When Select Staffing's newly hired consultant submitted his 50-page report in 2001, showing how the outsourcing firm could employ risk management to overcome the fact that it had overshot its workers' compensation loss projection by $20 million, he was told by the CEO at the time: "Sounds like you're trying to build an empire. We're not that big of a company."
Seven years later, with 400,000 employees on call and about 130,000 on assignment each week via 300 branches across the United States, Select pitches itself as the country's largest privately held staffing company, and the sixth-biggest overall, rising from $180 million in revenue in 2001 to a projected $1.7 billion this year.
Yet the firm might not have survived had its former consultant, Fred O. Pach?n, not gone on to build a risk management "empire," with workers' comp loss control and safety as its core principles.
The way Mr. Pach?n--now the firm's full-time vice president of risk management--and his vastly expanded staff turned around the company's loss experience and corporate culture made Select Staffing one of three winners in the 2008 National Underwriter "Award for Excellence in Workers' Compensation Risk Management" program, earning the firm an Honorable Mention.
A summer job as a claims adjuster at Industrial Indemnity broke Mr. Pach?n into the industry. By the time Select asked him to come aboard full time, he noted, "I had dreams of building my own firm--something large and respectable."
But after some coaxing--along with a company car and Los Angeles office--Mr. Pach?n agreed to work for Select full time for a set period. "I said, 'I will give you two years, because it will take that long to get [these ideas] off the ground,'" he recalled. "It's been seven years and I'm still here. They had some doubts about my suggestions, but I knew they would work."
Recently, Select's largest workers' comp carrier, ACE USA, released a stewardship report stating that Select was their best performing client, surpassing state averages, noted Mr. Pach?n.
But not too many years ago, performance wasn't anything to brag about when it came to managing workers' comp at Select.
Indeed, back in 2000, Select's poor claims history had caused their insurance premiums to triple, meaning they could no longer afford third-party workers' comp coverage--forcing them to self-insure and pay all claims out of pocket.
With less than three full-time equivalents in its risk management department, Select opted for a $250,000 self-insured retention program. Loss control became a keen priority, as firms like Select--which makes its living by hiring people who are technically on Select's payroll, but who then work for Select's client companies--cannot remain competitive if their workers' comp premiums and loss costs are far higher than industry benchmarks.
"It's a fragmented industry," said Mr. Pach?n. "The top 10 staffing companies combined total 25 percent of the total market." That means any staffing firm carrying a higher-than-average workers' comp cost is not likely to survive, let alone prosper, he noted.
"Unlike other businesses out there, the staffing industry has two expense drivers that control its destiny--one being payroll, and the second being workers' compensation insurance," Mr. Pach?n wrote in his award essay.
"Our product is people. However, if our product 'fails'--meaning our people get injured--then production is affected and losses eat our profits," wrote Mr. Pach?n, who does double-duty as the firm's general manager of Select's construction division.
Select's clients hire the firm to find workers to fill various blue- and white-collar positions. For example, one Select client--Matel--asks for seasonal workers because they are most busy around Christmas and cannot afford to employ all employees on a full-time basis year-round.
Matel states their pay rate, how many people they need, and in what locations they are needed. Select then checks its pool of available workers, or conducts a screening process for new ones.
Their on-call workforce includes light industrial (such as distribution centers and warehouses), construction, trucking, clerical, administrative, technical and executive positions (CFO, CEO and other top posts), and the medical field. Besides Matel, Select's client list includes Countrywide, Costco, Trader Joes, Toyota, Union Bank, Walgreens and Wet Seal.
Approximately 10 percent of the positions filled are considered "high risk," according to Mr. Pach?n. "In this industry," he said, "most of the risk walks through the main door of one of our branches. That is the applicant."
Mr. Pach?n couldn't turn around the situation alone, expanding Select's risk management department from three to 62 full-time members. The staff includes underwriters to assess risks at client work sites, nurses and specialists to handle safety, adjusters to settle claims, investigators for fraud prevention, and auditors to monitor claim progress and outcome.
But the "empire" extends even further, with the full-time risk management team at Select supplemented by over 300 designated workers' comp coordinators to serve each branch, 20 insurance adjusters at the various third-party administrators, three professional consulting firms, and 1,200 associates trained in safety to keep an eye on most client sites.
Mr. Pach?n also implemented a claims management system that lowered the cost per claim by 75 percent. A unit of 24 claims professionals is solely dedicated to overseeing Select's TPA and insurance processing. The system's focused initiatives include:
o Reducing adjuster case loads from 175 to 125 per adjuster.
o Designing and implementing comprehensive TPA account instructions.
o Establishing guidelines in regard to reserve settlements and attorney referrals.
o Conducting monthly and quarterly file assessments and audits.
Select's system also includes a custom-designed application that tracks claims and risk management-oriented audit performance in real time. This "dashboard" influences management reviews and the prices those managers can charge their customers, Mr. Pach?n noted.
Also foreign to the company at the time he came aboard were safety incentive programs. Mr. Pach?n suggested these be initiated on sites with a history of high frequency and severity of losses. Originally allotted a $100,000 budget, today $2.4 million is spent on incentive programs.
At the most difficult sites, where risk is "inherited," a pay rate increase is awarded for each hour a worker goes without an accident. "The logic is that we force the individual to think of safety every hour of the day," explained Mr. Pach?n.
Another loss control program is as simple as giving out a phone card. If a safety manager sees a worker doing their job in a safe manner, or doing anything related to proper safety precautions, he'll introduce himself as a Select staff member, indicate his reasons for his approach and give the worker a 100-minute international phone card as a prize.
Select also takes into account cultural diversity. For example, given that 90 percent of its industrial workforce is Spanish-speaking, in order to activate the calling card, the worker must listen to a safety message in Spanish and English.
Select is responsible for the work environment into which they place their associates, yet the agency doesn't have 100 percent control over the actual workplace--a prescription for disaster in workers' comp. "If [our clients] are not properly screened, underwritten and reviewed, then they can become a liability," said Mr. Pach?n.
This is why proper risk management is so crucial, and it is what prompted Select to introduce an underwriting approach--assessing the potential risks at a client's work site just as any workers' comp insurer would when quoting a premium.
As a result, Select is "a staffing company that really operates like an insurance company," according to Mr. Pach?n, who said that a client's safety history is factored into price-quoting. A less-safe shop gets a higher quote--if Select chooses to do business with them at all.
The company began ranking clients by frequency of claims, and developed a prohibited task list to protect all employees.
As a result of its risk management efforts, Select saw its injury rate drop dramatically--from eight per 200,000 worked hours in 2001, to a little over three this year--while its cost per indemnity claim fell from $14,450 in 2006-2007 (on 721 claims), to $8,308 in 2007-2008 (on 446 claims)--both well below national averages for the employee staffing field.
As a marketing bonus, the risk management department's achievements are used as a selling tool to show clients that people placed by Select remain healthier on the job and return to work faster if injured--which translates into better productivity and less retraining for the client.
If a Select worker is hurt on the job, Mr. Pach?n and his team have prepared everything but homemade chicken soup to get them back to work as quickly as possible. An injured worker is offered 60 days of modified duty, engaging only in activity permitted by the treating doctor.
A Select medical case manager interviews the injured worker and sends them a medical questionnaire designed to guarantee the best care possible. As part of the close-knit environment Select seeks to create, the worker also receives a get-well letter and a box of chocolates.
The medical case manager and utilization review program offered by Select's TPA controls medical costs and conducts periodic fee reviews. The company also has five claims investigators and works with two California insurance department investigators to protect against fraud.
In contrast to the insurance industry's standard 65-day investigation cited by Mr. Pach?n, he said Select's claim investigations are normally completed within three days.
Select also works alongside Los Angeles District Attorney Al McKenzie, according to Mr. Pach?n, who said Select has financially backed the prosecution of two California medical mills and put five people in jail for workers' comp fraud.
Select has indeed made risk management a cooperative effort. Safety programs are tailored for each client, and performance is measured monthly and adjusted as needed.
Spreading the accountability and reward across the board, each client gets a set of benchmarks that determine where they are as far as frequency and severity of losses. If progress is noted, the client is rewarded with cash rebates for helping to manage losses.
Moving up the totem pole, every Select branch manager is given a monthly cash reward, depending on their performance against safety incentive benchmarks. These branch managers report to regional vice presidents, who also get a cash bonus if their branches meet their respective goals.
Safety performance for each branch is graded by letter, and the better the grade, the less the in-house share-of-insurance quote is allocated to that unit.
While insurance is the highest expense each branch faces, Mr. Pach?n's risk management program has reduced the cost of retained risk by 60-to-80 percent. "Not paying a lot for insurance allows you to be more competitive," he noted.
In 2001, Select experienced $30 million in workers' comp losses--which came out to $8.50 per $100 of annual payroll. Seven years later, with losses now at $2.35 per $100 of payroll, and revenue projected to reach $1.7 billion, Select's expected workers' comp loss costs are still $30 million.
"Based on the trend that we were going, we should be at $120 million in workers' comp losses by now," had it not been for all the risk management and loss control programs implemented along the way, said Mr. Pach?n.
Adding to the workers' comp challenge is the fact that the rapidly growing firm has bought 77 companies in the past five years--many of which were in distress because of workers' comp woes, according to Mr. Pach?n. That is, until Select and its risk management team stepped in and put their loss control and safety programs in place.
"That is what has allowed our company to grow on a 35 percent basis every year," he said.
For Mr. Pach?n, the secret of Select's success is simple: "There is no question that enterprise risk management is part of Select's culture," he wrote in his award essay. "Its risk control program is so embedded into the company that it is now being used as one of the primary selling tools and distinguishing factors from the rest of the industry."
He added that his risk management program's "integration with the operational model of the company has reached the highest levels and plays a defining role in every important decision."
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