Software Can Help Optimize Supplier Relationships And Spending

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Perhaps more so than their brethren in other industries, financial services institutions, particularly insurance companies, rely extensively on outside suppliers for business operations.

What makes the situation highly complex for insurance companies is the need to manage suppliers in two key realms–suppliers of contract labor, known as services suppliers, and suppliers to replenish lost or damaged goods, known as goods suppliers.

Given the huge dollar amount that goes toward both services and goods suppliers, competitive insurance companies need to streamline their supplier relationships, “whittling down” their supplier ranks to include only the most high-caliber, readily available and affordable resources, while wringing optimal cost-savings out of contracts with preferred suppliers. The actual accomplishment of this feat, however, is anything but simple, primarily because suppliers contracts tend to be departmentalized and not leveraged across insurance companies.

With no central repository of information, insurance companies are severely hindered in their abilities to derive contractual cost-savings and negotiate better deals with preferred suppliers. Fortunately, new developments in enterprise software–namely, supplier relationship management (SRM) software–are dramatically changing the way insurance companies manage the full course of supplier relationships, from sourcing and procurement to invoicing and settlement, for improved profitability and customer relationships.

Here, we will examine how insurance companies can leverage SRM for improved operations in the two key realms.

Services Suppliers. Like their close cousins in the banking world, insurance companies rely extensively on contract labor to meet customer demands. Insurance companies have traditionally struggled to rein in services spending and the costs associated with managing myriad suppliers, which is estimated to account for over 50% of total corporate spending. With so much money going toward services, how can insurance companies gain control over these spiraling expenditures?

The short answer–by taking services supplier relationship management processes online, thus centralizing the process and automating the more mundane tasks associated with it. In this spirit, lets start with sourcing and procurement.

Bringing the SRM process online permits centralization, helping insurance companies to overcome departmentalization as an obstacle to efficient, cost-effective management of services suppliers. Too often, buyers in different departments across insurance companies waste time researching, analyzing and creating new relationships with suppliers that another department in the company has worked with before.

With an SRM system, an insurance company gains visibility over the redundant relationships the company may have with suppliers. Instead of five different departments creating five different contracts with the same supplier at different rates, an insurance company can leverage its buying power to negotiate preferred rates and cost structures across the enterprise, saving money for the company and its customers.

In addition, by taking the sourcing process online, insurance companies can solicit supplier bids through an SRM system. This means the company receives bids in real time like an auction, including up-to-the-minute pricing and the expected time to receive the services in question.

Going one step further, new supplier rating systems enable buyers to analyze who are the companys best and worst suppliers, providing critical information for consolidating or diversifying suppliers and negotiating better deals with them.

Todays SRM systems can provide buyers with not only unprecedented visibility into the most readily available and affordable suppliers but also a comprehensive history, down to individual details on individual worker backgrounds and compensation. In this vein, SRM systems help insurance companies ensure the integrity of their contingent workforces, while maintaining consistent compensation levels for similar skill sets–not only between individual contract workers but between contract workers and in-house resources.

Consistent compensation rates are very important, because insurance companies often dont concern themselves about the rates nor have a way to control them. This lack of control is the primary culprit for out-of-control services spending. For instance, heres a common scenario: An insurance company may have two contractors with the same qualifications and experience from the same supplier on the same client team. One may be billing out at $50 per hour, the other at $100 per hour. This happens because different hiring managers hire these contractors. Todays SRM systems automatically set limits and control rates, creating parity in compensation levels for similar skills and reducing maverick spending.

Goods Suppliers. SRM systems are also quickly gaining traction in the claims management area, helping insurance companies to manage and optimize relationships with preferred suppliers for lost or damaged goods.

Once preferred goods suppliers are sourced and utilized as the de facto standard in a centralized system, insurance companies can tap significant cost-savings resulting from discounts. For example, a company may save an average of a day to a day and a halfs worth of rental car fees every time a customer uses a preferred auto body shop for automobile damage.

In addition to contractual cost-savings, whittling down goods suppliers can have a significant impact on what is ultimately a key determinant of bottom-line results–customer satisfaction. Remember, an online system centralizes SRM and removes communication barriers. When insurance companies and preferred suppliers are in constant contact, lost and/or damaged goods are replenished more quickly and easily, resulting in decreased inconvenience and friction, and hence, higher satisfaction, on the customer end.

Imagine how an insurance company could improve its customer service during a customers most vulnerable time–the claims process. For example, a fire burns a customers house down and the owners need to replace their household goods. Because the insurance company has negotiated contracts with preferred suppliers for preferred prices, the customer could go directly online and quickly choose and receive replacement goods from a catalog. The ease and speed of the process builds customer loyalty and lowers the cost of the claim for the insurance company.

By virtue of inherent supplier rating capabilities, todays SRM systems help insurance companies determine the most affordable suppliers, further helping to drive down insurance companies claims costs. Such systems also deliver a valuable negotiating platform. For instance, if a car rental company promises a response within a half hour and doesnt deliver, the insurance company can manage and re-negotiate the contract, ultimately promoting more value for the insurance companys dollar while promoting a higher level of customer service.

Finally, embedded analytics show insurance companies how their vendors are performing. With this concrete information, insurance companies enjoy better lines of communication with preferred suppliers, who, in turn, benefit from tangible information in terms of performance and how theyre being measured.

The ultimate benefits of SRM systems–namely, significant cost-savings and improved efficiency and customer service–are realistic and achievable, although not without their challenges.

There are three main steps to SRM in insurance: identification of suppliers with which to establish preferred relationships; negotiation of relationships; and collaboration with these suppliers when customer demand spikes (in the services supplier realm) and/or when claims are submitted (in the goods supplier realm).

Todays SRM systems do not yet handle negotiation of relationships. However, by automating the mundane tasks of managing supplier relationships–namely sourcing, which often involves a huge amount of time for procurement departments, and invoicing and settlement, which often yield huge paper trails–employees can focus on more strategic activities, including contract negotiation.

Insurance companies looking to implement any new system should be prepared for some friction, not only from within, but from its suppliers. New SRM systems have been known to intimidate suppliers a bit. With insurance companies now mandating that information be sent to the system “this way or that way,” suppliers can easily become overwhelmed. The good news is that todays SRM systems can accommodate diverse types of electronic information exchange. In addition, a Web-enabled solution is easily accessible, no matter the level of technological sophistication on the supplier side.

To overcome resistance, insurance companies must be prepared to really build the business case both internally and among suppliers. They will need to clearly explain the benefits–for insurance companies, happier customers and lower claims fulfillment costs, and for suppliers, more business and faster payment.

In the realm of goods suppliers, SRM solutions may still involve a fair degree of “re-keying” of information from front-end claims administration systems to SRM systems. Many believe that if insurance companies rely on claims adjusters to re-key information–making SRM just another manual, “need to do” process–the potential value of SRM solutions will be lost.

For this reason, many insurance companies are looking to directly integrate claims management and SRM systems. In the meantime, they are eliminating the need to “re-key” by porting information electronically at various intervals in batch mode.

Gaining real-time visibility and control over services supplier relationships and spending is becoming an increasingly critical focus area for insurance companies, especially in these challenging economic times.

Overall, SRM enables an insurance company to gain a complete picture of its supplier relationships. SRM delivers critical information on goods and services spending to all of the key people involved in the decision-making process. Most importantly, it allows insurance companies to start managing their supplier spending strategically and proactively. This helps optimize efficiency and provide additional services to customers, while reducing seemingly uncontrollable expenditures.

Frank Siderio is an insurance industry strategist, and Chris Yaldezian is a financial services industry strategist for PeopleSoft, based in Pleasanton, Calif. They can be reached via e-mail at frank_siderio@peoplesoft.com and chris_yaldezian@peoplesoft.com.


Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.