Written by Matthew Parker, Managing Director at Procurato
Navigating the complexities of the insurance industry requires a robust understanding of its many components. One such component is the sourcing and management of third-party suppliers, a crucial yet often misunderstood aspect of the insurance claims process.
Getting it right is critical, as suppliers can profoundly impact a complex, interconnected system of customers, controls, and costs. The importance of third-party supplier management cannot be overstated, given its direct influence on claims handling and overall claims performance.
The consequences of poor supplier management are significant. Underperforming suppliers can drive customer complaints, erode cost controls, and increase the claims operation ratio. Claims handlers may face a surge of inbound calls from dissatisfied customers who aren’t receiving the expected level of service. Additionally, inadequate oversight can lead to regulatory risks, especially when it comes to managing customer data, adhering to compliance processes, and supporting vulnerable customers. Finally, ineffective supplier management can stifle innovation, limiting the insurer’s ability to adapt and improve over time.
This article explores various organisational designs that insurance companies adopt to structure and organise the sourcing and third-party supplier management. It delves into the key differences, advantages, and disadvantages of these approaches, providing insights into what can be achieved and important practical considerations when implementing a specific structure.
Importance of understanding the end-to-end process of managing third-party suppliers in Claims
The sourcing and managing third party suppliers in claims encompass the acquisition of goods and services necessary for settling an insurance claim. This includes everything from hiring third-party adjusters to acquiring replacement parts or services for insured assets. This process is fundamental in ensuring that claims are resolved efficiently, cost-effectively, and in alignment with policyholder expectations.
The procurement process typically involves vendor selection, contract negotiation, managing supplier and relationships, and ensuring compliance with regulatory standards. If carried out effectively, it can significantly reduce the total cost of claims by minimizing overpayments and ensuring fair pricing for services of rendered suppliers, whilst delivering great outcomes for customers who use the service and employees at insurance companies who interact with it.
The way insurance companies separate or encompass these activities into one role varies widely between insurance companies.
Differences between Strategic Sourcing, Vendor Management, Supplier Management & Supply Chain in insurance companies
There is a lot of confusion between insurers of what those things actually are. We will start with defining each of these areas to clarify the roles, responsibilities and perspectives. Strategic Sourcing Strategic sourcing is a systematic, long-term approach focused on building a comprehensive understanding of an organization's spend profile and aligning supplier strategies with the company's long-term objectives.
In the insurance sector, strategic procurement influences everything from claims processing efficiency to regulatory compliance. This method is not merely about finding suppliers, but it involves cultivating relationships with vendors who can provide the best value over time. In insurance companies, strategic sourcing plays a critical role in managing the total cost of claims. By strategically selecting suppliers that offer the most advantageous terms and conditions, insurance firms can significantly reduce operational expenses.
Vendor Management
Vendor management in insurance involves overseeing and coordinating interactions with third-party vendors that provide goods and services to the company. The goal is to ensure that vendors meet their contractual obligations and deliver on performance metrics. Effective vendor management results in stronger partnerships that can lead to improved service quality and cost efficiencies.
In the context of claims support, vendor management ensures that insurance companies work with reliable providers who can deliver timely and efficient services. This might include everything from repair services for insured assets to legal services for claims processing. By maintaining robust vendor management practices, insurance companies can reduce the risk of service disruptions and enhance customer satisfaction.
Supplier Management
Supplier management encompasses a broader scope than vendor management, focusing on the strategic partnership between an organization and its suppliers. This involves not only managing supplier performance but also fostering long-term relationships that can drive innovation and value creation.
While vendor management is often seen as a subset of supplier management, the latter is more strategic in nature. Supplier management in insurance companies involves evaluating and enhancing supplier capabilities, ensuring alignment with the company's strategic goals, and promoting continuous improvement. This strategic approach can lead to significant benefits, including cost savings, improved service quality, and enhanced supply chain resilience.
Supply Chain Management
Supply chain management (SCM) in insurance refers to the oversight of all activities involved in the delivery of goods and services, from initial procurement to final delivery to the end customer. SCM is critical for ensuring that the claims supply chain operates efficiently and effectively, minimizing costs and maximizing value.
In the insurance industry, SCM is essential for managing the flow of suppliers and materials and services required for claims processing. An efficient supply chain ensures that all necessary resources are available when needed, reducing delays and enhancing the overall customer experience. Additionally, effective SCM can help insurance companies respond more adeptly to market changes and disruptions such as weather events or shortages of car parts due to geopolitical risks.
Procurement
Procurement, on the other hand, is the broader process that includes tactical elements such managing the immediate needs of the organization, often driven by short-term goals as purchasing and order management. A typical example of this in an insurance company is making some contractual changes to an existing supplier contract. Strategic sourcing is a component of procurement focused on long-term value creation through strategic supplier selection and relationship management.
A critical component of claims procurement is determining whether Procurement, Strategic Sourcing, Vendor Management, Supplier Management or Supply Chain should take precedence.
Understanding the nuances can often feel complex. However, these elements are crucial for optimizing procurement processes, reducing costs, and ensuring efficient claims management. As insurance companies navigate the intricate landscape of procurement, distinguishing between these terms and their applications is essential for operational success.
Practicality & Implementation
Step 1 - Factors to Consider when Choosing the Right Structure
Determining whether to implement a strategic sourcing, vendor management, supplier management, or a full supply chain structure requires careful consideration of various factors:
Alignment with Organizational Goals
The chosen structure should align with the company's overall strategic objectives. For insurance companies, this often means focusing on reducing the total cost of claims while maintaining or improving service quality. A strategic sourcing approach, for example, may offer the flexibility and foresight needed to align strategies with these goals.
Vendor and Supplier Relationships
In the insurance industry, maintaining strong relationships with vendors and suppliers is crucial. The procurement structure should facilitate effective communication, negotiation, and collaboration with suppliers. Vendor management and supplier management structures are particularly suited to this, as they emphasize relationship-building and long-term partnerships.
Flexibility and Scalability
The needs of insurance companies can change rapidly in response to market conditions, regulatory changes, and technological advancements. A supply chain structure may provide the flexibility and scalability needed to adapt to these changes, ensuring that the procurement function remains agile and responsive.
Risk Management
Risk management is a critical consideration in the insurance sector. The structure should incorporate risk management practices to mitigate potential disruptions in the supply chain. This might include diversifying suppliers, implementing robust contract management practices, and establishing contingency plans (Protiviti, 2024).
Size of the of the Organization and spend with third party suppliers
If there is a large spend with a large number of third-party suppliers, this may suit the investment in dedicated teams whereas if the spend and/or risk is lower, the return on investment may not suit a large structure and the decision might be to focus on just one area e.g. sourcing or vendor management.
Pros and Cons of Strategic Sourcing
Strategic Sourcing can provide significant long-term cost savings and improve supply chain efficiency by fostering strong supplier relationships and strategic partnerships. However, it requires substantial upfront investment in time and resources to analyse procurement needs and develop comprehensive strategies.
Pros and Cons of Vendor & Supplier Management
Vendor or Supplier Management focuses on optimizing supplier performance and minimizing risks. It is beneficial in environments where the reliability and quality of suppliers are critical. On the downside, it may not address broader procurement strategies and long-term cost efficiencies as comprehensively as Strategic Sourcing.
Pros and Cons of Supply Chain Management
Supply Chain Management offers a holistic approach, integrating all facets of the supply chain to optimize performance and responsiveness. It is particularly advantageous for companies with complex logistics and distribution needs. However, the complexity of SCM can be overwhelming and may require significant investment in technology and skilled personnel.
Step 2 - Factors to consider when separating or integrating the responsibilities into one role
After selecting the appropriate structure, the next consideration is whether the roles should be separated or, conversely, integrated into a single role. There is no definitive right or wrong answer; this decision should be based on the current capabilities within your team, capacity and your organisational structure.
Here, we outline the advantages and disadvantages of each approach to help you determine the best fit for your needs.
Benefits of Separation of roles for Strategic Sourcing, Vendor & Supplier Management and Supply chain management
Specialization and Focus: By separating these functions, each team can specialize in its respective area, leading to improved efficiency and effectiveness. For example, Strategic Sourcing can focus on long-term procurement strategies, while Supplier Management can concentrate on day-to-day vendor relations and performance.
Risk Mitigation: With dedicated Supplier Management, companies can better manage vendor-related risks and ensure compliance with service-level agreements, which is crucial in regulated sectors like insurance.
Enhanced Negotiation Power: A focused Strategic Sourcing team can leverage data-driven insights to negotiate better terms and contracts, potentially leading to cost savings.
Allows you to separate the roles easier between different departments
Drawbacks of Separation
Increased Complexity: Separation can lead to increased complexity in coordination and communication between teams, potentially resulting in inefficiencies or misalignment.
Resource Allocation: Maintaining separate teams for Supplier Management and Strategic Sourcing requires additional resources and may not be feasible for smaller organizations.
Potential for Conflict: Differences in priorities and objectives between teams can lead to conflicts and hinder overall procurement performance. A typical example of this is a price focus by procurement and not understanding the full cost of claims of their actions to Claims.
Having spoken with multiple Claims Directors at leading UK insurance companies, we frequently hear that procurement teams often lack a full understanding of the total cost of claims. They tend to focus solely on pricing without considering the end-to-end claims management process. As one Claims Director explained:
"CPOs will always try to get the lowest price possible, but it’s the claims teams that have to work with suppliers to deliver great service to the client. This creates tension between procurement and claims teams. Claims are not a race to the bottom, unlike Procurement, which can sometimes come across that way."
If the decision is made to invest in sourcing and managing claims third-party suppliers, alongside defining the focus of the role(s), another critical consideration is determining where this role should sit within the business. At Procurato, we are frequently asked this question by clients, and there is no one-size-fits-all answer for every insurance company.
We have observed success—and challenges—when the role is integrated, fully separate, or partially separated. The key lies in understanding the drawbacks and benefits of each option to make an informed decision that aligns with the organization’s goals and structure.
Integration: Within the Claims Department
Advantages of Integration
Streamlined Communication: When it is part of the claims department, communication between adjusters and the roles managing third party suppliers is more direct and efficient. This integration facilitates seamless information flow, reducing the potential for miscommunication and delays.
Enhanced Coordination: By aligning activities with the claims process, insurance companies can ensure that third-party supplier management efforts are closely coordinated with claims handling. This synergy can lead to faster resolution times and improved customer satisfaction.
Unified Objectives: Integration promotes a cohesive approach to claims management, aligning the managing of third-party suppliers with the overarching goals of the claims department. This alignment ensures that both teams work towards common objectives, such as cost containment and timely settlements.
Disadvantages of Integration
Potential Conflicts of Interest: Integrating the managing of third-party suppliers within the claims department can create conflicts of interest, particularly if sourcing decisions are influenced by the team to reduce price at the expense of quality.
Resource Allocation Challenges: The claims department may face resource allocation challenges, as the managing of third-party suppliers activities require specialized knowledge and expertise. This can lead to inefficiencies if these tasks are not adequately supported with trained individuals.
Separation: As an Independent Function
Advantages of Separation
Specialized Expertise: Operating claims of the managing of third-party suppliers as a separate function allows for the development of specialized expertise. The managing of third-party suppliers can focus exclusively on key tasks.
Objective Decision-Making: A separate function can provide a more objective approach to vendor selection and contract management. This independence reduces the risk of biased decisions and ensures that procurement activities align with best practices.
Scalability and Flexibility: An independent function of the management of third-party suppliers can offer greater scalability and flexibility, adapting to changes in demand and market conditions more effectively. This adaptability is essential in responding to fluctuations in claims volumes and service requirements.
Disadvantages of Separation
Communication Barriers: Separation can create communication barriers between claims team and the professionals who manage third-party suppliers, leading to potential delays and misunderstandings. Effective collaboration requires clear channels of communication and well-defined processes.
Potential for Misalignment: Without close integration, there is a risk of misalignment between the people managing third-party suppliers' activities and claims handling objectives. This misalignment can result in suboptimal decisions that do not fully support the claims department's goals.
The final option is a hybrid of the two where we typically see Strategic Sourcing Separate from Supplier Management or Vender Management. This shares similar pros of cons to the above but a role level rather than an overall perspective and sometimes seen as a good compromise of keeping the independence of supplier selection to Strategic Sourcing separate and the day-to-day Supplier Management within claims.
Case Study
Procurato were asked to undertake a review of how a personal lines insurance company managed their third party spend and provide recommendations
Overview and objectives
The client was looking at how they can maximise claims savings whilst meeting regulatory requirements and delivering great service to customers.
Key focus areas
Was the current set up of splitting out Procurement (external to Claims) and Supplier Management (within Claims) effective
Were they maximising total value from the claims supply chain
Did they have an effective risk management in place
Key activities
Engaged stakeholders through interviews to capture detailed insights and current challenges
Benchmarked current performance to Procurato’s maturity model identifying strengths and areas of development
Highlighted key areas where there were improvements required (mainly priorities, resource, capability and tools)
Delivered a set of target operating models to consider
Benefits Achieved/Outcomes Delivered
The review identified the need to focus on Strategic Sourcing to focus on delivering long term total claims savings opportunities (5% more total cost savings than was currently being achieved) but to stay separate from claims but with closer alignment to the Claims Director
The need to invest in an improved risk management process (with recommendations how do this) to reduce the cost and improve the efficiency of managing supply chain risk
To retain Supplier Management within Claims but with an additional focus of introducing supplier led innovation as opposed to just managing day to day issues.
Conclusion
In conclusion, the decision to implement a Strategic Sourcing, Vendor Management, Supplier Management, or Supply Chain structure in insurance companies should be driven by strategic objectives, operational requirements, size of the organisation and return on investment. Each framework offers distinct advantages and challenges, and a thorough evaluation of these factors will enable insurance companies to make informed decisions that align with their long-term goals and enhance their competitive position in the marketplace.
Deciding on where the role(s) should sit depends on factors such as benefits such as streamlined communication and enhanced coordination with integration whereas separation provides specialized expertise and objective decision-making.
Through strategic alignment and thoughtful implementation, setting up the right structure to manage third party suppliers in claims can significantly contribute to the overall success of the insurance claims process, ensuring that policyholders receive timely and high-quality service whilst controlling the costs for the insurance company.
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