Stealth Solution.

Conseco Inc.'s new management has addressed the insurer's high-visibility problems by chopping jobs, selling assets and restructuring debt. Now the company has quietly launched an ambitious program to improve customer service and lower operational costs.

Out of the limelight that has burned the company for the past few years, Conseco Inc. has quietly launched a program to improve customer service and internal operations. The multiline insurer/financial-services provider has not trumpeted the early results outside its own walls, but Chairman and Chief Executive Officer Gary Wendt is confident that his lofty goals for the program will be met.

"Process Excellence" employs the principles of Six Sigma, developed and used by manufacturers for two decades but only recently embraced by the financial-services industry. Conseco launched its program in mid-January, and only a few projects have been completed so far. But Wendt and his team of more than 170 Six Sigma professionals, who are dedicated exclusively to the work, expect to achieve more than $100 million in savings in the program's first year.

"That's about $65 million after tax, or about 15 to 17 cents a share," Wendt said. "And we'll get that, too. Not if, but when, and when is moving along quite rapidly."

Since the 1980s, U.S. industry has employed Six Sigma, a process to objectively measure and correct operational problems that practitioners identify. Its chief application, however, has been to fix assembly-line inefficiencies at manufacturing plants. Conseco's program is based on Six Sigma principles, but is fashioned to ultimately improve customer service.

Process Excellence is not yet the stuff of press releases. It is so new that the Carmel, Ind.-based holding company has not discussed it much with the cadre of stock analysts that follow Conseco, Wendt said. Analysts will learn a lot more this fall when Conseco management holds a major round of meetings with them.

Wendt, who has held his posts at Conseco since June 2000, learned the value of Six Sigma when he headed GE Capital Services, his previous employer and a subsidiary of General Electric. He initiated the process at Conseco to help the insurer recover from its many problems, with the goal of reshaping the company into an industry power. The company has initiated 231 projects aimed at improving customer satisfaction and lowering costs.

The pretax $100 million goal is not supposed to be a one-time improvement. Conseco executives said many of the fixes put into place by Process Excellence will save money repeatedly in future years. Others are learned competencies that can be transferred to other parts of the business. Company leaders also know of many other problem areas that will be addressed as team members finish existing projects.

Beyond the discipline required for the process, company officials say the program changes the company culture. "The attitude here is more customer-focused," said Ruth Fattori, who heads the program as executive vice president for process and productivity. "We have found you can't apply Six Sigma internally; that's what manufacturing typically does. Process Excellence is more holistic. We focus on the customer and looking at things from the customer's point of view." The discipline is a structured methodology that uses data "as opposed to thinking that when the boss has an opinion, it's the right one," she added.

Ups and Downs 

Conseco began operations in 1982 and became a public company in 1985. Two years later, it moved into its headquarters on a sprawling campus on the outskirts of Indianapolis. It grew explosively under the previous management through the late 1980s and the 1990s into an insurer of national scope through 17 acquisitions. These deals resulted in high debt levels for Conseco, but for the 10 years ending in early 1998, the company rewarded investors with 47% annual total returns on its stock. Investors soured on the company, however, on April 6, 1998--the day Conseco announced its $6 billion acquisition of Green Tree Financial Corp., a Minnesota mobile home mortgage lender. Investors believed Conseco had paid too much, and the company's stock sank more than 90% to $5.62 a share by April 28, 2000. That was the day founder Stephen Hilbert resigned as CEO.

"A year and a half ago, there was a question of whether the company would survive," Fattori said. "Now it looks like we're out of intensive care, but we're still in the hospital. Process Excellence is our discipline of medicine and exercise that we have to do to get out."

Importing the Cure

Wendt knew at the time Conseco's board of directors recruited him that he could import his Six Sigma experience from GE Capital to rebuild Conseco. He also knew he had to bring along Fattori, a Six Sigma expert with a spark-plug personality. "I met with Ruth before we had all our refinancings done and A.M. Best was kind enough to give us back our A- rating," he recalled. "I told her she had to come to work with me, and she didn't believe it. But I told her she didn't have a choice anymore, that she had to come." Both Fattori and Wendt still have homes in Connecticut and often fly back for weekend visits.

Fattori honed her Six Sigma skills in the manufacturing environment before joining GE Capital, where she tried to introduce the same techniques in a nonmanufacturing environment as vice president and chief quality officer. "We didn't exactly hit a brick wall, but we encountered difficulties and problems, and we tried to understand why," she said. What she and others learned was that the processes of the financial-services business can't be seen, as can those of a manufacturing line, so Fattori and her team could not anticipate that fixing one problem might cause a problem elsewhere. As a result, team members at Conseco construct "process maps" that enable them to see their equivalent of the assembly line and then apply the Six Sigma principles.

Setting the Parameters

Six Sigma works by reducing variations in processes, which are the unwanted abnormalities. Sigma is a statistical concept that represents how much variation there actually is. By definition, a level of Six Sigma is equal to 3.4 defects per million opportunities. Examples of this high level are a dial tone when picking up a phone or safe water when turning on a faucet. A level of less than Two Sigma produces more than 300,000 defects per million opportunities.

Conseco has applied the process to reducing the variation in times before it answers a phone at its call center and in uniformly paying claims faster on long-term-care insurance. In these cases, the median time may remain the same, but the extremes, like taking 15 minutes to answer a call, are eliminated.

"The range is what gets you into trouble," said Fattori. "Once you've got your variation reduced, you can work on shifting the mean if you choose to."

Six Sigma and Process Excellence name their practitioners by borrowing from karate, a highly disciplined Japanese system of self-defense. As of mid-September, Conseco employed 145 "black belts," full-timers who lead project teams after undergoing four weeks of training. These black-belt employees--whose title comes from that of a person who has attained the rank of expert in karate--hail from sales, operations, customer service, collections, the credit organization, information technology, human resources, training and finance.

Twenty-three "master black belts" train the black belts, coach them and oversee projects. They undergo eight weeks of training. Eighteen "green belts," who receive two weeks of training, serve as team members or leaders within projects. They remain in their normal assignments while working within Process Excellence. "Champions" are business leaders with one week of training. They number 238, and they sponsor projects. Conseco intends to provide a minimum of four hours of overview training to all of its more than 14,000 employees, and had trained 726 as of mid-September.

Process Excellence is a five-step procedure--define, measure, analyze, improve and control--or DMAIC, (pronounced dee-MAY-ic). Each step has its own challenges depending on the project, but Fattori said the first stop usually takes the most time. That is when leaders decide who will be on the team, what they will do and what resources they will marshal. Control is often the most difficult step, in that it is the phase during which leaders ensure that the solution lasts and continues to benefit the company. The improve step often requires the most creative thought. "That's where we're trying to get people to look at things differently, to challenge the status quo, to achieve a paradigm shift," Fattori said.

Dedicating the Resources

Having the senior executive's enthusiastic commitment, as Conseco has with Wendt, is "critical" to the success of Six Sigma projects, Fattori said. "You need the senior person, because you're really changing the culture, and the biggest demonstration of commitment is dedication of resources," she said. "It's probably not worth doing if you're not going to dedicate the resources to do it. People have full-time jobs and asking them to do it on top of those jobs is next to impossible." At Conseco, management assumes the full cost of all projects, including salaries for the master black belts and black belts.

In return, the dedicated belt-holders are supposed to achieve annual cost-saving goals that Fattori has set at $500,000 a year for black belts and $5 million a year for master black belts. Her thinking: three projects a year per black belt at a savings of $150,000 a project, "and I rounded it up," Fattori said.

Management can instantly check on the progress of each project at a special Web site that is color coded, with green meaning a step is complete. At the end of each DMAIC step, management holds formal, structured reviews--called "toll gates"--with black belts, and the project leaders must prove that the savings are real. In addition, members of Conseco's Finance Department must sign off after the design step and control step. "We don't want just the black belts saying a project will save a million dollars," Fattori said. "We want Finance saying it. In the control step, we don't want black belts giving us the theoretical savings; we want Finance to tell us what in fact we have saved."

Fattori said it's not uncommon for a project to be canceled when leaders find it is too big, too small or that it's not worth the effort. "We don't want a return of just $20,000 unless it has a huge impact on the customer," she said. "And we want it doable in six months. If it's more, the same people might not even be on the team anymore." And sometimes a project with no financial return, or even a cost, might be worth finishing if it has a huge impact on customers. Sometimes projects expand, and sometimes they are divided into two or three.

Sharing new knowledge from projects is important. What leaders learn from one project can help advance another, and they want to bank knowledge gained for future endeavors and to develop best practices.

Racing Against the Clock

Conseco employees have widely embraced the changes brought by Process Excellence, largely due to Wendt's enthusiasm and commitment, but also to the sudden, shaky state in which the company found itself, Fattori said.

"This is a company that was in trouble," she said. "They knew where they wanted to go but didn't know how to get there. Gary restructured the debt; Gary made some organizational changes, and now we have to grow organically and improve our customer service dramatically."

Fattori said the company is "in a serious bind, and the clock is ticking. We don't have the luxury of doing this a little here and a little there, so there's tremendous enthusiasm that this may be the answer for improving our internal processes."

Workers at companies with good profits and/or solid management might put up resistance to a program like Process Excellence, and that might have been the case at Conseco three years ago.

Spending at that time was "out of control," Fattori said. The previous management bought luxury items, including pricey artwork they kept at headquarters. But the spending didn't matter then. "They were making so much money so fast that they couldn't spend it fast enough," she said. "They didn't need a Process Excellence."

Wendt has been selling the artwork and trying to integrate the different systems and technologies of the many acquired businesses, she said.

Leaders are trying to apply Process Excellence to the company's every function, facility, site and job, said Bob Preston, a master black belt and senior vice president for Process Excellence at Conseco Finance, which was formerly Green Tree Financial. Preston sees other future benefits from Process Excellence. He said the program is "a breeding ground" for future managers, in that it gives them an opportunity to grow and become stronger leaders. He also expects the program to help "when we get out of the hospital" and engage in acquisitions and joint ventures, and when the company needs to assimilate new design methodology, new products and new technology.

Translating Six Sigma Methodology

Conseco Inc.'s leap into Six Sigma methodology is still rare among financial-services institutions, and the company faces special challenges in making the process work in a nonmanufacturing environment, according to officials at the International Society of Six Sigma Professionals, Scottsdale, Aniz. The society, which is nearing its second anniversary, is a professional group dedicated to the advancement of the methodology and its practitioners.

The society has more than 8,000 individual members from more than 600 companies. Most of the first companies to use Six Sigma were manufacturers in the Fortune 500 group that followed the lead of top executives Jack Welsh of General Electric and Lawrence Bossidy of Honeywell (formerly Allied-Signal), said Roxanne O'Brasky, society president. The methodology then spread to Ford, DuPont and Dow Chemical, before making its way into transactional and service businesses like GE Capital, McKesson HBOC and American Express.

Companies have been drawn to Six Sigma because their complex problems "suck up a lot of profit," but they are so resistant to resolution that companies tend to just live with them, said Donald Redinius, the society's executive adviser and formerly in the executive ranks at Fortune 100 and 200 companies at the senior vice president and president levels. O'Brasky said that successful use of Six Sigma by insurers may take longer to achieve than it did for manufacturers because the methodology is statistically driven, and insurers and other non-manufacturers "don't normally collect defect and dissatisfaction data."

"They probably have quality-improvement efforts in place," she said, "but Six Sigma is driven by data." Also, insurers will want to make improvements for their customers, while the methodology was originally created to improve internal processes, she noted.

The likelihood of success is much higher when a company's executive team leads the way and approves a major deployment, said Redinius. That includes dedicating people entirely to the job, as is the case at Conseco. GE, Seagate Technology, Dow Chemical and DuPont, with the strong backing of management, all achieved great success, with DuPont probably at the top, Redinius said.

"It's a very financially driven methodology," he said. "Every process that gets improved is defined through a project. Without leadership support, the people assigned don't have the environment in which to work with what they've learned." And that's not just leadership from top executives, but from parts of the company undergoing the projects, he added.

"If you're not holding management accountable, management won't pay attention," he said. "The managers have to identify and define the projects to be worked, based on priorities, and someone has to monitor the results afterward."

Corporations usually use Six Sigma to attack problems that are harder to fix, which is where most of the money is tied up. As a result, it often takes a high-level management executive to comprehend the impact on the business, Redinius said.

The hardest part of the process is usually the analysis phase--when team leaders try to unscramble the data and "the most horsepower" is needed--but it varies among companies, Redinius said. "Some management teams are so disoriented, they can't even define a problem," he said, But Six Sigma can be worth the effort. For example, GE is projecting a savings of $7 billion over five years. If a corporation has a net profit of 5% to 8% of revenues, Six Sigma commonly adds 2% or 3% more, he said. Although the process was created by U.S. corporations, Japanese companies have embraced it, including Nissan, Sony, Toshiba and Panasonic. There is also a high level of interest in Europe.

Redinius said Six Sigma's emergence was made possible by "a magic thing" that happened in the early 1990s: "The computer and the software were so cheap and user-friendly" that companies didn't need statisticians anymore. "Now, thanks to the power of the computer, reasonably bright people can run the analyses, and they couldn't do that before."

Conseco would be involved in Six Sigma even if computers were not available, said Ruth Fattori, executive vice president in charge of "Process Excellence," Conseco's version of the program. But computers help to "crunch the numbers" and to model processes, so leaders can see what is likely to happen if the company attacks a problem in a certain way. She also said it's important for project leaders to crunch numbers once or twice so they better understand the math and how the program works.

On the solutions side, however, computer technology "has opened all kinds of doors that we wouldn't have had a couple of years ago," Fattori said. "In one of our projects, fax server technology is one of the solutions. Five years ago, that wouldn't have been a solution."

Conseco Moves Full Speed Ahead With Six Sigma

Most of Conseco's "Process Excellence" efforts are aimed at Conseco Finance, the large lending organization based in St. Paul, Minn. With some 7,200 employees, the subsidiary employs about half of all Conseco employees. As of September, it had 124 of Conseco's 231 Six Sigma-based projects, 11 of 23 program-designated master black belts, and 97 of the company's 145 black belts. Master black belts and black belts are project leaders and trainers who work in the program full time.

Benefits from the Conseco Finance projects are expected to yield $65.2 million, or nearly two-thirds of the entire corporation's estimate of $100 million by early 2002, said Bob Preston, a master black belt and senior vice president for Process Excellence at Conseco Finance.

Conseco's Supplemental Health operation, meanwhile, is engaged in a major effort to relocate its call center to India from its home campus in Carmel, Ind. It has eight Process Improvement projects, with many more in the pipeline, said Elizabeth Georgakopoulos, president of Supplemental Health. Finance and insurance are the two major segments of Conseco's business.

Reducing Collection Letters

Two of Conseco Finance's completed projects will save an estimated $2.8 million. The smaller project, headed by black belt Adam Taylor in Sacramento, Calif., found that the company has been unnecessarily sending an average of 1,100 to 1,200 collection letters each day to customers who had fallen behind on mortgage loan payments on manufactured housing. By eliminating these unnecessary letters, it will save an estimated $541,000 annually.

Not only did Taylor's team suspect that the company was incurring unnecessary expense, but the members knew that the letters made customers upset when they received one after making a payment arrangement, when they got more than one letter at a time or when the letters arrived only a few days apart.

Taylor said the project's research data showed Conseco's internal systems did a better job identifying which clients should receive collection letters than did human collectors making those decisions. Taylor's team used that to develop a set of logical criteria to guide the human collectors. On Aug. 9, the team put that system into place in every division: consumer finance home improvement and equipment finance/ commercial finance.

Before implementation, unnecessary daily mailings varied from near zero to nearly 3,000. With the stricter guidelines backed by the statistical data, Taylor's team reduced the daily mean to 9.8 unnecessary mailings between Aug. 9 and Aug. 27, and reduced the upper limit of daily variation to 61. The project thus increased the Sigma, or control of variation, to 4.5 from 2.1, with 4.5 equaling an accuracy rate of 99.865%.

The project determined that 39% of the 1.6 million collection letters a year that Conseco Finance had been sending were unnecessary.

In Houston, black belt John McLaren worked on a project involving the claims process of Financial Institution Recovery Service, a group Conseco Finance uses for processing damage claims on manufactured homes it repossesses when owners fail irretrievably behind on mortgage payments. These customers may still owe money on the loan, even after Conseco seizes the structure and resells it. Part of the way Conseco can reduce that deficiency balance on behalf of the customer--and recover money it may never otherwise collect on that balance--is to file claims with the insurer of the structure for sudden, direct or accidental events that diminished the value of the home at resale, such as vandalism after it was vacated.

McLaren found that of 4,081 claims the service filed last year on behalf of Conseco and the homeowner, only 2,367 resulted in payments. The results could have been caused by improper field inspections or mishandled paperwork, but Preston said in many cases, Conseco was not filing the claims itself on behalf of the customer. "We were able to attack those paradigms and reeducate our work force into understanding there were lots of opportunities to file claims," he said.

McLaren's team created a training manual, exams and a continuing-education plan. It also tracked performance in each region of the United States, and it set stricter standards for completing a current-inventory condition report, which is issued before selling each house. From July 11 through August, Conseco banked an extra $558,734, and it anticipates annual savings of $2.2 million from this initiative.

The project also benefits new customers and improves Conseco Finance's competitive position. "We have to price losses into our program," said Preston. "To the extent we can reduce the bad loans, we can have better pricing for customers in the future and probably get some people into homes that historically they have been unable to afford."

McLaren's project was in the control phase in September, but the results so far exceed company expectations.

Before the project, the claims-paid rate was about 9% of houses resold, but it rose in August to 28.6%, much better than Conseco's goal of 20%.

Preston added that Conseco Finance plans to replicate the system for use by its divisions of home improvement and mortgage services.

Supplemental Health Projects

Another major division of Conseco Inc., Supplemental Health, insures about 2 million people, 750,000 of which have coverage through work-site plans. Georgakopoulos said the company is No. 1 or No. 2 in all markets in which it competes, and it is one of the biggest claims payers among supplemental insurance providers in the United States. The Conseco products include Medicare supplement, long-term care, group disability and specified disease.

In addition to the eight Process Excellence projects, the division has 19 outsourcing projects under way, including the one to relocate the 24-hours-a-day call center to India without inconveniencing policyholders of the four subsidiaries affected: Pioneer Life Insurance Co., Washington National, Conseco Senior and Conseco Health. As of September, the relocation was in a pilot phase, with 24 employees answering calls on behalf of Pioneer Life.

"The reason we're employing the Six Sigma process to the move is to ensure first that we've got an efficient measurement of the process," said Scott Rogula, a black belt heading the project. "We also want to establish the baselines for various aspects of the business, such as quality and productivity, to ensure we don't impact our customers in a negative way. And then we actually want to improve the process."

According to Georgakopoulos, one of the problems with the call center is that the company does not have good baseline measures in place for it in general. By using black belts in India; Conseco hopes to keep disruption to as small a time and as narrow a scope as possible before improvements take hold. Rogula said that establishing a baseline also provides an opportunity to find out what policyholders expect of their call center.

The call center at the company's headquarters in Carmel, Ind., currently has 84 employees, but it has experienced turnover of 50% a year or more. Georgakopoulos said the high turnover has produced "a considerable amount of litigation" against the company due to "inconsistent customer interaction."

"It's not just whether we're answering the phones fast, but I've got this peripheral cost, which is not small for this business," she said. "We know the sensitivity around health insurance in general, so we had no choice but to do something."

Ruth Fattori, Conseco's executive vice president in charge of the Process Excellence initiative, is establishing the methodology in India and has visited the site. Georgakopoulos said she and her division are directly responsible for moving the call center operations to India. "People are going back and forth doing training and monitoring, and senior-level management are making sure we're in sync," she said. "The quicker we can get it into control, the transition up and running and stabilized, the quicker we can put black belts on it and drive the cost savings." In addition to savings of about 20% on salaries in India, she expects the process improvements to drive costs down by another 10% to 20%.

The project is in the measure phase. Rogula expects more reliable, consistent and dependable service for customers and $1 million in savings annually.

In a completed project out of Supplemental Health's claims office in Chicago, master black belt Ken Stark projects saving $225,000 annually by cutting in half the number of assessments performed by outside vendors on claimants before Conseco pays long-term-care nursing-home claims. Conseco pays about $300 million a year in long-term-care claims. Stark said the assessments help the company obtain information to adjudicate claims.

Conseco analyzed assessments data from October 2000 through December 2000 and learned that vendors used four criteria to request an assessment. Stark said the data showed one--a dollar limitation-- wasn't valid. Digging deeper, the team found other flaws about when the criteria should be applied. "So we came up with a decision matrix, gave that to the adjusters, piloted that and found that we basically cut the need to do an assessment by about 50%," Stark said. "Of the remaining assessments we needed, we reduced turnaround time from vendors by 47%, to about eight days from 16, without compromising the process."

Again, project leaders expect to extend the benefits from this project to other company processes. Stark said they are replicating the project in home health-care claims because they involve the same kind of data. And Georgakopoulos said the company might be able to apply the findings outside the claims area, perhaps in "front-end processes" like underwriting.

Managing the Urgency

Conseco's commitment to its Six Sigma/Process Excellence program reflects an urgency it feels to create a new company, and it led to a decision to shortcut the introduction of the program. "It took years for GE to get to where we are today," said Georgakopoulos. "I came from Citigroup, a big Six Sigma company. The first thing they did was train everybody in the company, and then they started their Six Sigma projects.

"We did the opposite. We said, 'Pick a couple of black belts, get them trained, get them working on projects,' and now we're in the process of backfilling. And so, that cost a lot of money, because we basically had to shoehorn in the projects and say, 'Trust us.' It would have been much easier if the people you were working with had been trained, but we didn't want to take that time."

Georgakopoulos' subsidiary was the first to hold a Process Excellence training session and was an early adopter of the methodology in the Conseco organization. "We focused on getting the productive projects out first, and now we're retrofitting the culture change," she said.

Before Process Excellence, the long-term-care assessment vendor was doing a better job of measuring what Conseco was expecting of it than what Conseco was measuring, Stark said. "Now our vendors know they're being measured and that we have our hands around that data," he said.

The power of the Process Excellence tool to measure metrics across the businesses has uncovered "glaring problems," Georgakopoulos said, and it has the leadership team asking whether it should be adding black belts faster. But it has to balance that with how much change the organization can absorb at one time.

"We're learning a lot about where the mistakes are, where the issues are in the organization, and now we have to live with them until we can get them all on the queue," said Georgakopoulos. "That is a very tough discipline, not to get yourself in over your head.. .You've got to be patient about how fast you can entertain [projects] ."

Part of the challenge, Stark said, is "interfacing" those improvement projects with processes now also affected by outsourcing. Another part is that projects can cut across "functional silos," the business functions that normally do not communicate with each other.

With GE, the only other financial services company to have applied Six Sigma on a large scale, Conseco hopes to gain a competitive advantage "for at least a little while, because insurance, of course, is known for its poor service, not its good service," said Georgakopoulos. "There are a lot of quality-improvement programs going on in insurance companies, but they're all benchmarking each other. This is an absolute; we're measuring against an absolute Sigma calculation. So I might be four times better than an MG by the time I'm done.

"We can't afford incremental improvement in insurance services," she added. "We need quantum leaps against an objective method. I'm going to go from One Sigma to Four Sigma, while someone else may be going from one to two and calling it a win."

From 2.1 Sigma to 4.5 Sigma

Beginning July 2, project leaders compiled data on mortgage collection letters and devised guidelines for collectors to determine which letters were unnecessary. The new standards went into effect Aug. 9. The green horizontal line is the mean of the number of daily defects, about 1,100. The red horizontal lines are the upper and lower control limits, by definition three standard deviations away from the mean. Ninety-nine percent of all data should fail between the control limits; data outside the limits is considered an aberration. From Aug. 9 to Aug. 27, the daily mean of unnecessary letters dropped to 9.8, equivalent to 4.5 Sigma, an error-free rate of 99.865%, from 2.1 Sigma before Aug. 9. The expected results: enhanced customer satisfaction and more than a half-million dollars saved annually.

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