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A COO pushes IT innovation by making it about business value

Linda Tucci, Executive Editor

NATIONAL HARBOR, MD. -- CIOs who believe that IT innovation has the potential to transform the businesses they work for might want to pay attention to what Kenneth Klepper is doing. President

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and chief operating officer of Medco Health Solutions Inc., a fast-growing health care company with close to $60 billion in revenue, Klepper is leading a radical redesign of the company's core business processes, from legacy systems to an agile framework.

As a COO, Klepper does not pretend to have deep IT expertise, but he sees ways of using IT in the business. Over the past two years, he has invented new working groups, shifting IT experts into business units and shaking up reporting lines. He has taken advantage of a tipping point in technology tools to enable business people to engineer their business processes. But what's the key to this ambitious -- and long-term -- business process transformation under way at Medco? According to Klepper, that would be good old-fashioned money.

"The Medco story of transformation is not so much about the technology obstacle, but how you get funding," said Klepper, who spoke about the company's IT innovation to an audience of CIOs at the recent Forrester CIO Forum 2010 in National Harbor, Md. "IT innovation is ultimately a financial exercise. The technology is kind of interesting, but we see this as an earnings engine."

Based in Franklin Lakes, N.J., Medco provides pharmacy benefit services to large employers and individuals. Not only has the company grown rapidly since it went public seven years ago, but it also has grown into other businesses, including basic research in genomics. Although Medco has business processes that service parts of its multiple lines of business, each of those businesses has unique requirements calling for custom solutions. Custom solutions also are the cost of doing business with many Medco customers. "We cover about a third of the Fortune 500 companies, and let me assure you, every single one of them is special," Klepper said.

Medco's legacy applications, however, were not conducive to adapting business processes or solutions on the fly. Nor could these systems easily handle what Klepper terms Medicare's "crushing demands" and health care reform. To remain competitive, Medco needed to rethink its business processes -- and not by taking small tactical steps but by moving to a new operating and governance model focused around agility, he said. "Incremental change will not fund transformation."

Keep redesigning until you can say 'yes'

To kick-start the transformation, Klepper created two organizations: business innovation and agility centers ( BIACs) and centers of excellence (COEs).

The BIACs, staffed by top Medco business and technology performers, are responsible for designing agile business processes that will keep Medco competitive in its marketplace.

The COEs, which are held accountable for Medco's core processes and for driving productivity, function as the BIACs' construction arms. Hundreds of IT people have been moved out of their core IT groups and into the COEs. Their challenge is to extract the business rules rapidly from Medco's legacy systems, fit those rules to the company's new, standard application framework (from Pegasystems Inc.), align the changes with operations and ultimately retire the legacy systems.

And, because IT innovation shouldn't happen in a vacuum, the company also threw down a challenge to the heads of Medco's operations centers: If technology were not an issue, could they redesign their workflows from end to end to decrease labor costs by 30%? As Klepper tells it, the challenge to cut staff actually was more like an ultimatum: "Our task was, you keep redesigning until you can say yes to that question."

"The BIACs make sure we are differentiating in the marketplace so we can win and retain business. They have to keep us moving in the marketplace, but they will not move very far if the operations team does make it highly accretive from an earnings standpoint," Klepper said.

With yes for an answer, Medco built a cash-flow model that calibrates quarter by quarter the investment in the transformational agile redesign to the labor costs saved by the redesigned workflows.

"The senior VP of operations and the senior VP working with all the business innovation centers have to look me in the eye and say, 'Kenny, if you give me the tools … I will guarantee you that I will give you the savings,'" Klepper said. "Then I have to turn around and look at my business process centers of excellence, which are run by the vice president of business process transformation and the head of my core IT, and look at them and say, 'With the money that you've got, can you deliver what these guys are asking for?'… Right now, they are all saying yes."

IT innovation easier said than done

Klepper's focus on the bottom line during this transformation is "cool," said Bobby Cameron, principal analyst for Forrester Research Inc. Demanding that the business people cut their labor force represented "good, aggressive management" and would resonate with leaders in IT, where labor costs are always an issue. "I am sure he would back off if quality or compliance was threatened," Cameron said.

But equally critical to the transformation is a practice Forrester has been advocating for some time: overhauling the IT structure so that it functions as a value to the business, not a cost center, Cameron said. By embedding the business analytics skills often buried in the IT department into the business organization, Medco ensures that the business process "is synchronous" with the business planning.

IT innovation is ultimately a financial exercise. The technology is kind of interesting, but we see this as an earnings engine.

Kenneth Klepper, president and COO, Medco Health Solutions Inc.

And indeed, the jury is still out on whether the new agile framework will pay off, because development expense has been deferred for two years, Klepper notes. "That's what the accounting rules are for," he said

Reaction from the IT leaders in the conference audience suggests that reinventing the relationship between IT and the business -- even more than making the money work -- is easier said than done. Frank Anastasio, a project director at the AARP, asked Klepper which skills he looks for in the leaders of the reorganization and whether there has been "a bubbling up" from the technology groups into leadership positions. (Klepper's answer to the latter query: It's a mix, with primarily business people heading up the BIACs, and legacy technology people "who were all about execution" distinguishing themselves in the COEs.)

Chase Garwood, CIO of a U.S. Department of Homeland Security directorate, wanted to know how Medco has dealt with "the fear and confusion" that ensues when operating models are changed. "There are folks who like their box," he said.

Klepper didn't whitewash the challenge. "There are people who are afraid, and they are worried," he said. And there "were real mixed feelings" among the legacy IT people who have been moved into the COEs out from under the CIO.

"But once they got in there, and they recognized the freedom they had and how much they were respected for what they know and how much we were relying on them to move us to this next future state that supports this agile strategy, they started getting excited," Klepper said. "Some were taking on hero status -- and they weren't getting much of that in the legacy team."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.


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