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Five years ago, Pennsylvania Blue Shield supported its complex decisions by making lengthy studies to gather extensive cost data--that were good for only short-term use. Pennsylvania Blue Shield followed the prescribed methods of financial recording and reporting as recommended by the Blue Cross Blue Shield Association. This cost allocation methodology was adequate for product pricing but failed to provide the level of information necessary for management decisions.
Senior Vice President of Finance Robert E. Patterson saw that Pennsylvania Blue Shield needed timely, accurate, and extensive cost data to react to the dynamic health insurance environment. He believed improved financial information could enhance the strategic and operational decision-making process and provide better measures to quantify product and organizational performance.
The decision was made to implement an activity-based costing (ABC) system. Much of the work of implementation followed a structured methodology, but to overcome the subjective, cultural issues surrounding the introduction of a new cost system a unique approach was needed.
STEP 1: PLANNING
Although ABC was emerging as the tool of the '90s, Pennsylvania Blue Shield hesitated to buy in to the new approach quickly and without guidance from professionals. First we enlisted the aid of qualified, knowledgeable consultants to educate us on ABC and assist us in developing a workable plan. As we learned later, this planning process was critical to the success of the new cost system.
During the planning phase, we interviewed senior management to identify four major corporate factors:
*The company's critical issues,
*Management's difficult decisions,
*The corporate culture, and
*The current approach to financial management.
From senior management's perspective, the critical issues facing Pennsylvania Blue Shield were the same issues facing many businesses today: market share, integration, overhead cost control, capacity management, and legislation.
To respond proactively to these issues, management needed a great quantity of information, some financial, some not. Initially, senior management found it difficult to pinpoint the specific financial information that might be needed. The focus continually returned to currently available data.
By determining the difficult decisions that management typically faced, we were able to identify the financial information management would need to support decisions (see Table 1), especially those having an impact on the critical issues. Based on the level of information identified through this process, the...