Managing Vendors Is

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No Picnic For Buyers

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In doing their jobs, risk managers rarely act alone, oftenrelying on a team of outside vendors–including brokers, third-partyadministrators, safety experts, captive managers and other outsideprofessionals–to implement their coverage and loss controlprograms. Making the most out of these relationships hinges onclear and ongoing two-way communication, experts warn.

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“At the time you're hiring and bringing a new service provideron, you need to make expectations clear and relay them to theprovider,” according to Janice Ochenkowski, director of global riskmanagement for Jones Lang LaSalle in Chicago, a commercial realestate company, as well as treasurer of the Risk and InsuranceManagement Society.

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The risk manager, she continued, should establish the criteriaas well as timing–how quickly things should be turned around, theerror rate expected, and what type of communication is anticipated.Communication parameters, she said, include how often and what kindof reports are needed, the frequency of the reports, and what kindof detail is expected.

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“If you tell the service provider early on what you expect, asyou are working through the year of service with them, you knowwhether they are meeting your goals or not,” Ms. Ochenkowskiexplained. “You don't have to wonder whether they are doing a goodjob because you've identified what a good job is, and they knowwhat making you happy will take.”

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Knowing the needs of the organization helps a service providerto more accurately price the services and staff, “and you evaluateyour service relationship on an ongoing basis as the various targetdates come up,” she added.

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For instance, she noted, “if you say you need quarterly reportsand you expect it by the first week following the quarter's end,you know if they are meeting that or not. When you get the report,you can review it to see if it is the quality you are lookingfor.”

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If the report doesn't meet the risk manager's needs, she said,that dissatisfaction should be communicated immediately to theservice provider, rather than waiting for a year-endevaluation.

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“If a relationship is working properly, there should never be asurprise on either side,” she noted. If the service is poor,however, the risk manager should give notice to that effect, shesuggested, giving the vendor an opportunity to fix the problem.“But if it doesn't work, you have to find another provider,” sheadded.

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“You know what the key service areas are, so you can communicatethat in the next bid process,” she said.

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The most important elements in the mix, according to Ms.Ochenkowski, are service and price. “Generally it's a goodpractice–even if you are pleased with the provider–to test themarketplace every three-to-five years to make sure you are gettingthe market standard in terms of pricing, and that the service leveland systems you have are best practice,” she noted.

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Karen Beier, vice president of risk management at Shaklee Corp.in Pleasanton, Calif., and a RIMS board liaison for membership andchapter services, said an excellent resource for risk managerstrying to identify the best service provider is networking.

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She also recommended RIMS e-groups, where risk managers can postquestions in general or specific categories for recommendationsabout service providers. She noted that risk managers also cancontact service providers and ask for a list of clients whorecommend them.

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Ms. Beier also recommended the Quality Improvement Process,available through RIMS, which has two specific tools for dealingwith vendors–the “Safety and Loss Control Provider and RiskManagement Partnership Tool,” along with the “Claims ServiceProvider and Risk Management Partnership Tool.”

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“If you use these tools–if you want an RFP, request forproposal, for example–they have 39 guidelines,” Ms. Beier said.

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After selecting a provider based on identified criteria, thetools can be used to structure a service agreement. She added thatRIMS is in the process of building an online tool to help riskmanagers select guidelines and create a service agreement. Anothertool being built by RIMS will help risk managers evaluate a serviceprovider's performance, she said.

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The QIP tools, available in hard copy and off the Web,“demonstrate an understanding of the types of operations yourcompany has, what its risk exposures are, and what safety and losscontrol practices are in that industry,” she explained. “So itlists points that are specific from an expectation standpoint andfrom an evaluation standpoint of how they perform the service.”

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The tool also can help identify services a company should begetting, she noted. “The key is communication and evaluation,”laying everything out up front and measuring performance based oncriteria.”

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Stephen Cross, chief executive officer with Aon Captive ServicesGroup in Dublin, Ireland, said risk managers should expect “facetime with senior people in the [service provider] organization.” Hesaid service providers can assure top performance in a variety ofways.

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With some accounts, for example, “we will put an element of ourfee at risk. So there is a fixed portion of the fee and then we'llhave a portion that's variable depending on us meeting delivery andservice standards. It's good for the client and it works for us aswell.”

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Nancy Gray, executive director of Aon Insurance Managers,Onshore Americas, in Burlington, Vt., added that “what's reallyimportant is to make sure that both sides understand theexpectations from day one and establish service standards.” Thesestandards should go beyond financial statement preparation tostrategic objectives, “which means understanding their needs andmaking sure there is communication throughout the year,” shesaid.

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The management agreement, suggested Mr. Cross, should clearlystate the client's and the vendor's responsibilities. He noted thatthe dynamic has additional complexity because “it's not just abuyer and service provider relationship, particularly in thecaptive industry. You've got all sorts of people feeding into that,from our own brokers to other brokers on the account. You've gotbanks, fronting companies, regulators. So it's almost like a seriesof dominoes. Something that is late from one vendor affects theentire chain.”

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The same is true on the client side as well, noted Ms. Gray.“You're dealing with corporate accounting, treasury, riskmanagement and legal,” which demands coordination between serviceproviders and client, she said.

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Mr. Cross emphasized the importance of high technology standardsin a service vendor. “I wouldn't work with an organization unlessthey had a good system to operate from,” he said. “If it's anIT-driven relationship, I would expect the service provider to havean outstanding global system, tried and tested.”

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He added that risk managers should also find out “how we goabout hiring people and what skill sets we look for.”

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“It's a people-to-people business, so the buyer needs to knowthe provider is competent,” he added.

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Caption for Buyers Report art of group of service providers, orrisk manager at the center of a series of individual serviceproviders:

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Risk managers must clearly communicate what they expect fromtheir many vendors and monitor results continuously, expertswarn.

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Flag: Checklist

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Head: What Should Buyers Do?

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To establish and maintain a satisfactory relationship with anyservice vendor, a risk manager should consider the followingsteps:

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o Make expectations clear to the provider.

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o Establish timing clearly–including turnaround expectations,the acceptable error rate and when progress reports areanticipated.

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o Make clear the type of communication anticipated–written ororal? Mailed, faxed or e-mailed?

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o Set forth how often reports are expected and what kind ofdetail is required.

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o If the buyer is dissatisfied, that should be expressedimmediately, with the vendor given a set time to correct theproblem.

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o If the problem is not corrected, or further mistakes ortransgressions are committed, it's time to look for a new vendor,using experience as your guide in what to demand in the biddingprocess.

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o Even if the risk manager is satisfied, it doesn't hurt to putthe contract out for bid every few years to see what the market hasto offer, even if you end up sticking with your current vendor.

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