Managing the Fundamentals
A few months ago I contrasted the waning days of Dotcom 1.0 with the waning days of Dotcom 2.0, and what an interesting few months it has been.
While companies like Airbnb and Uber are encountering growing pains and resistance from regulators and lawmakers, their fundamental offerings are still pretty solid. If you want an alternative way to book lodging or a ride, they will get you where you want to go.
A disturbing trend has arisen recently with several disruptor-wannabees. Some unicorns—start-ups with a valuation exceeding a billion dollars in a short time frame—are apparently talking the talk without managing their internal fundamentals. At times the focus is on disruption itself with quality taking a back seat (in some cases it’s even tossed in the trunk). These stories are disturbing, but they help to highlight our own firms’ true value as our technical prowess evolves. Because you just can’t disrupt doing the right thing.
The Triple Constraint
Anyone who’s managed a project knows there are three factors to consider: time, quality and cost. In every case, you can master two, but one will always suffer. If you want high quality and low cost, it’s going to take more time. If you want high quality and fast delivery, it’s going to raise the cost. Usually those are the only two reasonable combinations, because the other option sacrifices high quality. Sure, there’s a market for fast and cheap, but it never leads to satisfaction or repeat business. In insurance, this is definitely a losing combination.
There’s been enough chatter about Zenefits in our industry, but let’s start close to home. What happens when you take a compelling HR system and add insurance procurement with no internal controls? You end up with a fundamentally bad investment. I can’t figure out if the proximate cause of Zenefits’s current situation was a disdain for learning the basics of the industry they so desperately wanted to disrupt or if they just didn’t care. Anyone with an insurance license knows the process isn’t hard, the concepts aren’t very complicated and the continuing education components aren’t all that intrusive. It’s like renewing your car registration. If you can’t take a couple days to complete the process, you’re in the wrong business. Additionally, anyone who actually brokers insurance also knows that an insurance license isn’t enough. To provide real value to an insured, you have to become an expert. Without this, where’s the quality?
Lending Club is a company attempting to disrupt the loan industry. As with all disruptors, the idea is that it can operate more efficiently by using data analytics to identify and approve loans. Tying into the social media marketing craze, the play is to make folks feel like they are borrowing within a social group, but under the hood the loans are ultimately placed with outside investors.
Removing the bank part of being a bank was supposed to eliminate a large chunk of the bureaucracy. Banks make loans against their own holdings. In some situations, like mortgages, they group the loans and sell them as a commoditized product. Lending Club basically brings this commoditization method to smaller loans.
You’ve probably heard that Lending Club is under investigation for a lack of internal controls. It’s been accused of placing loans with investors beyond the appetite of the investors. Whether this is a mistake in the automated process or intentional bad behavior is to be determined, and honestly it’s irrelevant. Removing the bureaucracy removes the controls. A lack of controls leads to a lack of quality. And without investors, Lending Club can make no loans.
Theranos is attempting to disrupt the diagnostic laboratory industry. Its primary product is a set of testing criteria that perform more than 200 medical tests on a single drop of blood. If your doctor orders a blood test, you can theoretically use the special Theranos “Edison” device to send a sample directly to them instead of visiting a local lab to have blood drawn. The end result is an improved experience at a substantially reduced price, the perfect recipe for disruption. The company received significant backing and a whopping $9 billion valuation.
Earlier this year, the Centers for Medicare & Medicaid Services revealed its own testing found high levels of inaccuracy in Theranos’s results. In addition, quality control inspections of its diagnostic laboratories have revealed issues from uncalibrated testing machines to unlicensed lab technicians. Theranos has responded by voiding two years of test results. Again, without quality you have nothing.
What Can We Learn?
I’m not suggesting a conspiracy or even a direct link between these events. Building new technologies and new business models is hard. Mistakes will be made and in some cases corrected, but there is a lesson here for us. Sure, insurance isn’t the most high-tech industry but it’s not because we’re lacking in creativity or vision. It’s because what we do is complex and important. Complexity requires a high level of expertise and attention. Importance means quality comes first, every time. We don’t just place policies; we provide assurance that when something bad happens it will be made right. Speeding up the process of buying insurance doesn’t increase assurance. You can disrupt archaic business processes, but you can’t disrupt quality.