Beware the Perils of Scope Creep

Pitfalls to consider when shopping for a new claims management system.
By: | February 4, 2014

From a 12/12/13 news release:

North Dakota’s workers’ compensation agency is considering suing a company that failed to complete a $17 million computer system overhaul. Workforce Safety and Insurance hired Chicago-based Aon eSolutions in 2007. The software system upgrade that was to save the agency $3.4 million annually was plagued by delays and cost overruns and was never finished. The contract expired at the end of last year and WSI did not renew it. WSI Deputy Director Clare Carlson says the agency likely will decide on legal action in the next few months. The Bismarck Tribune reports that the state Legislature earlier this year approved $750,000 for potential litigation. Aon has said the company was not solely responsible for delays.

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In the past, I have written columns on the use of technology to improve claim handling efficiency. It is incumbent on claims departments in the “modern” era to have some type of computer data capture and processing system. The amount of bills, correspondence, statutory form requirements, etc. has proliferated over the last three decades to the point that it is virtually impossible to handle a large caseload (whether the claims are WC, GL, Property, Toxic Tort, Medical Malpractice, etc.) without the use of a robust computer system.

Of course, recognizing the need for such technology is materially distinct and apart from actually obtaining or upgrading a system that meets user articulated requirements. Anyone who has gone through the selection and implementation of a new computer system, or a significant upgrade of one already in use, can attest to the tortuous course that often must be taken before the project is completed. In its wake is often a litany of mistakes and errors that result in the flotsam and jetsam of once successful careers for both the implementer and the client.

In order to ascertain what is desired, it is necessary for the claims organization to formulate a list of desired functionality. This is far from a facile task or quick task, but one that is absolutely necessary in order to have at least a reasonable chance of ultimate success. Obviously, if the client doesn’t know or understand what it wants, the chosen vendor will not know either. This is a recipe for disaster.

Weighing Options

The first choice of any claims department is to either obtain an entirely new computer system, or upgrade the one that is already being utilized. Many factors come into play when making such a decision, including cost, desired functionality, implementation time, and training needs. Of course, vendors are endemically “optimistic” about what they accomplish for a client. They will assert that they can bring in the project faster, better, and less expensive than the competition. Sorting through the marketing blatherskite is crucial for the client. Otherwise be prepared to run hard aground.

Usually, a prospective client will ascertain internally whether they think their present system requires an upgrade (based on the desired functionality and cost), versus the installation of a completely new computer system.  This takes a prodigious amount of work and involves Claims, IT, the CFO, and CEO. Once a decision is made to go new, or upgrade, a selection process (or “beauty contest,” as they are called in the vernacular) begins to find the correct partner in order to achieve the desired result. Here is where it gets dicey.

No organization has an unlimited amount of time or money for a new or upgraded claims computer system. The buyer wants it to be done within budget and on-time, while achieving the desired improvement in functionality (which will hopefully result in more efficiency). The vendors will virtually all claim they can accomplish the mission within the established parameters of cost and time. Now the burden is on the buyer to choose the right partner/vendor.

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It is logical to assume that a buyer will ask for references and speak to former and present clients of vendors being considered to obtain opinions on the efficacy of their work. However, this is sometimes either overlooked, or half-heartedly pursued. Keep in mind that self-recommendation is no commendation. A vendor will often tell the buyer whatever it takes to secure the contract. Their system will walk the dog, result in world peace, and determine the nature of the afterlife! Well, perhaps not that blatant, but you get the picture. Thus it is incumbent on the buyer to be very detailed in checking references, especially since the cost of a typical computer upgrade is in the millions of dollars. The purchaser should not be swayed that the vendor they favor is a nationally known organization. Bigger doesn’t necessarily translate to better. Check references!

Avoiding Friction

Once a vendor is selected, the buyer had better well know what it wants, because the two words that are anathema to any project of this nature are “Scope Creep.” This is when the original parameters of functionality become stretched resulting in more costs and elongated implementation time. Scope Creep has all of the attractiveness of a poke in the eye with a sharp stick. Now it is normal for additional functionality suggestions to arise during the course of a computer system upgrade or new implementation, but beware when any conversation starts out with, “It would be great if we added an entirely new module that will really make this thing a rocket ship.” The warning signals should be going off at 120 decibels whenever a discussion of this ilk commences, because the buyer is now trading money and time for allegedly a major increase in relevant functionality.

If there is going to be a riff between buyer and vendor, it will normally occur due to “scope creep.” The typical scenario is that the buyer will claim that the vendor did not fulfill its contractual obligation and the project faced time and cost overruns. The vendor will counter that the purchaser approved additional functionality that wound up costing more than originally anticipated. This is the stuff of which lawsuits are made, and when the papers are served, all bets are off on the ultimate litigation cost, but seven figures is not unheard of in this arena. Clearly it is more productive to have hard delineations on the original scope of the system work so this type of situation will not occur.

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In terms of the impact on the claims adjusters, this transpires when the upgrade or new system is ready to be unveiled and placed in production. Prior to that, there had better have been detailed and pertinent training sessions for the claims organization, because once the genie is out of the bottle, there is no going back. Having been through numerous projects of this nature in my career, I can also say with certitude that once the system is in production, issues with functionality will ineluctably materialize. They may be large and/or small, but this will transpire. Therefore, there had better be a prearranged agreement on how these items are going to be handled in terms of who, when, how, and timeframe for completion.

The selection of a vendor to increase functionality of an existing system or install an entirely new system is serious business. It goes without saying that it is an expensive endeavor, but beyond the sheer monetary cost are the ramifications and repercussions of the decision-making process that will echo far into the future and materially impact the organization, for better or worse.

John D’Alusio has more than 35 years' experience in insurance and claims. He has been the senior claims and operations officer of three national claim departments for carriers and TPAs. John has written extensively on the Medicare Secondary Payer Law and other insurance topics. He can be reached at [email protected]

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