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 / Summer 2009 / Issue 55(originally published by Booz & Company)


Reframing Your Business Equation

Southwest’s consumer orientation helped the company avoid the blind spot in the industry equation. A hub-and-spoke model works well for freight — Walmart uses the same logic for its cross-docks to fill truckloads of goods as it routes them from suppliers to stores. Unlike the traditional majors, however, Southwest understood that its customers should not be treated like freight. And by starting with an important variable that its rivals had overlooked — the convenience of its customers — Southwest reframed the industry equation and transformed air travel.

Accuracy, not Efficiency
The Progressive Corporation offers another example of the power of reframing industry equations by starting with the customer. Unlike most businesses, which seek to make an operating profit, the insurance industry has traditionally accepted a model wherein claims and expenses exceed premiums, but the difference is covered by the return on the investment of premiums. Insurers work to keep expenses as low as possible, but ultimately make their profits by delaying the payment of claims to maximize the investment return. Progressive challenged this industry paradigm in 1990 with the introduction of its “immediate response” claims service. Embodied by the white SUVs driven by claims representatives equipped with laptop computers, this program paid claims in the field, often at the scene of the accident.

This innovation has been but one of many under the leadership of Peter Lewis, CEO since 1965 and son of the founder. Lewis has inculcated a customer-first philosophy that pushes the company to differentiated service levels unique within the industry. The service mind-set does not ignore the expense side of the equation. But rather than hold the claims to earn additional returns investing the premiums, Progressive realized that claims representatives could do a better job estimating costs by observing the car and accident in the field. These more accurate cost estimates, coupled with the willingness of customers to settle for a claims check in the field to avoid the hassle of the typical claims process, reduced the level of payouts and simultaneously increased customer satisfaction. Furthermore, the early payment typically prevents lawyers from getting between Progressive and its customers. When they do, it’s mostly the lawyers who benefit.

Other insurance providers centralized their claims representatives into a pooled resource to minimize idle time. Their paradigm led them to focus on minimizing this expensive labor cost; Progressive worried little about utilization and instead focused on speed and accuracy. Progressive cares about expenses as much as its competitors do, but recognized that the real leverage came from more accurate claims settlements, not lower operating expenses.

Incremental to Step Function
Looking beyond individual companies, we can also find that entire functions or disciplines become defined by equations that need to be reframed. Consider the world of information technology (IT), which has pursued continuous expansion of computing capacity as defined by Moore’s Law. When Gordon Moore, cofounder of the Intel Corporation, noted in 1965 that the number of transistors on a computer chip had doubled every 18 months since the invention of the integrated circuit in 1958, he was simply making an observation of an empirical pattern. But that observation became a “law” that, ever since, has driven the industry toward a goal of continuous expansion of computing capacity. It even led to analogous “laws” such as Kryder’s Law, which has encouraged a similar pattern for the cost of data storage.

Riding this ongoing cost curve, most corporate CIOs have continuously expanded corporate processing and storage capacity, and have then added increasingly complex applications to consume the available resources. This behavior offers a modern example of Parkinson’s Law, coined by C. Northcote Parkinson, a British naval historian. Commenting on the British government bureaucracy in a 1955 article in the Economist, Parkinson observed that “work expands so as to fill the time available for its completion,” and later IT observers have commented that data expands to fill the space available for storage. Swiss computer scientist Niklaus Wirth coined yet another law integrating Moore’s and Parkinson’s observations with the unfortunate conclusion that “software is getting slower more rapidly than hardware becomes faster.”

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