Transformational Thinking in Insurance Sourcing and Procurement Services
Insurance Experts' Forum, May 8, 2014
Challenges in Insurance Sourcing and Procurement Services
Perhaps no department in an insurance organization undergoes more of a challenge to change “on the fly” than Sourcing and Procurement Services. Because it deals with so many third party partners, suppliers, vendors and service providers, plus unplanned additions caused by acquisitions, attempting to transform can cause major upheaval and strain on the whole organization. These challenges are just the beginning. Overlapping and redundant third party services cause issues and are often inefficient. Inconsistencies in third party selection and performance measures and processes can cause undetectable waste. Inconsistencies in contract wording, terms and conditions, can cause legal headaches, just as the inability to readily meet regulatory reporting requirements relating to third party risks. Sourcing and procurement should be able to track all contractual terms and conditions, especially penalties and termination fees, but often they haven’t been given the proper technology to effectively track important details.
Then there are operational inefficiencies caused by multiple third party and internal department handoffs and inconsistent and redundant sourcing and procurement processes across the company especially in international locations. It helps when Sourcing and Procurement Services can tie their goals to specific business goals, and to align with business and architecture requirements. This will give them the ability to scale services up and down and track (by department) business outcomes that will positively or negatively affect the company. All of this requires transformational thinking and a willingness to explore meaningful change. (For a good definition of transformational thinking vs. legacy thinking, see my first blog.)
Insurers must shift towards transformation thinking in Sourcing and Procurement Services in order to engage third parties that can help build the company’s future not just cut costs. Sourcing and Procurement must think “offense” not “defense.” The initial steps are as follows:
Reject these ideas:
First, don’t accept the idea that the current Sourcing and Procurement Services will meet the insurers’ demands as they change their business models to adapt to market trends. Business needs present Sourcing and Procurement Services with an opportunity to transform. Also, reject the notion that the subjectivity in how third parties are selected and measured, and the obscurity with respect to the quantifiable benefits each third party contributes to business outcomes will be allowed to continue. As every area of the insurance enterprise becomes more transparent, the time is ripe for that transparency to flow into Sourcing and Procurement and to give everyone the benefit of clear knowledge and certainty.
Accept these ideas:
At the heart of transformation should be a rethinking and restatement of Sourcing and Procurement’s vision, mission and goals. Accept the idea that transformational thinking starts with a new target operating model. This means stepping up to transform five dimensions,
a) People, b) Information and Data, c) Processes, d) Location, and e) Systems.
Lead the effort in launching a Sourcing and Procurement transformation program that leverages new technologies and the following best practices:
People – Create a new vision and mission that shifts the focus of the department toward seeking and engaging third parties that can help create the company’s future, versus simply using vendors to augment the staff needed for day-to-day operations. Employ leaders and managers experienced in selecting innovative third parties versus those experienced only in cost-cutting and finding wage arbitrage.
Information and Data – Create a cross-functional committee to define the data to be captured from third parties, as well as the performance metrics, dashboards and contract templates needed. Ask IT and Operations to create a single data repository for all third party contracts across the company. Leverage a document management system that includes workflow automation, and provide access to all stakeholders including Legal, Compliance and Enterprise Risk Management. Eliminate paper files, and use search engines to navigate through digitized contracts and agreements.
Location – Immediately reduce the number of locations where sourcing and procurement activities are carried out. Multiple locations lead to dissimilar processes, and decision-making. Leverage a central unit for all strategic contracts to manage all third party contracts as a “single portfolio” and capitalize on volume discounts.
Processes - Create a single sourcing and procurement process across the company with slight variations to meet local regulatory requirements and local practices. Eliminate multiple processes immediately! Establish a penalty system for non-compliance such as a decrease in the budget of the offending department. Encourage a culture of unity in processes by communicating the end benefits for both the company and individual departments.
Systems – Acquire a procurement system that includes automated routing of requests, statuses and approvals. Provide interfaces to the aforementioned single data repository and document management system. Develop an electronic scoring system for all third party selection that allows for the continual “grading” of performance. Differentiate partners from and vendors. Ask Actuarial services to model the risks associated with third party contracts.
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