Rousmaniere: Why Innovation is Hard

A Harvard Business School guru, Clayton Christensen, has written often on innovation, market disruption, and how newcomers in an industry upend the powers that be.  He recently wrote an article on why companies find it hard to innovate, and why many innovative projects fail. 

I shared the article with a very smart person with varied experience in workers’ comp claims.  That person responded with an insider’s explanation about why innovation is especially hard in workers’ comp claims management.  These voices form a chorus of two, the international guru calling on concepts, and the workers’ comp expert speaking in our dialect. 

The workers’ comp smarty pants points to the fragmentation of the market due to state rule.  Many types of obvious and desirable claims management improvements are, he says, in effect illegal, or require elaborate new licensing, approval, and certification.

And corporate risk managers are inured to the lackluster, lackadaisical product they have been getting. “We see this eroding very slowly as old line risk managers are replaced by younger quants,” my insider says. Workers’ comp is a minor overhead item for most clients with little impact on real corporate performance.

“Our clients are not expecting big changes in workers’ compensation and it’s unlikely that any innovations that drive even a 5% improvement in annual costs will be seen as worth the effort. Procurement departments hate innovation. Price trumps innovation.”

Even worse, “Workers’ comp has no track record of rewarding innovation whatsoever.   Any innovation is at least conceptually transparent the minute it hits the market and is soon copied by all players, immediately diluting any competitive advantage for the innovator.”

Let’s turn to Christensen, who wrote “The Hard Truth About Business Model Innovation,” in MIT Sloan Magazine (Fall 2016). One can’t easily summarize his tightly written article. But here are some select passages, dotted with some comments.

“Business models develop through predictable stages over time — and executives need to understand the priorities associated with each business model stage.  Business models by their very nature are designed not to change, and they become less flexible and more resistant to change as they develop over time. We often refer to these ingrained approaches as a business’ culture.”

“A business model [begins] with the creation of the new business unit and its business model, then shifting to sustaining and growing the business unit, and ultimately moving to wringing efficiency from it.”

Business cultures change through three successive models, according to Christensen.

Creation stage model: “A founding team armed with an idea, some funding and ambition, and sometimes a technology is entirely focused on developing a compelling value proposition — fulfilling a significant unmet need, or job. It’s useful to think of the members of the founding team as completely immersed in this search.” [PR: This reminds me of the energy and excitement of start-ups in our industry. I’ve been in a few and advised others.]

Scaling / sustainability stage model: “Whereas in the creation phase the business unit created customers, in the sustaining innovation phase it is building these customers into a reliable, loyal base and building the organization into a well-oiled machine that delivers the product or service flawlessly and repeatedly.

“As the business unit racks up sales, the voice of the customer gets louder.” [PR: Performance metrics emerge with a vengeance.] The business unit is now in the business of building processes. The performance metrics (lead) managers to direct investments toward growing the top line and maximizing the bottom line.” [PR: One Call Care Management, Medcor and pharmacy benefit managers exhibited these traits during their significant growth phases.] 

Efficiency model: [PR: This model captures the business climate in workers’ comp claims]. “At this point, the business unit begins to prioritize efficiency. The activities of efficiency innovation include outsourcing, adding financial leverage, optimizing processes, and consolidating industries to gain economies of scale. 

“Managers should not bemoan the shift to efficiency innovation. Over time, business units must become more efficient to remain competitive, and the shift to efficiency innovations as the predominant form of innovation activity is a natural outcome of that process.” 

Christensen explains why early phase innovation is choked off during the efficiency phase: “The business unit frequently achieves efficiency by shifting to a modular structure so that (functions) may be outsourced to third parties. The business unit reaps the efficiency rewards of modularization but leaves flexibility behind.”

This shines light of why mature claims organizations have difficulty in adopting early stage innovations, which target unaddressed “jobs” such as connecting people through technology most of us experience with Facebook, Google, and Amazon. Insurers and TPAs are not adept at perceiving that kind of connecting “job.” They are more comfortable with streamlining the completion of familiar jobs that were identified decades before.

What can a mature claims organization do to help early phase innovation within their own ranks? Christensen says, “managers should tread with caution in asking an existing business to take it on — and should instead consider creating a separate unit to pursue the new business model.”  

What claims payers are doing this?

ABOUT THE AUTHOR

Peter Rousmaniere is widely known throughout the workers’ compensation industry, both for his writing and consulting experience. Based in the picture perfect New England town of Woodstock, VT, he is a regular on the conference circuit, and is deeply in tune with trends and developments within the industry. His passion is writing and presenting on issues largely related to immigration, and he maintains a blog on the subject at www.workingimmigrants.com.

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