(Editor's Note: The following is an opinion piece by Christopher Tidball, an executive claims consultant and author of multiple books. The views expressed therein do not reflect those of PropertyCasualty360.com. Rather, they are intended to spark dialogue about optimization within readers' respective claims organizations.)

Price is often a primary consideration in many of our buying decisions, but does it ever get in the way of doing the right thing?

When buying a home, is it worth skimping on price if it means bad schools for your children or a high crime rate? When buying a car, would one forsake safety for a low price? These same considerations should play out when making crucial business decisions, in particular in claims departments where outcomes have far bigger ramifications than simple cost savings.

Having spent the better part of my career overseeing claims operations, I am keenly aware of the push to always drive down price points. I am also aware of the resulting unintended consequences that can adversely impact productivity, indemnities, expenses, and policyholder retention.

Despite this, I feel there is an undercurrent throughout the claims industry that too often overemphasizes price. While price is important, there are several other factors in key purchasing decisions that are arguably far more crucial.

Again, consider the purchasing decisions that we make in our personal lives and the impact of price. In my own situation, I could arguably purchase a home identical to mine in a different zip code for roughly half the price. I would then have costs associated with private schools, elaborate security measures and a much lower rate of home value appreciation. When making key business purchasing decisions overseeing claims procurement processes, similar situations often played out with vendors providing much lower upfront pricing, with many costs only to surface for what I really wanted. In many instances, the higher cost vendor was actually the cheaper option in the long run.

The Claims Handling Equation

The challenge in many claims organizations is that vendor related services are often considered a commodity, much like airfares. But, does it make sense to always buy the cheapest plane tickets? What if a particular airline has a lower fare but has a track record of running late or losing luggage?

When it comes to claims handling, the mantra is often the lowest ultimate cost. Sometimes paying a little bit more on a claim can save a lot of money in terms of reduced life cycle and litigation. The same holds true in the world of vendor services. Consider subrogation where contingency fees continue to get ratcheted down. Then consider the financial implications of violating the Fair Debt Collection Practices Act. In order to lower fees, service providers need to hire less experienced personnel who may not fully understand the implications of the FDCPA and the millions of dollars paid out annually as the result of violations. Beyond subrogation, consider the implications of HIPAA or Hi-Tech violations when dealing with medical-related claims.

The truth is, we are becoming a more regulated and complex society with soaring litigation rates. Arguably now more than ever, claims handling experience and expertise should be the first consideration when looking for a business partner. Certainly price should be a consideration, but only to point rather than a fault. But here is a list of four considerations that are even more important than price.

1. Claims knowledge. As we have discussed before, a career in claims is simply not for everyone. A fundamental understanding and execution of best practices requires a specific skill set and an insatiable curiosity that is far from ubiquitious. Business partners that have not only an understanding of claims, but also experience can relate to the challenges of claims executives and serve as an integral part of organizational success.

2. Execution. The framework for success lies in the proper leveraging of people, processes and technology. Certainly anyone can introduce a product and offer a low price, but can they execute? To drive organizational results there must be the proper balance of people using effective processes in conjunction with innovation which serves to drive productivity and results.

3. Vision. Many believe that leadership is the ability to translate vision into reality. It is fine to have a vision, but is there a demonstrated history of turning that vision into a product that can drive claims outcomes and organizational results? During my tenure overseeing claims vendor management, it was not uncommon to see potential suitors with grandiose visions that were going to transform the insurance industry. The key to success is partnering with those who have actually succeeded into turning the vision into the venture.

4. Results orientation. Getting a contract with a claims organization is a small part of the challenge with the far greater the ability to deliver results. While up front pricing may be enticing, it is critical to ask questions as to how the organization can provide such savings over the competition. Is there an onshore versus offshore component? Is there a skillset differential? Is there a lack of institutional knowledge that can result in compliance deficiencies and litigation risk? What percentage of the claims industry does the potential business partner currently service?

5. Price. Yes, price does matter. However, it should never be the driving force unless there is an apples to apples commodity. In the grocery store, buying the banana with less bruises for the same price as the clean banana doesn't make sense. The reality is that in the claims industry there aren't a lot of apples to apples comparisons to be made, as key differentiators are usually present when there is effective due diligence. Certainly competitive bidding and offshoring can be beneficial, but it can also result in unintended consequences that can more than offset any realized savings.

Like many aspects of claims, the key to success is investigation. Just as we wouldn't cut a check to a claimant without first asking key questions, we should take the same precautions when seeking out business partners. By identifying business partners who understand our challenges and can collaborate to drive results, carriers take significant steps towards gaining a competitive advantage in the marketplace over those whose main motivation is driven by price.

Special Reports /

Four Claims Considerations That Trump Vendor Pricing

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