is through advertising. Pinterest feels having ad drops for items you might be interested in, like Amazon or Google, is not what they stand for and may alienate users. Currently, they have decided that they will keep improving their business and that a revenue opportunity will present itself eventually. Investors may be okay with that for now, but soon they will lose interest and take their funding with them. Hopefully Pinterest finds a revenue model soon because I know my wife will be upset if they aren't around anymore.
The article Pinterest's Right of Web Passage - Huge Traffic, No Revenue in the WSJ talked about a company which my wife loves, Pinterest. Essentially, it is an online website where you can "pin" different media that you have found on the internet. Essentially it is an online scrapbook. Pinterest's popularity is surging, especially among women, because it is a place where they can keep images of clothes, decorations, food, or whatever else they want. They can repost them to facebook, twitter, blogs, etc. without having to search the internet to find it again.
From what the article says, would say that Pinterest has two of the three hedgehog categories down. First, they have a passion for what they do. Everyone at Pinterest seems excited about the company and what they can give to the community. Second, they are the best at what they do. In fact, at the moment, they are the only online scrap booking website. Companies have stopped focusing on facebook and other online advertising. Instead they are trying to get their products on people's pinterests so they can cheaply advertise to all their friends.
On the third section, profitability, they are having problems. At the moment, although they are a huge success, they are not profitable. Additionally, they aren't sure how they will make any significant revenue. The way most online companies that are even remotely similar to Pinterest gain revenue is through advertising. Pinterest feels having ad drops for items you might be interested in, like Amazon or Google, is not what they stand for and may alienate users. Currently, they have decided that they will keep improving their business and that a revenue opportunity will present itself eventually. Investors may be okay with that for now, but soon they will lose interest and take their funding with them. Hopefully Pinterest finds a revenue model soon because I know my wife will be upset if they aren't around anymore.
Friday, February 3, 2012
Alaska Airlines and the Hedgehog Concept
I had prepared another article below, but when I saw this on, I knew I needed to write about it. In the WSJ, the article An Airline That Makes Money. Really. showed a great example of the hedgehog concept. In an interview, Bill Ayer, CEO of Alaska Airlines, described the typical model for the airline industry. If you are losing money, increase capacity to take advantage of economies of scale and ignore the other problems reducing profitability. With this strategy, the airline industry was down 25% last year in the markets.
Alaska Airlines decided to set a different focus: run an airline like any other business. In any other business expanding before you are able, you will run into financial trouble. Instead of expanding, they focused on improving operations to increase profitability, specifically, they focused on the metric cost per available seat mile.
So how was Alaska Airlines able to become the best at running a profitable business while facing the same obstacles as other airlines? First they helped their employees become passionate about the goal. They did this by helping show their employees the importance of a long term profitable business. Even in unions, employees jobs wouldn't be secure if Alaska Airlines wasn't around to employ them. This helped them to eliminate defined benefit pensions for new employees and negotiate reduced union salaries in return for profit sharing bonuses.
In order to learn what they needed to know to become the best at running an airline like a business, Ayer brought in successful businessmen such as Jim Collins, Jim Senegal, and Oren Smith. He also borrowed best practices from other industries and implemented them in Alaska Airlines.
Focusing on this single principle has benefited Alaska Airlines economically. They have a goal to reduce expenses by $300 million from 2003 by reducing their cost per available seat mile metric from 8.73 cents to 7.25 cents. So far, despite fuel costs rising 35% in 2011, they have reach 7.6 cents. Also, Alaska Airlines is the only pre-1978 carrier that has not filed for bankruptcy.
Alaska Airlines decided to set a different focus: run an airline like any other business. In any other business expanding before you are able, you will run into financial trouble. Instead of expanding, they focused on improving operations to increase profitability, specifically, they focused on the metric cost per available seat mile.
So how was Alaska Airlines able to become the best at running a profitable business while facing the same obstacles as other airlines? First they helped their employees become passionate about the goal. They did this by helping show their employees the importance of a long term profitable business. Even in unions, employees jobs wouldn't be secure if Alaska Airlines wasn't around to employ them. This helped them to eliminate defined benefit pensions for new employees and negotiate reduced union salaries in return for profit sharing bonuses.
In order to learn what they needed to know to become the best at running an airline like a business, Ayer brought in successful businessmen such as Jim Collins, Jim Senegal, and Oren Smith. He also borrowed best practices from other industries and implemented them in Alaska Airlines.
Focusing on this single principle has benefited Alaska Airlines economically. They have a goal to reduce expenses by $300 million from 2003 by reducing their cost per available seat mile metric from 8.73 cents to 7.25 cents. So far, despite fuel costs rising 35% in 2011, they have reach 7.6 cents. Also, Alaska Airlines is the only pre-1978 carrier that has not filed for bankruptcy.
Memory-chips and the Value Curve
The WSJ article Micron Chief Dies in Crash, mainly discusses the death of Micron CEO Steven Appleton in a plane crash; however, it also talks about the struggling micro-chip industry. Micron is the last remaining American semi-conductor company. Many of the current Japanese competitors are considering pulling out of the market, and consolidations are likely. The reason for the industry troubles can be seen in the simple value curve shown below.
The article states that with lower demand for computers, computer manufacturers are looking for lower prices. In addition, consumers always want the newest, and best thing. Memory-chips haven't had a drastic improvement in many years. A large reason for this is that research is very expensive in the industry, especially for such price sensitive products. While the chips' performance and reliability are always improving, consumers always want more.
The article states that with lower demand for computers, computer manufacturers are looking for lower prices. In addition, consumers always want the newest, and best thing. Memory-chips haven't had a drastic improvement in many years. A large reason for this is that research is very expensive in the industry, especially for such price sensitive products. While the chips' performance and reliability are always improving, consumers always want more.
Friday, January 20, 2012
GE and Profit Pools
Today on the WSJ website I found an article titled "GE Profit Slides Amid Margin Squeeze" by Kate Linebaugh and Bob Sechler. While I was reading this, I kept thinking that is was a great example of profit pools.
Profit at GE fell 18% year-over-year in the fourth quarter 2011. The article mainly focuses on two of GE's profitable segments: the industrial segment, and the lending/financing segment.
The industrial and financing segments clearly show how some profit pools are more lucrative than others. The industrial segment saw an increase in revenue of 10%; however because of increased price pressure from low demand and competitors, margins fell by 1.4% resulting in only a 1.9% increase in profit. On the other hand, the financing segment saw profits increase by 58% despite decreased revenue.
Even with the above information, GE is working on reducing their financing arm (as is evidenced by the decreased revenue). In the fourth quarter, GE was able to reduce the segment to 39.5% of earnings which is within their goal of 30% to 40%. Why would GE want to reduce their most profitable pool and focus on increasing a less profitable one? Three things came to mind.
1. Profit pools can be split into smaller pools. GE's financing arm gives loans for a number of different situations, including real estate development, consumer purchase, and industry. Not all of these pools is as profitable as others. In fact, the article states that GE is still suffering losses from a Japanese consumer finance business it sold off a year ago. This goes along with GE's plan to keep financing earnings between 30% and 40% while reducing the number of assets. Focusing on the more profitable financing segment will allow them to maintain profits with fewer assets.
2. Some profit pools may rely on other pools. GE's financing revenue is largely dependent on its sales of physical goods. If GE were to abandon their industrial and unprofitable segments, they would have no customers to sign up for financing. Essentially, the cost of keeping unprofitable or less profitable pools open are required to keep the larger profit stream coming.
3. Pools can be more or less profitable at different times. The article mentions that during the credit crisis, GE's financing segment experienced large losses. Because GE had allowed the segment to grow so large in comparison to other profit pools, this had a significant impact on GE as a whole. This is another reason GE was working on reducing its financing segment. By diversifying, GE is able to take advantage of increased profitability in different pools at different times and decreases the downside risk to the company if one pool performs poorly.
Profit at GE fell 18% year-over-year in the fourth quarter 2011. The article mainly focuses on two of GE's profitable segments: the industrial segment, and the lending/financing segment.
The industrial and financing segments clearly show how some profit pools are more lucrative than others. The industrial segment saw an increase in revenue of 10%; however because of increased price pressure from low demand and competitors, margins fell by 1.4% resulting in only a 1.9% increase in profit. On the other hand, the financing segment saw profits increase by 58% despite decreased revenue.
Even with the above information, GE is working on reducing their financing arm (as is evidenced by the decreased revenue). In the fourth quarter, GE was able to reduce the segment to 39.5% of earnings which is within their goal of 30% to 40%. Why would GE want to reduce their most profitable pool and focus on increasing a less profitable one? Three things came to mind.
1. Profit pools can be split into smaller pools. GE's financing arm gives loans for a number of different situations, including real estate development, consumer purchase, and industry. Not all of these pools is as profitable as others. In fact, the article states that GE is still suffering losses from a Japanese consumer finance business it sold off a year ago. This goes along with GE's plan to keep financing earnings between 30% and 40% while reducing the number of assets. Focusing on the more profitable financing segment will allow them to maintain profits with fewer assets.
2. Some profit pools may rely on other pools. GE's financing revenue is largely dependent on its sales of physical goods. If GE were to abandon their industrial and unprofitable segments, they would have no customers to sign up for financing. Essentially, the cost of keeping unprofitable or less profitable pools open are required to keep the larger profit stream coming.
3. Pools can be more or less profitable at different times. The article mentions that during the credit crisis, GE's financing segment experienced large losses. Because GE had allowed the segment to grow so large in comparison to other profit pools, this had a significant impact on GE as a whole. This is another reason GE was working on reducing its financing segment. By diversifying, GE is able to take advantage of increased profitability in different pools at different times and decreases the downside risk to the company if one pool performs poorly.
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