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CIGNA P&C A Turnaround Vision: Moving from the Bottom to the Top
Turning strategic vision into reality is a full-time job for everyone in the organization. The story of how CIGNA P&C achieved its vision is a classic tale of focus and alignment.
When Gerry Isom became president of CIGNA Property and Casualty (P&C) in 1993, he faced a formidable challenge: a very numbers-driven company that seemed unable to influence the direction the numbers were heading down. During the four years before Isom came on board, the company had lost more than $1 billion, and the combined ratio was 140%. (For every $1 premium coming in, the company was paying out $1.40 in losses and expenses.) In 1993 alone, CIGNA P&C lost $275 million. It was at the bottom of the fourth quartile in the P&C industry. Isom resolved to take the company into the top quartile. His strategy for getting there? To reshape CIGNA from a generalist insurance company, willing to underwrite a risk in any sector, to a specialist company that would underwrite only when it could be assured of better-than-average results.
Leading Strategic
Change
Gerry Isom came to CIGNA with a
strategic vision in mind, but he still had to make several
important changes before he could build a scorecard. He had to
restaff, reorganize, and revisit the market segments CIGNA was
servicing.
Starting at the top, Isom reinvigorated the executive council by bringing in four new hires to join the six members already on board. Twenty of the top performers, from the business and from the IT organization, were also brought together to create a transformation team. In addition, the position of "transformation officer" was created. Distribution management, underwriting, and claims management the three components of P&C's value chain were redesigned to make them more responsive to changing market conditions. These changes set the stage for the leadership team to begin focusing on the business segments that would yield profitable results. The new strategic approach to market segmentation began to show results at the end of the first year of the strategy.
Implementing the
Balanced Scorecard
Once these changes were under
way, Isom launched the Balanced Scorecard program. (A senior vice
president was given full-time responsibility for keeping it on
track.) As a first step, the executive team began to translate
the strategic vision into specific performance objectives:
- Enter markets that meet profit targets;
- Build and maintain relationships with target customers and producers; and
- Manage risk more effectively.
Achieving Consensus
The scorecard was instrumental
because it clarified what it meant to be a top-quartile performer
across the entire portfolio of businesses the company was in. The
leadership team wanted to introduce discipline in the business by
focusing on markets. The BSC was used to develop strategic
clarity about the products offered, the specific industries they
would service, and the size of companies they would target.
Each of the business units had to understand whether it had relationships with the right agents and brokers to attract the target customers it wanted to do business with. Each unit needed an appropriate set of underwriting and claims-processing capabilities to perform well in its target markets. The BSC process was used to clarify issues and achieve consensus on how to implement the strategy.
During the first eighteen months, the executives and transformation team developed a strong set of measures they could all agree on. The next challenge was taking the scorecard to the rest of the organization. To accomplish this, the leadership team agreed to integrate the scorecard with the financial planning process, communicate more effectively with the rest of the organization, and link the BSC with the compensation plan to achieve organizational alignment.
Aligning the
Organization with the Strategy
Because the twenty business
units were each in a different line of business, each began with
a different strategy. Scorecards helped to clarify thinking about
the overall strategic objectives for the company and were used to
achieve consensus across the units on the high-level strategic direction. All business units
ultimately shared a common set of strategic business objectives.
Based on this shared understanding of the strategy, each of them
was able to tailor scorecards to its own unique strategic
realities.
The business units used scorecards to tell the story of their specific strategy to everyone in their own business. They used measures to monitor progress toward meeting these objectives. The units identified the things they needed to get done to move the company into the top quartile.
Making Strategy
Everyone's Job
The next phase in the rollout
was to implement the BSC at the individual level. This was a
turnaround situation, and there was considerable excitement (and
some skepticism) associated with the changes that were
introduced. An incentive compensation system was used to involve
every employee in the BSC program and reinforce all the strategic
changes.
A business unit roster was used to link every employee to a specific line of business. This allowed management to communicate a specific business vision to the people who would carry it out. In addition, incentive compensation was tied to the contribution each individual made to a specific line of business. At the end of the year, each employee was awarded a number of "phantom" shares based on his or her individual performance. The value of the employees' shares was determined by the performance of the business unit they were a part of. How the business unit performed against the measures on the scorecard determined the value of a share for the business unit.
Today, employees directly influence the number of shares they will receive through their contribution as reflected in their personal performance measures. Every employee has a performance management plan that provides a line-of-sight to his or her impact on performance outcomes. Everyone's effort is harnessed to optimize business unit performance.
Building a Strategic
Feedback System
During the first iteration, the
BSC reporting system generated about ten inches of paper reports.
Management quickly realized that a paper-based reporting system
would be of limited utility. They wanted people to be able to see
how they were doing with a quick glance at the system. They also
wanted to be able to widely share information about how well the
businesses were achieving their objectives. More feedback was
needed to make the system responsive to their needs and to drive
the strategy deeper into the organization.
CIGNA P&C built a monitoring system that provides a simple summary using red, yellow, and green indicators. When the indicators are green, the business is moving in the desired direction. Yellow indicates cause for concern. Red means something is not right and requires further examination. For example, red might indicate a single large loss or a number of smaller losses in a particular market. In either case, an alert is sounded, and attention is drawn to discover the root cause of the situation. This reporting system has eliminated much confusion, and useful information is now readily available. Solutions can be developed more quickly.
Culture Shift into High
Gear
Well into its fifth year, this
management system is driving ongoing transformation. Keeping the
transformation alive is the challenge that Gerry Isom has
described using the metaphor " . . . like hammering a nail
into granite." Transformation is hard work and has
significant cultural implications in order for it to be
successful.
At the start of this transformation effort, the finance department had control over much of the information considered to be "important." As a result of the BSC, there has been a significant transfer of management authority from finance to other business managers. For a numbers-driven organization, this has been a significant shift. Today, scorecard information is available to everyone in the organization. Everyone knows what the strategies are, what the objectives are, what the measures are, and how they are doing. The BSC management system makes it possible for people everywhere in the organization to provide feedback (observations, comments, and suggestions) to those responsible for specific measures.
The front line has become a source of insight into how well the strategy is being executed. The ongoing challenge is to shorten the time it takes to organize a meaningful response to market changes. Putting the strategy on everyone's desktop, and inviting dialogue throughout the organization, helps to move knowledge around the organization faster. It increases the ability to use knowledge, make decisions, and execute the strategy.
The Bottom Line
Within one year, Isom's team had eliminated the losses. Within two years, they were
beginning to show a profit. After six years of using the BSC,
CIGNA P&C joined the top quartile of its industry. Its
financial performance went from a loss of $275 million in 1993 to
more than $100 million in profits five years later. Gerry Isom
saw his vision translated into reality.
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More than just a new measurement system
Imagine entering the cockpit of a modern jet airplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot?
Q: I am surprised to see you operating the plane with only a single instrument. What does it measure?
A: Airspeed. I'm really working on airspeed this flight.
Q: That's good. Airspeed certainly seems important. But what about altitude? Wouldn't an altimeter be helpful?
A: I worked on altitude for the last few flights and I've gotten pretty good on it. Now I have to concentrate on proper airspeed.
Q: But I notice you don't even have a fuel gauge. Wouldn't that be useful?
A: You're right; fuel is significant, but I can't concentrate on doing too many things well at the same time. So on this flight I'm focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of flights.
We suspect that you would not board the plane after this discussion. Even if the pilot did an exceptional job on airspeed, you would be worried about colliding with tall mountains or running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of guiding a complex vehicle like a jet airplane through crowded air spaces with only a single instrument.
Skilled pilots are able to process information from a large number of indicators to navigate their aircrafts. Yet navigating today's organizations through complex competitive environments is at least as complicated as flying a jet. Why should we believe that executives need anything less than a full battery of instrumentation for guiding their companies? Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward excellent future outcomes.
The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success. Today, organizations are competing in complex environments so that an accurate understanding of their goals and the methods for attaining those goals is vital. The Balanced Scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The Balanced Scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.
But is there anything new about a call for a "balanced" set of measures? While virtually all organizations do indeed have financial and nonfinancial measures, many use their nonfinancial measures for local improvements, at their front-line and customer-facing operations. Aggregate financial measures are used by senior managers as if these measures could summarize adequately the results of operations performed by their lower and midlevel employees. These organizations are using their financial and nonfinancial performance measures only for tactical feedback and control of short-term operations.
The Balanced Scorecard emphasizes that financial and nonfinancial measures must be part of the information system for employees at all levels of the organization. Front-line employees must understand the financial consequences of their decisions and actions; senior executives must understand the drivers of long-term financial success. The objectives and measures for the Balanced Scorecard are more than a somewhat ad hoc collection of financial and nonfinancial performance measures; they are derived from a top-down process driven by the mission and strategy of the business unit. The Balanced Scorecard should translate a business unit's mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between outcome measures the results from past efforts and the measures that drive future performance. And the scorecard is balanced between objective, easily quantified outcome measures and subjective, somewhat judgmental, performance drivers of the outcome measures.
One test of whether a Balanced Scorecard truly communicates both the outcomes and the performance drivers of a business unit's strategy is its sensitivity and transparency. Observers should be able to look at the scorecard and see behind it, into the strategy that underlies the scorecard objectives and measures. As an example, one division president reported to his company's president when he turned in his first Balanced Scorecard:
In the past if you had lost my strategic document on an airplane and a competitor found it, I would have been angry but I would have gotten over it. In reality, it wouldn't have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but, again, it wouldn't have been that big a deal. This Balanced Scorecard, however, communicates my strategy so well that a competitor seeing this would be able to block the strategy and cause it to become ineffective.
The Balanced Scorecard is more than a new measurement system. Innovative companies use the scorecard as the central, organizing framework for their management processes. Companies can develop an initial Balanced Scorecard with fairly narrow objectives: to gain clarification, consensus, and focus on their strategy, and then to communicate that strategy throughout the organization. The real power of the Balanced Scorecard, however, occurs when it is transformed from a measurement system to a management system. As more and more companies work with the Balanced Scorecard, they see how it can be used to:
* Clarify and gain consensus about strategy
* Communicate strategy throughout the organization Align department and personal goals to the strategy
* Link strategic objectives to long-term targets and annual budgets
* Identify and align strategic initiatives
* Perform periodic and systematic strategic reviews m Obtain feedback to learn about and improve strategy
The Balanced Scorecard fills the void that exists in most management systems-the lack of a systematic process to implement and obtain feedback about strategy. Management processes built around the scorecard enable the organization to become aligned and focused on implementing the long-term strategy. Used in this way, the Balanced Scorecard becomes the foundation for managing information age organizations.
- Robert S. Kaplan and David P. Norton, adapted from The Balanced Scorecard, HBS Press.