The competitive pressures driving product development have not let up. In a recent George Group/Wharton School study, 94 percent of financial services firms reported that "launching new products and services" was required to be competitive in their segment. Why such a strong focus on new products? The pressure to proliferate has only intensified. For many, this means innovating amidst an already cluttered portfolio. About a quarter of the competitors in the insurance market have doubled their offerings over the past five years, and trends toward customization and consumerism will likely drive the pace of proliferation even higher over the next few years. However, if the past is any indication of the future, this proliferation will significantly degrade not improve most companies' prospects.
Impact of Complexity on Execution The trend toward complexity begs a question: So what? The issue would be moot if, indeed, the cost of complexity was small. It is appealing to think so in the financial services business particularly in the product development cycle in which new products and services are often defined by IT requirements or parameters. IT is usually at the center of product development efforts in the insurance industry, but from the IT perspective, complexity can be perceived as cost-free, which can lead to over-proliferation. Product offerings are often defined by what the IT system will allow. The costs of complexity are, therefore, often borne downstream - in execution, in administration and customer service. In fact, complexity can be the single biggest factor impeding execution and customer service. Part of the solution, then, lies in moderating the natural impulse of IT to proliferate.
For example, one insurance company we know of had recently been hit by a number of execution issues during healthcare insurance re-enrollment periods: Customers were not getting ID cards, or there were lapses in sign-ups, and customers were finding themselves in the service provider's office, apparently without insurance. At the root of these execution issues was the sheer complexity and variety of plans and options offered: standard in the IT system, but beyond their current execution capabilities.
Impact of Complexity on Customer Behavior Complexity, in other words, can be a huge "hidden cost" (rarely captured in anyone's accounting systems, or identified by the operations group), driving execution breakdowns and customer dissatisfaction. But the issues don't stop there. In markets with highly configurable products, such as insurance, increasing the choices on offer to the customer can actually deteriorate the overall customer experience. It is the phenomenon of overchoice - a customer-unfriendly quality that the financial services industry is especially prone to. For example, a recent study found that as the number of mutual funds on offer to employees as part of their 401(k) plans increases, people's level of investment decreased. There are a number of reasons for this. For one, the potential for regret increases in the mind of the consumer. Or they may be overly taxed by the decision process and drop out, as one insurer recently found.
Navigating the Threats of Complexity
But there are strategies for ensuring your product development efforts lead to customer satisfaction and profitability. In fact, companies that achieve these objectives have the following traits in common:
- They are disciplined about portfolio choices. Much complexity is added outside formal product development processes, as products and services are modified to gain an incremental sale, regardless of downstream impact. Exemplars tend to adhere to standards on incrementalism to avoid "complexity-creep."
- Their selection of which products/services to offer is supported by a full picture of complexity's costs. The lack of a clear end-to-end value stream perspective due to institutional silos tends to obscure the true impact of proliferation. Product development efforts should be informed by downstream impacts and the ability to execute.
- They have developed processes designed to handle variety. More flexible processes can handle more complexity. Many insurance companies have grown up very IT-centric, and as a result lack the processes to handle the variety required by the market.
- They package complexity to be customer friendly. With an exploding level of choice for consumers, insurance companies need to be proactive to avoid turning customers off. Just as Dell packages options together into easily digestible consumer platforms, insurance companies have the opportunity to gain an edge in the market by positioning for simplicity.
The companies that can rise to these challenges will, as we have found elsewhere, lead the pack in customer satisfaction and profitability. Our advice is: don't say "yes" to new products unless you have a handle on how you're going to be able to execute on them beyond the IT department - in many cases, less is more and better for both your company and your customers.
Matt Reilly is Senior Vice President at George Group Consulting and can be reached at [email protected]. Stephen Wilson is Engagement Director at George Group and co-author of "Conquering Complexity in your Business" (McGraw Hill). He can be reached at [email protected].