Organizational Issues Insurer, Thyself

FRAMINGHAM (03/15/2000) - Mark Caron is used to big guys beating on him. A one-time high-school football halfback, he bears the scars of shoulder, knee and ankle injuries suffered in the gridiron wars. But--tough guy that he is--Caron grossly underestimated the battle ahead when he took the reins as CIO at the ailing Blue Cross/Blue Shield of Massachusetts two years ago.

The year before he joined, 1996, was the company's worst year ever. He knew it would be a mammoth challenge to turn that around, but the part that he thought would be most difficult for him amounted to only a fraction of the adversity.

Caron thought he understood the situation when he joined several other executives brought in to engineer a corporate turnaround near the end of 1997.

He remembers thinking it would be demanding yet within reason to craft a future-proof IT architecture including the applications, standards, policies and procedures that would enable Blue Cross to retain and attract profitable customers. He would also have to reshape the company's decade-long relationship with EDS, its IT outsourcer. With those changes in place, the culture would follow along--or so he thought. He couldn't have been more wrong.

SCOUTING THE ORGANIZATION Caron did not realize how hard it would be to prepare Blue Cross's painfully staid corporate culture for the technological and organizational changes it would have to make. Most employees at the $1.9 billion Boston-based health insurer had been in their jobs a full 10 years or more, and they were numb from a series of management changes and increasingly tough competition in the health-care market. Blue Cross had been losing members to scrappy regional newcomers Tufts Health Plan and Harvard Community Health Plan for years. Then, as now, the health-care market was "looking for a balance of three things: high-quality health care, cost-effectiveness and customer service," says Martin Silverstein, vice president of the health-care practice for The Boston Consulting Group. In the last two elements, Blue Cross was less than competitive. Tufts and Harvard were offering lower premiums to entice corporate members, which yielded significant membership growth. And as the incumbent health-care provider, Blue Cross was caught off-guard by the newfound emphasis on customer service, says Silverstein. Like many "Blues" organizations, Blue Cross did not have the entrepreneurial, service-oriented attitude of its younger peers in the market.

Corporate culture was largely to blame for that. Experience had taught Blue Cross employees to keep their heads down, not question the status quo, just get by. "Many Blues were bureaucratic, slow moving, less responsive to the market," says Silverstein. In fine Blues tradition, Blue Cross was clinging to old-school technology, processes and mentalities--the "not invented here" syndrome could have been invented there. Meanwhile, having lost more than half of its subscriber base in six years, it faced a serious threat of extinction.

"I'm thinking, 'I'm tougher than they are. I'm young,'" says Caron. "But I didn't realize how difficult this culture would be." A rugged 41-year-old with sandy hair and steely blue eyes, Caron came of age at companies that prized entrepreneurial spirit. "I didn't understand that people would view these changes as a threat. I thought it would be obvious that this was something that would help them."

But Caron got tackled for a loss. He spent the next two years on a bruising crusade to transform the company's systems and the employees' mind-sets. He's making a difference. He has brought sanity to the EDS agreement. His division just finished a successful upgrade of 3,500 PCs on time and under budget. He's trimmed a cool $52.5 million from the all-time-high IT budget of 1996, from $145 million to $93 million. And he's got big plans and dreams. But decades of culture die hard. Caron admits his efforts are still only a drop in the bucket.

LOOKING BACK The late 90s were not kind to Blue Cross. The company was having a rough time making the transition from the classic indemnity health-coverage model (where the insurer pays 80 percent of the cost, and the subscriber pays the rest) to managed care (where subscribers pay a small fee for services, but access to services is centrally controlled). Blue Cross lost $100 million in 1996. The number of subscribers dropped from 4 million in 1991 to 1.57 million in 1997, lost to the new regional rivals in a turbulent market.

Under a long-standing outsourcing deal with EDS, IT costs had skyrocketed.

While the industry average per-member, per-month IT cost ran at about $3.50, according to GartnerGroup estimates, Blue Cross's per-member, per-month cost was $7.20. And although Blue Cross outsourced all of its IT to EDS (about 450 EDS employees worked on the company's systems), there were still 150 internal IT people doing busywork in the business units.

On top of the dismal fiscal situation, end-user satisfaction within the company had reached rock bottom. A data warehouse project crashed several months into development because of disparate databases and the lack of a consistent data model. Creation of a sorely needed medical management system stalled because of a lack of sponsorship. These failures were to some degree due to the absence of a central IT department to chart long-term strategy and set standards. Left to their own devices, middle managers made decisions that optimized their own positions at the expense of the enterprise. Local optimization, for example, led to the proliferation of different PC operating systems and hardware, as managers made purchasing decisions according to personal whim rather than considering which platform would sustain the company for years to come. "It's hard for individuals to say, 'What's best for the enterprise?' versus 'What's best for me?' It's hard for them to rise above their patch," says Caron.

People were measured and rewarded on their ability to do things right versus doing the right thing. For example, internal PC support people in the business units focused on tasks such as fixing individual PCs within their units. But at any given moment, their energies might best be spent fixing an enterprise-level problem, such as a downed server, rather than concentrating on their own turf.

This misalignment of IT and business goals contributed to the company's losing members at a disturbing pace.

When Caron joined as the company's first CIO and senior vice president reporting to the CEO, his first objective was to bring the internal IT people into a central department reporting directly to him. This was a prerequisite to charting an IT strategy for the enterprise. One of Caron's early goals was to create an IT architecture that reflected the changes that had occurred in health care over the last few decades. "The typical indemnity business of 20 years ago was transaction oriented. Someone would go to the doctor, and then a claim would be generated and paid. But managed care is totally different. You process a claim and do the transaction like before, but now you need to generate knowledge as a result of that transaction," explains Caron. "You need to take administrative information, clinical information, pharmaceutical information--all of that--and build a picture of each member. Then you use that to create future products that reflect your members' needs." Health-care companies need to be proactive in serving members, or else members will simply ditch them for competitors. That's what had been happening to Blue Cross.

In order to move to systems that could use knowledge as a strategic weapon and not just grind through transactions, Caron first had to restructure the relationship with EDS, which had become grossly one-sided (costs kept going up even as Blue Cross's member base shrunk). Caron wanted to take back the intellectual capital that resided in the mainframe-based transaction-processing system developed and maintained by EDS. Knowing that he did not want to continue with a sole-source situation, Caron had two options: Bring all the systems back in-house, or go to a multivendor outsourcing strategy in which pieces of the architecture were outsourced to different providers and key applications were handled in-house.

Caron decided to go multisource. There was no way he could take the core mainframe applications back in-house; EDS had developed those applications and owned them. Since Blue Cross would need to run its business on those applications in the foreseeable future, keeping them with EDS was the only viable choice. And Caron had no desire to "own" the desktop assets. He believed a good outsourcer could provide and maintain PCs much more efficiently than he would be able to do in-house. On the other hand, he was anxious to take back control over key knowledge areas such as data warehousing, relationship management and medical management, because those areas were the keys to his company's future.

MAKING WAVES Caron did not rush his strategy. First, he spent three months gathering information. He huddled with every in-house IT person, and all the key EDS people. He left the rarefied air of the 31st floor executive suite and went down onto the field to see how business people actually did their jobs. He sat in the call center for days at a time, observing how representatives struggled with painfully outdated technology--like slow systems with unlinked data that might mean calling up multiple screens to answer a simple question--and the contortions required to hide from subscribers just how much modern functionality the company lacked. He accompanied salespeople on calls.

He hung around employee lunch rooms.

Something interesting happened during those months. Caron became convinced the company's past and current woes were not due to the employees. They were locked in a dysfunctional culture that valued strict adherence to the command-and-control model of management and discouraged innovation. But the culture was not of their own making. Generations of less-than-stellar leadership had left the employees wary of management, but they were essentially trying to do the right thing. And Caron believed most would step up to the challenge of the new paradigm if they had the chance.

At the end of three months, he had a much clearer picture of the direction he needed to take--and enough data to make the case. Caron's "plug-and-play" architecture contains four pillars: the outsourced systems (mainframes and PCs), a data warehouse based on IBM Universal DataBase, the relationship management systems based on Pegasystems's CRM suite and the medical management systems (for which a vendor has not yet been chosen). The four components of the technical architecture share data via IBM's MQ Series enterprise middleware. (This will be the wrapper around the legacy systems that all new applications will access for services, and should be completed by next month.) Caron expected to cut nearly $50 million almost immediately from the IT budget by going to a multivendor strategy. But cost reduction was far from the primary objective. Caron was building a foundation on which the future competitiveness of the company would rest.

Caron knew it would create a stir among the employees when he announced his intent to scale back the relationship with EDS and take a large portion of the systems in-house. EDS was part of the scenery. It was unthinkable that it should go. So he enlisted the aid of several prominent management consulting companies (including Ernst &Young and A.T. Kearney) to help him carry the message to the employees. Having a credible outsider present the exciting possibilities ahead of them would help soften the blow of change, or so Caron thought.

But the employees weren't buying it. Word around the water cooler was that Caron (the fifth top IT executive in four years) would never succeed in downsizing EDS. "They didn't believe we'd go to a multivendor environment," Caron says. "No one believed change would happen. The attitude was, 'He too shall pass.'" If the employees were skeptical, his EDS counterpart was even more so. After all, Blue Cross was still in the midst of its contract with EDS, which wasn't due to expire until 2002. But Caron was ready to go to court if necessary to break the contract. If it came to that, he believed he had a successful argument that EDS had unfairly profited from the agreement for years, in contravention of a contract provision.

Although he was ready for a legal fight, it was a last resort. Creating a tolerable solution for both parties would clearly be best. After all, Blue Cross's core applications were effectively held captive by EDS. It would have been extremely difficult and expensive to extricate Blue Cross from EDS altogether--never mind the lawsuit. But Caron's thirst to transform the relationship with EDS put him on a collision course with his EDS counterparts as well as a few Blue Cross senior executives who questioned the sanity of moving away from the established IT provider. He fought back hard, presenting to both EDS and Blue Cross execs the data depicting the upward spiral of IT costs in recent years. The Blue Cross executives had to agree the EDS deal had gone sour, and the EDS executive realized Caron wasn't going to back down.

After tortuous negotiation, both sides eventually agreed it made sense to have EDS keep ownership of the mainframe systems and break off the rest from the scope of the agreement. "In the end, they responded like a partner," says Caron.

Blue Cross has been an EDS client for 30 years, and EDS was keen on keeping the relationship in good standing. Mike Neely, EDS client executive for the Blue Cross account says, "We were seven and a half years into a 10-year contract. We were interested in extending that relationship." Ultimately, EDS supported Caron's goal of developing an enterprisewide IT strategy for Blue Cross, even though it meant the company would take in-house some systems previously run by EDS, and seek another provider to service its desktops.

Neely says the agreement reaffirms the two companies' commitments to each other, and their mutual decision to make the relationship advantageous for both sides. "[The new agreement] reinforces our sense of being part of the same team," he says.

In December 1998, Blue Cross issued an RFP for its desktop systems. EDS bid on it, but in March 1999, Caron signed Inacom Corp. (then Vanstar) of Omaha, Neb., to a five-year deal. This time, Caron made sure the contract had convenience clauses that would allow him to walk away if he felt the arrangement was no longer in Blue Cross's best interests. The Inacom deal was something of a turning point in the game for the employees. They began to believe Caron would do what he said he would. And when the new equipment came in--spiffy Compaq Pentium IIIs running Windows NT to replace the ragtag bunch of 386s they had been using--the employees were even more impressed.

Of course, with the new order came a boatload of new policies and procedures that required some getting used to. For example, as previously mentioned, individual departments traditionally had handled their own IT purchasing--a policy that resulted in hundreds of different PC models on the desktop and sky-high support costs. Caron now had centralized oversight of all IT purchases. Better to err on the side of micro-management than let chaos creep back in, he believed. Caron also cut the number of laptops from 800 to 400 after he found few employees were using them offsite. Caron instated a pooling system by which employees who were traveling could sign out a portable machine for their trips.

Another significant policy change: centralized storage of e-mail. Employees had been using their e-mail inboxes as giant file cabinets for David Letterman jokes and electronic chain letters along with the occasional business memo.

With centralized storage, users would be required to clean up their act--literally. The system purged messages after a set time period. The users adapted fairly quickly to these changes, says Caron.

LOOKING AHEAD The powerful new PCs and other projects in the works will go a long way toward enabling Caron's vision of retaining and attracting new customers while providing the best possible health care. As a first step in the customer service organization, the call center will have "screen pop" capability, bringing up all of a member's data on file (including dependent information) once the rep inputs the subscriber number. Agents will no longer have to fumble through multiple screens to find data on a subscriber's child, for example.

As a next step, customer service reps will be able to make proactive suggestions to members based on knowledge embedded in an advanced customer service application. For example, the application would prompt a customer service representative to call a member with breast cancer and tell her about support groups for breast cancer patients in her area. Caron hopes one day subscribers will be able to schedule doctor appointments at night, via an online scheduling application or quick-response e-mail. He also hopes to develop new insurance products such as policies targeting specific demographic groups (young men prone to sports injuries, for example) based on insight gleaned from slicing and dicing customer data in previously unimagined ways.

This is the promise of an organization that uses knowledge as a weapon.

Caron's eyes light up as he sketches these scenarios for making Blue Cross's subscribers happier and healthier. But then he comes back down to earth. It wasn't too long ago, after all, that his company ran on outmoded PCs and decrepit green-screen terminals and was consumed with the boring but inescapable Y2K remediation. It's a far distance to come in only 24 months, and this rosy picture still lies in the future. "We have to walk before we run. And we have to learn to run before we can run a marathon," says Caron. He thinks it will take another 24 to 36 months to implement these applications.

That is, if he survives that long. In the turmoil during the EDS confrontation, Caron often wondered if he would be left standing. He jokes that he's outlasted the office pool. "I know they had bets that I would be gone," he says.

And there were times when he wondered if he should go. After his first year on the job, Caron took the unusual step of commissioning an outside company to conduct an assessment of his job performance. This is a practice Caron has followed in all his jobs. He feels it contributes to a more accurate assessment of his performance. The cultural contrast here is stark. No one at Blue Cross--before or since--had ever done such a thing. The company interviewed Caron's peers. Their feedback took him by surprise. "No one questioned my competence with the technology. But they were concerned that I wasn't driving consensus-building enough, that I was introducing the destabilizing influence of change." Deeply concerned, he had a heart-to-heart with CEO William Van Faasen. "I said, 'Bill, I think I'm failing.' He said, 'Hell, no, you can fix that. I'd be more worried if people didn't think you knew what you were doing.'" Renewed, Caron decided to fight on.

BREAKING THROUGH Caron has outlasted the office pool, and the benefits of the IT transformation he led are beginning to roll in. His IT budget for fiscal year 2000 is a lean $93 million with about 200 internal IT people, 200 from EDS and about 40 from Inacom. The per-member, per-month IT cost is down to $4.10.

Caron hopes to whittle that number down to the industry average (which is still running at about $3.50 per-member per-month) within the first half of 2000 by retiring some mainframe-based reporting applications and consolidating some midrange systems. The best news: Membership is finally beginning to pick up.

Blue Cross added 140,000 subscribers in 1999 and forecasts it will increase several hundred thousand per year for the next two years.

Blue Cross is in much better shape than it was three years ago, says Boston Consulting Group's Silverstein. In fact, Blue Cross is currently thriving while its arch-rivals are starting to be plagued by dismal financial results. "But [health care is] still a very tough business to be in," says Silverstein.

Beyond the cost reductions, Caron has created a sustainable architecture on which to build applications for the future. He has also created a work environment that he believes will attract his share of the best IT candidates.

He has a lot to offer: the chance to work on contemporary technology and a solid commitment to training and certification. He is already rebuilding the intellectual capital that had been delegated to EDS.

The people--the ones he believed in at the outset of the turnaround--today believe in him. "I've got a team of people who would walk over fire for me because they believe in what we've done," says Caron with evident satisfaction.

Alas, one man can't change a decades-old culture over a year or two. "You're trying to fix years of neglect in a few months. There's going to be some pain," Caron observes. It is simply not possible for one man--a CIO--to transform a company of 2,750 individuals, and Caron knows it. "Although I think I've made some progress, I'll never really change the culture. That would take decades to do."

If he could replay his last career move, he might look for a better cultural fit, ask more questions about how decisions are made and interview people lower on the food chain to try to gauge their attitudes.

But for now, he's going to stick with it. Says Caron, "You don't win by quitting." And for this ex-jock, winning means too much.

Lauren Gibbons Paul is a freelance writer in Waban, Mass. She can be reached at laurenpaul@mediaone.net.

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