Steve Player talks with Patricia Cochran, CFO of vision benefits provider Vision Service Plan, about the firm’s 50 years of growth and how deep insights from its activity-based costing program are transforming its planning, reporting, and performance management.
Steve Player: Tell me a little about what Vision Service Plan does ...
Patricia Cochran: We provide eye care as an employee benefit. We've been in business a long time -- since 1955. We are the largest provider of this service, covering over 55 million people throughout the United States, which means that about one out of every six people has our vision coverage. We primarily sell it through employers, as well as associations. We also have an individual plan so that people can buy it directly. We provide eye exams, eyeglasses, and contact lenses if patients need vision correction.
We have an eyewear frame company that sells frames on a global basis under brand names such as Calvin Klein, Fendi, Pucci, Nike, Disney, and Tommy Bahama. We also sell sunglasses and corrective eyewear for patients all over the world. VSP owns four optical labs that can grind blanks into prescription lenses. Additionally, we have a doctor practice solutions company that serves eye doctors.
SP: So you're providing consulting to help doctors set up their office, schedule billing, do back-office processing, and so forth?
Cochran: Right. It's an integrated solution to manage the practice -- everything from medical records to practice management, from electronic claims processing to the electronic ordering of materials.
SP: Is that a new service area for VSP?
Cochran: It's a service that we've been providing for some time, primarily in the United States, but what's new for us is that we have now expanded into Australia.
SP: Tell me about the company's move toward vertical integration. What's the strategy behind having an eyewear frame company and labs?
Cochran: The aim is really to have control over the quality of the product that we're delivering. Our mission is to provide very high quality vision care throughout the United States, certainly, and then we'd like to expand beyond U.S. borders. In order to do that, we feel that we need to have control over the complete set of services.
The vertical integration drive began some time ago. Back in the 1970s, we started with laboratories, and then about 15 years ago we started producing eyewear frames. About ten years ago, we added the doctor package solution.
SP: What kind of pressure does that put on the finance organization, when you move from a single-line business into multiple aspects of the value chain?
Cochran: It does add some pressure, because there are many more skill sets that we need. But it also provides an opportunity. The morale of our employees in the finance division is very, very high, primarily because they do have this variety of opportunities to grow and to have new experiences.
For example, I've been working here for 30 years. But it hasn't been the same job for 30 years. When I look back on my career here, I've always been challenged. I've always had new responsibilities forming. It's been very rewarding to be able to develop new skills and help the company grow.
SP: How do your colleagues react when you tell them that you've been at the same company for 30 years?
Cochran: They're usually shocked! But then when I explain the company's growth and the wonderful challenges and rewards that I've had along the way, I think they understand.
SP: You must have seen a lot of changes in that time ...
Cochran: I have. When I joined the company, we had about $30 million in annual revenue. This year, we'll do about $3.3 billion.
SP: Did you start in accounting?
Cochran: Yes, I came out of one of the Big Eight firms. I was with Ernst & Ernst, before it became Ernst & Young -- I go way back! -- and I came into the organization as its first controller.
SP: So you made a traditional transition out of the audit firm. Was VSP a client at the time?
Cochran: No, they weren't, but I knew the manager on the audit, and I said, "You know what? That job has my name on it."
SP: How has your career grown since then?
Cochran: My career has grown as the business has grown. When I first joined VSP, we were a single-state company (operating only in California). In the 1980s, we decided that we should become a national company in order to have total control over the quality of the product delivery. We were associating with other, similar organizations in the business around the country, but in order to provide consistent service to a company like IBM, which is our customer, we really thought that we needed to control all aspects of the business.
We started adding new vision plans in other states and acquiring existing companies. We went through a whole series of mergers and acquisitions that took about 16 years. When we started, we were naïve, in a way, given the complexity of state insurance regulations. We really underestimated the complexity that we faced. I think that we were probably the first national company to have underwriting authority in all 50 states.
I learned a lot about insurance regulations along the way. You have to come up to speed pretty quickly on what the lay of the land is from a regulatory standpoint. And obviously, if you've never been there before, you need to get expert advice. We've been fortunate to be able to work with some great accountants and attorneys around the country to help us get smart really fast.
SP: What role does finance play in your merger and acquisition efforts?
Cochran: There are a couple ways in which finance contributes. One is in the development process. In all of our acquisitions, our finance team has been very involved in looking at the other organization's records, sorting the data, digging in, and finding out what's really going on. I see finance and accounting as the language of business. We speak that language pretty fluently, so we can tell the rest of the management team what we see, what the concerns are, what the opportunities are.
The other thing that we've done in finance, and probably one of our best results, is to get the companies that we've acquired onto our financial system. When I look back at some of the things that my colleagues in other businesses have done -- leaving the systems the way they were and trying to cobble things together over many years -- I'm glad that we avoided this. Early on, we said, "We're going to get these organizations onto our company system. We're going to bite the bullet before it's too late, because the longer you wait, the worse it gets."
SP: It seems that you're moving throughout the value chain, from the independent optometrists all the way through to production. How are you pulling this together, and what role does finance play?
Cochran: One thing that we did was to experiment on a pilot basis by developing our own companies from the ground up. We created an optical lab to start with, and once we understood the business, we acquired other labs. We did the same thing with the eyewear frames business and with the practice solutions. We've sort of been in the kitchen mixing up our own little businesses, trying to see what works and what doesn't. Once we felt that we had some expertise, we were more confident about acquiring other companies.
Another thing that we've done is to create an electronic platform that we use to communicate and collect data via the Internet. We have an electronic claims processing system that pulls the data in through the Internet into a communication system that edits the claims. So we get clean claims; in fact, 95 percent of our claims come to us without us having to do anything to them. The finance team has been a big part of the testing and making sure that the controls are adequate. Certainly it's an area where we've had a lot of expertise and assistance on internal controls, because that's our bread and butter; all four business lines rely on the data from that system.
SP: My introduction to VSP was through the company's activity-based management program. What were you aiming to achieve when you set up activity-based costing, and what role does it play today?
Cochran: In my earlier years working here, I kept hearing from my colleagues in management, "If only we understood our costs!" They wanted to know what it cost to do a particular piece of work, and they couldn't decipher it through the traditional accounting that we were doing for them. I thought that there had to be a way to get that understanding to them. When I first started the activity-based cost program, I thought, "This is something that they will understand, versus the natural classification of expense or department reports."
At this point, the management teams in our organization know so much about their costs -- they can't escape! Before, it was a mystery; now, it's no longer a mystery. They understand how much it takes to do the work they're doing and whether it's creating value.
Activity-based costing has been very helpful for us. We've dropped some products that really weren't profitable. As much as we wanted to hang on to them, the facts were the facts, so we dropped them. It's definitely been a value-add.
SP: How is reporting being impacted? What are you looking to achieve in terms of how you convey information within the organization?
Cochran: With today's technology, there are so many wonderful tools that we can use to make it clear, to make it concise. The days of working through columns of numbers and trying to figure out what they're telling you are over. Through corporate performance measurement tools and some of the wonderful graphical presentations that we can create, we can ensure that the right information gets to the right people and that they understand the meaning behind the data and the essential things that they need to take away from a document.
Our activity-based costing work is helping us to feed data to our corporate performance scorecard so that we have reporting that's very clear, very concise, and yet behind it there's a lot of complex information.
We've been working to develop performance indices -- indicators with weighted measurements for key elements of our business -- so that an executive can ask, for example, "How am I doing in providing customer service? How am I doing in maintaining our doctor network?" Each index has several components.
SP: It seems similar to the Consumer Price Index. The weighting shows how complex factors interplay and gives you one place to keep the information ...
Cochran: It does, and it also gives us a place to have a conversation around accountability. Our CEO is very supportive of using the indices. For example, he asks each person who is responsible for an index to communicate to the rest of the team what they're doing to improve if they're in the yellow or red zone.
SP: Does this carry over into your planning effort?
Cochran: Absolutely, because we have access to all of these performance indicators and this cost information, and we can use this data to move forward and do our projections on a strategic basis.
SP: How do you keep from getting overloaded from too many measures?
Cochran: This is something that we have to discipline ourselves not to do. As accountants, we can think of all kinds of things that we might want to be concerned about. This is where the indices have been very helpful, because you may be measuring eight things, but you condense it to one index.
You need to get buy-in from those who are responsible for the performance of the index: "How should we weight these various measures that are going into the index?" This is very important. There's a sort of give-and-take, with our activity-based management team working with the management of the area that's responsible for each particular index to come up with a weighting that makes sense, that's reasonable.
SP: Have you made any major changes in planning and budgeting, or do you have a fairly traditional budget?
Cochran: I'd say that we're still doing traditional budgeting. One thing that I'll add, though, is that the budget isn't static, because we can adapt to various business changes.
We do the budget in a condensed timeframe; we give people about six weeks.
SP: So you're not a six-months-process type of organization ...
Cochran: No, we get that thing done! And then, on an ongoing basis every month, our business leadership team -- the four company presidents, the CEO, the CFO, and the VP of HR -- gets together, and if there are any changes that need to be made, we talk about these as a group. Do we need to increase an activity? Do we need to make a strategic investment in a business or a product line? The budget isn't set in stone, and it does evolve during the year, but there are some pretty substantial discussions among the top leadership team before any changes are made.
SP: How far out do you forecast?
Cochran: We do a pretty good job of forecasting for the next two years. We try to do some forecasts out five years, but I'd say that these are pretty big guesses.
SP: How does VSP deal with the kind of volatility that we've seen since the back half of 2008? I assume that some of your customers have been laying people off, so they have fewer employees for their health programs to cover. How does that impact you?
Cochran: We've been impacted from two standpoints. One, as you mentioned, is that unemployment is not our friend. The second thing is that when people are nervous about losing their jobs, they use their benefits at an extraordinary level. They're thinking, "I'd better use it today, because who knows whether I'll have it tomorrow?" So we've seen a real spike in utilization. In all the time I've been here, I've never seen a utilization pattern like this last year.
Our seven-executive budget oversight committee is where we think this through. Obviously, we want to safeguard our employee base; our talent pool is our future. With this as an underlying premise, we looked at our discretionary spending areas -- some of which are nice to have, some of which are part of our culture here -- and we thought about them in tiers: If we need to start paring back because of shrinking enrollment, what's our first tier? What are our second and third tiers? So we're ready to execute if we have to.
SP: You've gone from a state-based to a nationwide organization, and now the push is international. What's behind this?
Cochran: I think that what's behind it is this global economy that we're all in. In order to grow, which is one of our core values, we have to basically grow in operational exports. We have to grow offshore. We realize this, and we're trying to figure out how best to do it. The vision benefits side of the business doesn't translate very well offshore, because the rest of the world does health benefits in a different way than we do them in the United States, so we have to figure out a way that works.
SP: Does it involve more national coverages?
Cochran: Yes. A lot of coverage is sponsored by governments. In those countries where vision isn't covered, it's pretty much on a private-pay basis. The doctors aren't used to a discounted program, and our program is based on volume and discounts, so our first global moves were around the eyewear frames business, as well as our doctor practice solutions. We manufacture about 75 percent of our frames in China, and the rest in Japan and in Italy, where we own a factory. But we distribute them around the world.
SP: On the practice solution side, are there certain countries where this is a fairly prevalent service, or is it pretty much an open market around the globe?
Cochran: I think that it's an open market. British Commonwealth countries are the ones that are closest to the way we do things in the United States, so we're interested in Canada and Australia.
SP: How is this progressing?
Cochran: As I mentioned, we just did an acquisition in Australia, so we're excited about that. It was a doctor practice solutions company. We're also working to expand into Canada right now. We think that there's some great potential there, and we have our feelers out.
One of the good things about our frame company business is the doctor relationships it provides. We sell frames to eye doctors all over the world. This is a good way for us to open the door.
SP: You've certainly pioneered in several states, so we'll see how the pioneering goes across the globe ...
Cochran: Well, we created the vision care products in 1955. If you think back, who even had medical insurance? And here was this group of eye doctors from California who had a vision: As companies were starting to provide medical insurance, what about vision insurance? It's amazing to me that from this single idea has come this entire industry. And we built the company just by knocking on the doors of businesses and labor unions and convincing them that this was a product that made sense. It's made tremendous strides.
SP: It has certainly helped the world see better ...
Cochran: Yes. And this is one of the great things about the business: We have a kind of higher calling. One of the ways in which we give back is through our Sight for Students program, which provides free eye exams and eyeglasses to needy children who don't have services through some other venue. We target kids who may not meet the Medicaid credential, but whose parents are below the federal poverty line, so that getting that eye exam and buying a pair of glasses is really a stretch.
We work with organizations that help those children. About half of the kids that we serve come through the National Association of School Nurses. These nurses are out there every day; they know which children are struggling with their schoolwork, and they know when it's because they have a vision impairment problem.
We serve about 55,000 kids every year in all 50 states. It's one of the special parts of our business, which does have that higher purpose to it.
SP: What advice would you have for people coming into finance in terms of how they can advance their career?
Cochran: If they come with a finance background, that's very, very powerful, because they understand about growing the business. When they see a financial statement, they understand what it's trying to tell them -- and so many people working in businesses don't really understand that. They can translate the results of the business and communicate with the rest of the management team. They can explain what the economic outputs are from all the work that's been done. This is something that's sought after and appreciated.
To the degree that they can get exposure to other parts of the business --participate in teams that are working on projects, provide some advice and expertise -- they'll be quite valued. My advice to everyone on my team is: When an opportunity comes, take it. If somebody asks you to work on a project, always say yes, because it will lead to other opportunities. It will help you to grow, help you stretch and learn new things.
Another thing that's important is keeping up with what's new in management skill sets and business philosophies. You don't have to wait for somebody else to bring it to the organization; you can bring it in yourself. A good example is activity-based management. We jumped on that bandwagon fairly early. We jumped on the bandwagon of enterprise risk management early, and the same with corporate performance, dashboards, and scorecards. If something new is coming, don't be afraid to introduce it to your colleagues and your leadership team and ask about it, because doing so will help the business.
SP: Is there a rotation policy at VSP? An internal audit group?
Cochran: We do have an internal audit group, and we also rotate people among the four business lines so that they become more well-rounded and understand the rest of the business. The folks who work for us in accounting and finance can learn a lot of things, as I have in 30 years. My career has been more challenging than I ever dreamed possible, and this is because we have such a variety of business functions.
I'm very fortunate to have worked for three great CEOs in my tenure here. They've all been very supportive. They've all been willing to let me learn on the job, instead of saying, "Oh, well, you don't have that skill, so we'd better go hire somebody who has it." They've been willing to say, "Why don't you get some training? Why don't you talk to others? Why don't you try it out and advance your own skill set?" This is what I try to do with my team as well.
SP: Are you ever tempted to leave?
Cochran: No! I always say that I've never woken up on a Monday, or any day, and said, "Gosh, it's going to be so boring today; I don't want to go to work." It's always been fascinating and challenging.