Deming's Point #1 as Applied to the Insurance Industry

Create constancy of purpose for improvement of product and service.

Source: W. Edwards Deming, first principle

This W. Edwards Deming principle has great relevance to the insurance industry as illustrated by real-world examples.

As reported in my previous commentary, the 14 points of W. Edwards Deming are the foundation of his teaching and his discipline—all part of what he calls a "System of Profound Knowledge." It's from this foundation that an individual or an organization can function as knowledge-based—vis-à-vis shooting from the hip or, even worse, making decisions based solely on focus groups or public opinion polls.

My purpose here is to apply these 14 points to the insurance industry. Management consultant Michael Kami likes to characterize such anecdotal illustrations as "successes and messes." I'll try to offer both kinds of examples when it makes sense to do so.

"Real world" examples help us more readily understand the depth and meaning—and viability—of Deming's 14 points as they apply to the insurance industry. Our industry is no different than any other in this context; however, some believe we're "light years" behind others in our understanding and application of these principles.

I'd like to prove this indictment wrong to the extent that reality permits. Some illustrations will accomplish that outcome. However, others will demonstrate where we need to improve—or, to use the vernacular of Dr. Deming—where we need to "continually improve."

I used the condensed version of Deming's 14 points in my last commentary. As we work with each point in succeeding commentaries, I'll add Deming's own (minimally edited) elaboration on each point—and supplement it with examples from the insurance industry.

Here's Dr. Deming's Point #1:

Create constancy of purpose for improvement of product and service.

There are two problems:

1. problems of today
2. problems of tomorrow …

… for the company that hopes to stay in business.

Problems of today encompass maintenance of quality of product put out today, regulation of output so as not to exceed immediate sales by too far, budget employment, profits, sales, service, public relations, forecasting, and so forth.

It's easy to stay bound up in the tangled knot of the problems of today, becoming ever more and more efficient in them, as by, e.g., acquisition of mechanized equipment for the office.

Problems of the future command first and foremost constancy of purpose and dedication to improvement of competitive position to keep the company alive and to provide jobs for their employees.

Are the board of directors and the president dedicated to quick profits—or to the institution of constancy of purpose? The next quarterly dividend is not as important as existence of the company 10, 20, or 30 years from now.

Establishment of constancy of purpose means acceptance of obligations like the following.

• Innovation
• Putting resources into research and education
• Constantly improving design or product and service

It is a mistake to suppose that efficient production of product and service can with certainty keep an organization solvent and ahead of competition. It is possible, and in fact fairly easy, for an organization to go downhill and out of business making the wrong product or offering the wrong type of service, even though everyone in the organization performs with devotion, employing statistical methods and every other aid that can boost efficiency.

Your customers, your suppliers, and your employees need your statement of constancy of purpose—your intention to stay in business by providing product and service that will help man to live better and which will have a market.

Top management should publish a resolution that no one will lose his job for contribution to quality and productivity.

One outstanding example of "constancy of purpose" is William J. (Bill) O'Brien, when he was CEO of Hanover Insurance Companies in the 1970s.

I first met Bill at a seminar in San Diego in the early 1990s. I subsequently had dinner with him and our wives in Boston at his favorite downtown restaurant. (It was Hungarian.) He led Hanover's history-making turnaround with "constancy of purpose" as his principle discipline.

In San Diego, Bill told us that to lead any organizational transformation it's critical to:

• move away from the usual institutional or organization design that has as its purpose "keeping people from screwing up";
• think through your values and beliefs; and
• give all employees the same sense of purpose.

As confirmed by Larry Brandon in Pathway to Progress (CPCU—Loman Education Foundation, 2003), "Bill worked to develop a 'values-based, vision-driven' organization well before writing values and vision statements became a corporate fad."

Bill inculcated these values and vision into the culture of his organization and its people. The Hanover turnaround was nothing less than phenomenal. From stock valued at 98 cents per share, it grew to $45 on his watch. Surplus grew from $440 million to $1.7 billion—all without any acquisitions or capital infusion.

If you want to read more about Bill O'Brien, all you have to do is pull out your copy of Peter Senge's management classic entitled, The Fifth Discipline. Bill is quoted on at least 52 of the 371 pages in his book.

Bill O'Brien passed away recently, but his principles live on. In fact, Bill is quoted in Mr. Senge's Fifth Discipline Fieldbook (Doubleday, 1994) as follows:

We began by laying out a purpose for the company. In those days, when mainstream businessmen believed the only purpose of business was making money, it was very radical . . . It was a mission statement, although nobody had heard of that word yet. As soon as we had written it down, we thought we'd solved our problem …

[However] most purpose statements inspire the five or ten people who sit around writing them, but do nothing for the 5,000 other people in the corporation. If it is going to enlist people's spirit, a purpose must be extended into a set of values and a vision. We needed some shared sense of what we stood for as an organization …

As strong as were his words, his actions spoke louder. He and his company were innovative, they emphasized education and research, and they continually improved their products and service as they practiced and demonstrated their "constancy of purpose."