The high hidden costs of going rogue.

A large managed care company was experiencing multiple, on-going, inter-departmental turf battles that were beginning to damage the external credibility of the organization. It was a perfect example of data silos run amuck. The clinical, finance, sales, actuarial, claims and IT departments all had their own teams of analysts and IT staff generating their own reports, using their own datasets from their own systems, with their own definitions. Almost none of the data in any of the reports agreed with what was purported to be the same data coming from other departments. Even within some departments there were multiple reports that did not agree with each other. There was no system of record. No one version of the truth. At one point it was determined that there were seventeen different definitions for what constituted a patient bed-day (one insured individual admitted as an inpatient to a hospital for one day). It was becoming increasingly difficult for management to make decisions and run the company because nobody knew which information was accurate.

The company had grown organically over the last 25 years from less than $30 Million in annual revenues to over $2.5 Billion and had recently begun to toy with the idea of “going public.” Many of the people who had either helped start or grow the company were still with the organization. Many retained their original titles even though the scope of their duties now far exceeded their skillsets and what they had originally been hired to do. Many had been elevated to higher positions—to which they were arguably not qualified—by a founder and chief executive who valued their loyalty.

These people had personally cobbled together the original systems that allowed the company to get off the ground and had kept them operational long past their expected service lives. Although these systems had worked once, they were never designed for current volumes and requirements, and were incapable of efficiently exchanging information with the other systems with which they now needed to communicate.

In spite of all the reasons to make a change, the emotional attachments of these entrenched employees ran deep. Every attempted systems upgrade had either been blocked outright or significantly impeded by their unwillingness to abandon the “known” and relinquish control over their private data domains. A series of new CIOs brought in from the outside had failed to make headway with resolving these issues. Their vague arguments that new systems would make the company more efficient could never be supported either with credible explanations or detailed financial analyses, and therefore proved inadequate to persuade the recalcitrant and powerful stakeholders. That opposition continued until we helped the new CIO present the following arguments to the executive committee.

Your reporting strategy is your management strategy.
The most important principle that managers regularly fail to appreciate is that their reporting strategy for a process—what they communicate about their efforts to execute—is their management strategy for that process. An organization will focus where their leadership tells them to focus and ignore what their leadership ignores. The second principle is that there’s only one reason to write a report—to answer a business question. If you can’t state in plain English what that question is, if you can’t define what an answer to that question should look like, and if you aren’t convinced that getting the answer is important, then don’t waste time generating the report. The third principle is that people can only focus on seven to nine items at a time. If you ask them to focus on 20, they’ll effectively focus on none.

It was pointed out that management was violating every one of these principles and doing so repeatedly. No cohesive logic could be articulated for the conflicting reporting strategies being used by most of the departments. No rationale could be given for half the reports that were being produced. No explanation could be given for conflicting reports that effectively instructed staff to work in opposition to each other. When those who responded, “We’ve always done it this way” were asked, “Why?” a sickening silence fell over the room as the inadequacy of such arguments became embarrassingly apparent.

The message behind your actions is more important than your words.
It was explained that should an IPO materialize that investors would be looking at the company’s “story”—both for its market appeal and perceived ability to generate future cash flows. It was clear that the company had a story now—and it was not a good one. The inconsistent and conflicting messages that the different departments were delivering to customers (employers), patients, clinical providers and regulators left everyone involved with the clear impression that the company was poorly run at best and grossly incompetent at worst. And if the company couldn’t be counted on to manage its own business, what did that say about its ability to manage a patient’s health? This was not a story likely to instill confidence with either investors or existing constituents—and if that story were allowed to continued future business would surely suffer.

Alignment creates value. Chaos destroys it.
Alignment is a force multiplier—ten people in agreement can outperform 100 people who aren’t. An organization at war internally is fighting two enemies—itself and its competition. A house divided cannot stand. A team focused on one task is going to perform better, faster and cheaper than a team trying to juggle multiple competing agendas. The analogies are endless, but the point is the same. By indulging these data-wars the company was losing time, resources and money and those loses were growing at an exponential rate.

The formula for calculating the number of communication channels in a project or an organization is N*(N-1) where ‘N’ is the number of participants. If you have 100 people in an organization sharing one common message (one set of reports or facts), the number of channels is 100*99=9,900. If you have 100 people arguing over seven sets of reports, the number of channels is (100*7)*(99*7)=485,100. That creates just over 475,000 new opportunities for conflict, confusion and miscommunication. The bigger the organization grows the faster the opportunity for conflict expands and the more problems that have to be needlessly addressed. The intangible costs associated with addressing these problems are undeniable and large, but impossible to accurately estimate. The tangible costs of perpetuating the status quo are not.

This is costing the business and you a lot of money.
We sensed the message was beginning to sink in, but we pulled this final ace out from under our sleeve to make sure. As of the last quarter close the company was generating about $77 Million in annual net income. At the then current price/earnings ratio for public companies in their sector that would put the market capitalization of the business around $1.3 Billion. After an IPO the executive team would own about 30% of the business—meaning the value of their stock as a group would be about $390 Million. The annual costs to support all of these competing systems—including redundant analysts, dedicated IT staff, hardware, license and maintenance costs—was running about $22 Million. The annual amortization costs of a unified replacement system (calculated based on 200% of the proposed system purchase and implementation costs) was roughly $16 Million. The difference being a potential annual savings of $6 Million which translated into a $100 Million increase in the company’s market capitalization and an increase in the executive team’s stock value of just over $30 Million.

With those four arguments made the executive team voted unanimously to move to a new unified system.  By keeping those four arguments front and center they successfully made the transition over the course of the next two and a half years. Logic is great, but greed—and peer pressure—will always prevail in the end.