Tag Archives: Bruce Brodie

How to Manage Strategic Relations

Customers, distributors and vendors sink or swim together. One-sided relationships that maximize value for only one partner are self-defeating. They often result in the dissolution of worthwhile relationships, including the loss of key customers and the inability to access meaningful new opportunities.

Despite this, when it comes to managing relationships with vendors, distributors and customers, most companies set the bar low, and it shows during the annual planning process. Plans typically call for negotiating better rates with vendors and distributors. We often hear, “We’ll negotiate better rates and cut costs this year by one to two percent.” Or, “We’ll do more for customers and hope to increase our share of their wallet.” Or, sometimes even, “We just hope to retain the business.”

In addition to near-term planning, most organizations have traditionally managed important vendor, distributor and customer relationships through various business functions, including procurement, treasury, IT, sales and distribution, product and account management. In many cases, these functions are split by territory or division — and often even further by business line. As a result, organizations tend to manage these critical relationships in silos, quarter to quarter, seeking to maintain or marginally improve the partnerships currently in place.

Moreover, as many organizations look to expand beyond their existing footprint to increase scale, introduce innovative products and offer customers and partners engaging experiences, they often create even more silos that hurt relationships with new vendors, distributors and customers.

From a tactical approach to a strategic one

The status quo is far from ideal, and many companies are beginning to realize that successfully deploying their relationship capital can provide a significant boost to long-term revenue and profitability prospects.

Unlike traditional, siloed vendor, distributor and customer relationship management functions, strategic relationship management (SRM) views vendor, distributor and customer relationships holistically (e.g., from each perspective) and allows organizations to not only improve the terms of these relationships but also radically re-imagine them by developing new partnership models. SRM also enables organizations to streamline their total vendor and distributor footprint by focusing strategic spending on a few core partnerships.

Certain industries are rapidly adopting SRM to unlock the full value of their partnerships. The financial services, technology and professional services industries are early adopters, and we anticipate broader industry adoption as firms increasingly see their vendors, distributors and customers as strategic partners. Early adopters have begun viewing their strategic relationships as assets, with the objective of increasing long-term shared value for all parties.

See also: A New Paradigm for Risk Management?  

Organizations that have adopted SRM have seen tangible benefits from being in the cockpit with their most strategic partners. Organizations with SRM invest in partnerships by creating shared business plans and meeting regularly to discuss joint activities and coming opportunities. Enterprises and their top strategic partners have come to realize that they sink or swim together, and they focus on developing truly mutually beneficial relationships.

Examples of strategic partnership models include:

  • An insurer strikes a strategic partnership with a vendor. A global life insurer used several vendors to assist it with various strategic initiatives. Through its SRM function, the organization was able to prioritize one of the vendor firms that had a strong track record of helping the organization. Through several joint strategic partnership meetings, the two organizations defined a partnership model that could help drive shared, long-term objectives. The life insurer agreed to partner with the vendor on several strategic growth initiatives in return for taking over the vendor’s group life insurance plan (for 50,000-plus employees).
  • A strategic customer provides product feedback that increases sales and customer satisfaction. A large technology company had prioritized strategic customer accounts throughout its entire organization. By cultivating these relationships at all levels, the sales and distribution and account management teams were able to quickly relay real-time customer feedback to the product group. This transparency enabled the technology organization to make quick changes to its product offering that significantly increased sales, customer retention and satisfaction upon full product launch.
  • A partner opens the door to new markets. A regional bank used its SRM function as a foothold to expand its operations into new markets. The bank leveraged its strategic B2B partnerships, which already had operational or commercial reach, into select target markets that the bank selected based on the partners’ access to distribution channels and other opportunities to accelerate growth.
  • A large coffee retailer identifies a “win-win” opportunity with a strategic coffee supplier. Through its SRM function, a multinational coffee retailer identified a strategic partnership with one of its coffee suppliers in South America. The supplier produced top-quality Arabica coffee and needed to expand to meet the coffee retailer’s growing demands. Knowing the strategic importance of the relationship in the long term, the SRM function worked with the executive leadership team to create a mutually beneficial opportunity. The coffee retailer helped fund part of a coffee farm expansion project, and the supplier agreed to sell its product to the only retailer and work with it to develop new coffee blends. The retailer was able to build a strategic partnership that is helping to fuel its long-term growth strategy, while the coffee supplier was able to also grow its farming output.

Strategic Relationship Management approach

SRM strategically influences the lifecycle of major opportunities by focusing on four key concepts: connect, collaborate, leverage and influence.

Connect with your vendors, distributors and customers to identify their needs and develop strategies to successfully meet them.

Leverage strategic relationships to identify and prioritize growth opportunities.

Collaborate among business units, across borders and with external account stakeholders to create awareness of new opportunities.

Influence decisions where possible to increase benefits and drive growth for your customers and company.

This approach can help organizations develop joint strategies with their strategic partners to uncover mutually beneficial opportunities and create shared value. Selecting the accounts deemed “strategic” is one of the foundational aspects of setting up SRM, and companies must carefully establish the baseline criteria and other factors they’ll use to identify these accounts.

In addition, to obtain its full benefits, cross-functional executive leadership buy-in is essential to establishing effective SRM. An internal executive governance committee as well as appropriate account management processes and technology platforms will be necessary for the entire organization to effectively own and manage the targeted strategic accounts.

Conclusion: Benefits of Strategic Relationship Management

In conclusion, any organization can benefit from implementing SRM to strategically manage its most vital partnerships. Because of their scale and increased complexity, multinational organizations can stand to benefit exponentially.

Benefits for enterprise:

  • Leverage partners’ skills, capabilities and specialized knowledge as your own
  • Gain access to partners’ networks, channels and geographies
  • Create opportunities to evaluate a relationship holistically (i.e., as a buyer, vendor and distributor)
  • Lower negotiated rates with suppliers by negotiating across business units/divisions/ geographies
  • Improve revenue, margin expansion and prioritization of vendor and distributor relationships
  • Simplify relationships with fewer vendors and distributors

Benefits for strategic partners:

  • SRM-sponsored symposiums where buyers and vendors define common goals
  • Executive group partnership that incorporates global, regional and local perspectives
  • Candid and active feedback on final decisions (win or lose) within defined timelines
  • B2B business planning
  • Awareness of RFP opportunities

In short, having deeper and more meaningful partnerships with strategic partners creates transparency, trust and, subsequently, more opportunities for all parties. Moreover, the proper functions will clearly hear the voice of vendors, distributors and customers and thereby facilitate mutually beneficial, active strategic decision making.

See also: A Revolution in Risk Management  

This post was written with John Dixon, Jay Kaduson and Tucker Matheson.

BPO for Life & Annuity Market

Life and annuity insurers are focusing on three areas to drive growth: distribution, product and brand. Growth is hard enough in today’s market, but it’s even harder when your back office holds you back, both in terms of fixed costs and limited capabilities. Accordingly, achieving operational efficiency is table stakes for life and annuity insurers competing in an extended soft market.

Fortunately, given recent advances in technology and expansion of provider capabilities, business process outsourcing (BPO) has become a feasible way to reduce costs and increase efficiencies. Based on what we’ve seen in the market, we think BPO providers are ready to move from their traditional role as vendors to true business partners. With scale, advanced technology and money to invest, the best of them offer great opportunity for insurers to significantly lower costs and benefit from complementary services over the long term.

Why BPO and why now?

For years, insurers have tried numerous methods to achieve greater operational efficiency, including process reengineering, Six Sigma, and LEAN. Many companies also have pursued sourcing (primarily in IT) to stem the tide of rising fixed costs. While these initiatives have reduced costs and complexity to a certain extent, they have not lowered costs and operational complexity enough to enable the business to focus first and foremost on growth.

Fortunately, times have changed. Some BPO providers have recently offered savings on a per-policy basis (inclusive of both operational and IT costs) of anywhere from 20% to 40%. (Benefits depend on how much savings a company has already realized and how much additional opportunity for savings remains.)

BPO now offers the potential for greater long-term cost reductions and efficiencies than the methods insurers have used in the past.

In Europe, BPO and ITO (information technology outsourcing) has already played a major role in closed block businesses. Life, annuity and pensions BPO has a global market of more than $2.6 billion, nearly half of it in the U.K. In this case, the main point of BPO has been legacy policy cost reduction, but it also offers carriers an alternative operational platform for achieving faster speed to market for new products and for tapping into advanced customer service capabilities.

Legacy modernization is another important reason for considering BPO. As key staff retire, there is a real threat of knowledge loss, not least because legacy systems are concurrently moving toward the end of their effective working lives. Many BPO providers feature up-to-date and evolving technology platforms that are an attractive alternative to incurring continuing fixed costs in-house.

The key for carriers is to select a BPO provider that will keep its platform current rather than simply provide a “your mess for less” service (i.e., administration of your aging platforms). Without the right scope, BPO can backfire and actually result in a more complex operating model, with resulting stranded costs and a suboptimal customer experience.

What is large-scale BPO?

To understand what BPO entails, it is helpful to compare the different kinds of shared services that are available:

  • Captive shared services are when a carrier creates a wholly owned subsidiary to deliver services at a reduced cost. They can be established domestically, near-shore or off-shore.
  • Out-tasked shared services occur when a carrier hands over administration of its systems to a third party that offers wage arbitrage, but the carrier maintains ownership of the process and underlying systems.
  • In contrast, in a BPO transaction, the insurer hands over administration to a partner, who runs the former’s technology platform. In other words, the partner owns the process. Implementation may occur through a lift and shift approach (i.e., the partner takes over the carrier’s legacy platforms), through conversion (data is converted from the carrier’s legacy to the partner’s modern platform) or through a phased combination of both. To smooth the transition, ameliorate community and reputational concerns and improve change management, there is typically a significant amount of rebadging of employees from the carrier to the BPO partner.

Ideally, after BPO, the insurer is a service level agreement (SLA) manager, and the BPO partner controls the process. (N.B.: Contracts should be in place that stipulate performance requirements.) The insurer’s focus on the sourced business should be on performance and analytics, made possible through regular data feeds from the BPO partner.

  • In brokered BPO, the insurer contracts with a third party that isn’t itself offering BPO services but instead will manage the transition to a BPO provider. Ideally, the third party manager will have successful past experience with the BPO provider and managing the complex details of conversion from legacy platforms to new ones.

BPO is not one-size-fits-all. There are different varieties that insurers can match to their individual goals and circumstances.

Managing retained alongside sourced business

While moving the entirety of operations and IT to a BPO provider may seem appealing, insurers realistically will continue to be involved in many operational and IT activities. They often will retain key components of their operations and IT that they deem to be market differentiators. These most often relate to the customer experience (both with the agent and insured) and include call centers, portals and analytics. To remain effective, the operational platform that support retained components will continue to require maintenance, upgrades and BPO integration. Extensive up-front effort will be necessary to promote seamless integration of retained and outsourced components.

In addition, despite inclusion of a broad scope of operations and IT components, certain operational functions will remain with the insurer, namely HR, legal and compliance. Given significant sourcing, the question is if the insurer’s reliance on these functions will decrease and, if so, how to shrink them without increasing operational risks like:

  • Interruption of customer channels and operations: Businesses have been caught by surprise when service grinds to a halt at a provider.
  • Brand-damaging criticism: Businesses that fail to meet customer expectations – even if the cause is outside their walls – may see an increase in complaints, some going viral on social media.
  • Regulatory violation: A data error or breach at your service provider can put you in violation of regulations and jeopardize your customers’ trust.
  • System vulnerabilities: In a complex infrastructure that has dependencies you don’t even realize, a service interruption might trigger a series of problems that can affect your business.
  • Inaccurate reporting: Service provider processing errors can cause a misstatement of compliance, performance, operational or financial information.
  • Risk management lapse: Not knowing the controls around service contract terms can lead to unreported breakdowns in areas hitherto considered secure.

A good way to reduce the chance of BPO-related risks is to insist on a provider that comports with advanced service organization control (SOC) reporting. SOC 2 provides assurance that the provider has controls around the sourced technology and systems supporting the sourced business processes, but only to a pre-defined audience. SOC 3 provides the same assurance but more broadly to anyone interested in the provider’s control and allows the posting of a public seal on the provider’s website.

Embarking on BPO: An end-to-end approach

Given the significant potential for disruption to distribution partners, policy/annuity holders, employees and the community at large, BPO requires a more iterative approach to execution than many other forms of operating model transformation.

When evaluating BPO partners that best match criteria for in-scope functions and blocks of business, some carriers find that a single BPO partner may not meet all needs. Accordingly, it is imperative to determine the best BPO fit for each block of business.

Implications: Insights from BPO initiatives

  1. Plan big. Scope thoroughly enough to actually simplify management instead of just adding another layer of complexity to what you already have.
  2. Choose a partner, not a vendor. Approach the BPO as a relationship that will grow over time. Vet your prospective partner’s record of investment in other relationships and appropriately provide incentives to each other with thoughtful contracts that promote accountability.
  3. When vetting BPO providers, consider the amount of investment they’ll make to upgrade their platforms over time to continue delivering effective service.
  4. Don’t underestimate the amount of time that staff need to prepare for BPO. Identify all necessary business rules and ensure that key individuals and cryptic systems are aware of and understand them. You do not want any service interruptions.
  5. Map all dependencies on the policy administration platforms you’re seeking to move, inclusive of all ancillary applications.
  6. Realize that each part of the operating model you retain will add another layer of integration complexity to BPO.
  7. The prevalence of shared services and the opacity of many service-based cost-pools mean that many companies struggle to understand their IT spending. Therefore, it is vital to have an agreed-upon allocation method that won’t leave significant stranded IT costs post-BPO.
  8. Considering there will be more lines of accountability for running the business during and after the BPO, unless you use a brokered approach, you’ll have to create or augment an existing service provider management team.
  9. You may need multiple BPO partnerships. For example, the BPO partner that best meets your life book needs may not be the best choice to meet your annuity book needs.
  10. Ensure contracts account for all reasonable contingencies (e.g., growth, M&A, divestitures and spin-offs).

Are You Fit Enough for Growth?

When it comes to scrutinizing costs, most insurance companies can say, “Been there, done that. Got the T-shirt.” Managers are familiar with the refrain from above to trim here and cut there. The typical result is flirtation with the latest management trends like lean, outsourcing and offshoring. However, the results tend to be the same. Budgets reflect last year’s spending plus or minus a couple of percent.

Meanwhile, managers attempt to develop strategies to capitalize on the trends reshaping the industry – customer-centricity, analytics, digital platforms and disruptive delivery and distribution models. Yet, after all of the energy companies exert to reduce expenses, there is often little left over to spend on these strategic initiatives.

Why do you need to look at your expense structure?

A variety of pressures have led carriers to improve their cost structures. In all parts of the market, low interest rates and investment returns are forcing carriers to scrutinize costs to improve return on capital, or even to maintain profitability to stay in business.

After all of the energy that companies exert to reduce expenses, there is often little energy left over to spend on strategic initiatives.

P&C carriers with lower-cost distribution models have been able to channel investments into advertising and take share, forcing competitors to reduce costs to defend their positions. Consolidation in the health, group and reinsurance sectors have forced smaller insurers to either a) explore more scalable cost structures or b) put themselves up for sale. For life and retirement companies, lower interest rates have taken a toll on the competitiveness of investment-based products.

This spells trouble for companies that have not adequately sorted out their expense structure. And a shrinking insurance company sooner or later will run afoul of regulators, ratings agencies, distributors and customers. Even if expenses are shrinking, if revenue is declining more quickly then the downward spiral will accelerate. It is virtually impossible to maintain profitability without growth. Expenses increase with inflation, tick upward with each additional regulatory requirement and can spike dramatically when attempting to meet customer and distributor demands for improved experiences and value-added services.

The reality is that companies have to grow, and that’s difficult in a mature market, especially in times when “the market” isn’t helping. What’s the key to success, then? In short, growth comes from better capabilities, service, customer-focus and products – all of which require continuing investment in capabilities.

See Also: 2016 Outlook for Property-Casualty

The math doesn’t work unless you’re finding ways to spend less in unimportant areas and allocate those savings to more important ones. If your answer to any of the following questions is “no,” then it’s important that you look at your allocation of resources for capital, assets and spending:

  • Are you making your desired return on capital?
  • Are your growth levels acceptable?
  • Do you have an expense structure that lets you compete at scale?

The transformation of insurers from clerk-intensive, army-sized bureaucracies to highly automated financial and service operations has been a decades-long process. The industry has invested heavily enough in standardization and automation that one would expect it to be a well-oiled machine. However, when we look under the covers, we see an industry with a considerable amount of customization and one-offs. In other words, the industry behaves more like cottage industry than an industrial, scalable enterprise.

We know that expenses are difficult to measure, let alone control. But why are they so intractable?

The industry’s poorly kept secret is that insurers, even larger ones, have sold many permutations of products with many different features. All of these have risk, service, compensation, accounting and reporting expenses, as well as coverage tails so long the company can’t help but operate below scale.

Why are expenses so intractable? The issue is scale.

What defines operating at scale for you? A straightforward way to answer this question is to consider whether you’re operating at a level of efficiency on par with or better than the best in the marketplace. Where do you draw the line? The top 10% to 15%? The top 20% to 25%? Next, ask yourself if you, in fact, are operating at scale. Remove large policies and reinsurance that disguise operating results, then sort out how many differentiated service models you are supporting. Are you in the bottom half of performers? Are you in the top 50% but not the top quartile? Are you in the top quartile but not the top decile?

Every insurer needs a more versatile and flexible expense structure to fully operate at scale and be more competitive.

Competition is changing

Customers now have access to a wealth of information and are increasingly using it to make more informed choices. New market entrants are establishing a foothold in direct and lightly assisted distribution models that make wealth management services more affordable for more market segments. Name brands are establishing customer mind-share with extensive advertising. FinTech is shifting the way we think about adding capabilities and creating capabilities in near real time. Outsourcers are increasingly proficient and are investing in new technologies and capabilities that only the largest companies can afford to do at scale.

See Also: Don’t Do It Yourself on Property Claims

The competitive landscape will continue to change. More products will be commoditized – after all, consumers prefer an easy-to-understand product at a readily comparable price. As they do now, stronger companies will go after competitors with less name recognition and scale and lower ratings. Customer research and behavioral analytics will more accurately discern life-long customer behavior and buying patterns for most lifestyles and socio-demographic groups. The role of advisers will change, but customers of all ages will still like at least occasional advice, especially when their needs – and the products they purchase to meet them – are complex.

Table stakes are greater each year and now include internal and external digital platforms, data-derived service (and self-service) models, omni-channel distribution models and extensive use of advanced analytics. The need to improve time-to-market has never been more important. Scale matters. Because they can increase scale, partners also matter even more than in the past. If they have truly complementary capabilities, new partners can help you improve your cost curve because you can leverage their scale to improve yours (and vice-versa).

In conclusion, all companies – regardless of scale – need to ensure that their capital and operating spending aligns with their strategy and capabilities and the ways they choose to differentiate themselves in the market. In this transformative time, the ones that can’t or won’t do this will fall increasingly behind the market leaders.

Implications: Leave no stone unturned

  • Managing expenses is a job that is never finished. Even if you’ve already looked at expenses, it doesn’t mean that you get a pass from scrutinizing them afresh. You will always have to keep rolling that particular boulder up the hill. Acknowledging that you could always manage expenses better is the first step to doing it well.
  • Identify and commit to the cost curves that get you to scale. This may require new thinking about sourcing partners and which evolving capabilities hold the most promise for the future of the company. How transformative do your digital platforms need to be? Can the cloud help you operate more efficiently and economically? How constraining is your culture, management and governance?
  • Every company needs to invest. Every company needs to be “fit for growth.” You will need to increase expenses where it helps you compete and decrease it where it doesn’t. Admittedly, this is hard to do, but the companies that don’t do it successfully will be left by the wayside.

Are ‘Best Practices’ Really Best?

Best practices can help companies gain a competitive advantage. However, the opposite is often true. There are various reasons for this, but, in our experience, we have observed three major problems with implementing what a company perceives to be best practices.

  • First, the benefits are elusive. They are often difficult to measure, with no baseline or true comparison, and the costs to implement them are often excessive and misunderstood. This often means there are significant implementation costs and effort with few tangible results.
  • Second, best practices exist in the rearview mirror. By the time you have adopted them, business conditions and the right ways for implementing them will have changed.
  • Third, once adopted, these practices can be very difficult to change. The organization has invested emotion, credibility, time and money, and it’s very difficult to abandon a practice even if it doesn’t work or needs to be adapted.

What’s often missing is clarity on the best practices that are most relevant to the business.

Companies naturally want to be competitive, and many seek inspiration outside their own industry in their search for the best-of-the-best. Companies tend to reach broadly, embracing a great number of potential best practices. Conversely, some companies narrowly benchmark themselves against only their peers. Following either extreme often results in missed opportunity for real improvement. In addition, if implementation occurs in silos, then best practices tend to compete with one another and increase complexity and overhead.

Although the benefits from deftly applied best practices can be real and demonstrable, they often are more elusive than anticipated and can result in frictional costs, impasses, noise in the system and ultimately few concrete benefits to the bottom line. Moreover, implementation costs can be high but may not be visible until the cost of adoption or compliance becomes evident throughout the organization. Finally, benefits may elude adoption, specification, measurement and capture.

Our observations

Best practices tend to be selected and defined in isolation. Once they have a mandate, individual business and functional areas, centers of excellence and shared services often tend to implement new practices without giving sufficient consideration to downstream implications, such as costs. New best practices come with costs, and when they are supposed to result in higher service levels, they may come with higher-than-average costs.

Accordingly, the application of new practices requires balance and compromise. They may reduce expenses in part of the organization but may increase frictional costs and place an extra burden on people, process and technology elsewhere.

A common problem is that many companies attempt to implement too many new practices in too many places. Most organizations’ ability to adapt to change is limited, and change tends to be undermanaged, especially when new best practices are required by new control mandates.

Many companies also tend to overestimate the opportunities that standardization offers. We have seen some companies try to standardize everything and inevitably encounter challenges they had not anticipated. New best practices need to be capable of changing and evolving over time, as well as being able to adaptable to local differences and requirements.

Lastly, many companies fail to conduct a cost/benefit analysis when instituting new best practice mandates. If a best practice is central to the business strategy’s success, then frictional costs are an acceptable risk. However, excessive application of best practice improvements can waste resources (e.g., a need for excess staff to perform the work, complex policies and procedures, standardization for its own sake and demands for “unnatural acts of cooperation” that hinder the business’ ability to respond to changes in the marketplace).

What should companies do differently?

Many companies have the habit of relying on practices that are not appropriate for them and therefore fail to effectively execute desired strategy. To help prevent these problems, we suggest using a success framework that prioritizes and enhances company focus on improvement efforts. This framework should have the following six characteristics:

Success Framework A Mechanism…
1.  Prioritization To identify what’s most important and to align implementation effort with strategy.
2.  Proportion To confirm that the implementation effort is proportionate to the practice’s perceived value.
3.  Readiness To assess organizational appetite and readiness.
4.  Implementation To assign authority, accountability, responsibility, and appropriate resources.
5.  Impact To track impact, including both intended and potentially unintended consequences.
6.  Change To drive continuous improvement and to authorize a full stop if warranted.

 

It is critical to first identify which best practices are worth the effort, through prioritization.

Implementing leading practices can cost money, but there may or may not be tangible benefits or related savings. The question to ask is: How good is good enough? Moreover, when the implementations of best practices compete with each other for time and focus, there are frictional costs that further minimize expected benefits. Being cognizant of frictional costs and avoiding them is critical to optimizing investment and benefit realization.

What we’ve concluded

Best practices are about performing better and therefore adding strategic and operational value.

Accordingly, because of the highly subjective nature of “best,” we suggest the term “value added practice” (VAP) instead. By putting value at the center of practice improvement efforts, a company can better plan and implement new practices. Frameworks for investment and continuous improvement are key, especially at larger organizations where budgets, controls and approvals tend to be complex.

Before embarking on a new best practices initiative, a company should perform a quick self-diagnosis. Are you trying to implement a best practice for its own sake, or are you clearly focusing on the value you hope to realize?

If you plan to invest in new capabilities without tying them to specific business objectives, then you should step back and determine just how implementing new best practices will benefit the company.