With the onset of statutory regulation, insurers and brokers should look at smarter procurement to, among other things, cut costs, argues Lee Gladwell
As the newly regulated market environment places increasing pressure on the industry, insurers and brokers are being forced to examine new ways to transform their operations.
Among the processes under the spotlight is procurement, where traditional methods are being replaced by a smarter approach involving "service bundling".
Business-process outsourcing is also finally emerging as a real force in the insurance market and dialogues between both suppliers and contracting parties are becoming more sophisticated. Importantly, these dialogues increasingly recognise the interlinked nature of services and information from an end-to-end business-process perspective.
Although outsourcing itself is nothing new, why is it that it is only now becoming a more commonly accepted business practice for insurers and brokers alike?
An informal survey of our insurance customers recently revealed that, on average, 30 or 40 staff working in the procurement team manage between 400 and 500 separate supplier contracts. This demonstrates that it is not a question of whether or not insurers decide to outsource, as most businesses buy external services already, but the breadth of service and how it is currently being acquired that varies.
As we have seen, the insurance industry is beginning to see a critical shift in emphasis towards smarter procurement, and the new Financial Services Authority regulatory regime has been a primary cause of this. Procurement teams are now demanding fully managed and compliant services, such as end-to-end claims handling, 24/7 multichannel customer reception and nationwide supply-chain-delivery networks. Increasingly, there is also much more of a practical business dialogue between customers and suppliers as they seek to consolidate their base of suppliers and contracts.
So what are the challenges that are driving smart procurement? As in other sectors, insurers are increasingly seeking strategic partnerships for low-risk service improvement and business transformation to tackle significant challenges such as the new FSA-regulated regime.
Other drivers include the need to reduce operating costs through outsourcing non-core business processes such as loss adjusting and claims processing; generating economies of scale through consolidation of suppliers and service bundling, thereby reducing overhead costs; focusing on the improved management of claims costs, in particular through fraud and leakage prevention; and increasing revenues, through creating flexibility to growing and winning new business, in particular from the affinity sector.
Within the broker market, consolidation, regulatory issues and ongoing business pressures are also forcing the market to consider procurement as a means to relieve cost and increase service and efficiency levels, leaving insurers and brokers alike to focus on their core business activities.
Larger brokers and collaborative networks must in turn streamline and consolidate their back- and front-office operations, thereby removing duplication and aligning change initiatives to drive economies of scale to remain both compliant and competitive.
With this in mind, it appears that there is an increasing trend for procurement departments to increase and broaden their overall requirements, becoming much more clever in the way they work.
Smart procurement through business processing outsourcing contracts can offer significant benefits to business performance where high-volume processing activities are outsourced in their entirety or bundled, driving substantial economies of scale, increasing business focus and guaranteeing and agreeing service levels. This service quality assurance includes compliance, which can be an attractive solution for organisations struggling to tackle their own compliance issues.
In some cases, there may be concerns that the risk of an insurer or a broker having a relationship with just one procurement partner might be greater than with many different suppliers. However, if this can be managed effectively as a "true partnership", the arrangement can deliver benefits across all areas of service. The objectives and the benefits anticipated need to be understood from the outset and levels of performance standards agreed to contractually so that the majority of risks are duly formalised and can therefore be managed appropriately. If this partnership is adhered to, the risks are much less than those associated with dealing with multiple suppliers given the variety and inevitable inconsistencies of management.
When using one partner, identifying realistic and appropriate service levels is key to the partnership. These must also be considered as part of the planning and due-diligence process, where the impact on customer service is properly assessed, with risks identified and a clear transition plan agreed at the outset.
Cost saving during the procurement stage of a contract is a primary benefit of outsourcing, but it is necessary to set expectations. This may involve setting levels or thresholds within which cost savings are guaranteed and may also set out commitments to work towards targeted cost savings where these cannot be so easily defined. Again, it is important to understand all "stakeholder" expectations at the outset of the relationship and to contract appropriately to account for this.
By bundling services and choosing a stable and financially secure partner, business risks are reduced and substantial benefits of contracting a wider range of services through a preferred partner can be realised. Managing one partner, should require less effort than traditionally needed for multiple suppliers.
As with all business transactions, the final contract is the distillation of both parties' commitments to one another, however, the reality will be governed by the essence and development of the working relationship, which requires flexibility, understanding and a willingness to listen and act in equal measures on both sides.
In order to evaluate the success of a procurement partnership, ongoing management teams will need to look at certain criteria. A benchmarking period is the best way to agree, in absolute terms, current operating performance levels and measures. It enables the refining of key performance indicators and commitment to guaranteed service levels.
Procurement teams and those managing ongoing contracts will need to consider bundling one or more services to achieve the efficiencies, cost savings and increased service levels to enable a business to focus on their core activities while remaining both competitive and compliant.
- Lee Gladwell is business development director at Capita Insurance Services.
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