Sharing Services Helps Insurers Cut Costs

Savings ranges tend to be a little higher in U.S.-based companies than for their European counterparts due to restrictions imposed by some country-specific labor laws.

While the concept is easy to grasp, many organizations have discovered that implementation is not. This article highlights some of the best practices that organizations have followed to realize the benefits of a shared services model.

Determining What Should Be Shared

The first question facing an organization contemplating the move to a shared services model is: "What should be shared?"

While there are no hard and fast rules as to which functions are best suited to sharing, we have found that functions exhibiting the following attributes outlined in the accompanying chart (Checklist) are typically good candidates.

Functions that surface most frequently as candidates for sharing include accounting, human resources, information technology and purchasing. Functions specific to insurance include certificate and auto identification card production, as well as specialized claim-handling activities such as subrogation and special investigation units.

Functions that are core to the business, such as marketing and sales, are not prime candidates for inclusion into shared services organizations. However, specific sub-functions, such as media buying within the advertising function, could be incorporated into a shared services organization.

The Service Level Agreement

The Service Level Agreement is a critical part of the shared service model. The SLA is a documented understanding between shared service provider and user addressing such issues as price, quality and turnaround time.

In poor implementations, the SLA is often either overblown or overly simplified. Overblown SLAs get bogged down in complex calculations of the cost allocations, while overly simplistic SLAs fail to have any meaningful performance criteria. Striking the right balance is a key success factor. Successful SLAs provide the foundation for conducting a fact-based dialogue between the service provider and users.

Moving to strict performance measures and penalties too early in the evolution of the shared service can discourage constructive feedback early in the relationship. For example, in transitioning to a shared certificate handling function, there is always going to be some transaction failures during implementation. Having penalties in place at the outset can skew the dialogue toward remuneration when the appropriate focus should be on process improvement.

A better approach is to have a set of standards that are flexible in the beginning and that allow for constructive discussions as the new service entity learns how best to serve the various user groups. Over time this can evolve to more rigid performance standards.

Information Technology: An Example

A question often asked is: "Does the function change when shared?"

For best practice implementations, the answer is "yes." Successful implementations of shared services are more than an aggregation or centralization of activity. We will highlight how this is so using Information Technology as an example.

The role of IT in a shared service model is twofold–part supplier and part governing body. As a supplier, IT has customers to whom it must be responsive. Customers should be free to obtain services elsewhere if they are unhappy with the level of service or the price offered by the in-house IT organization.

In its role as governing body, IT must be free to adjust prices independent of costs to encourage some behaviors–such as greater architectural commonality–while discouraging others. A customer setting up its own help desk in the belief that it can do this more cheaply than IT might be an example of a behavior to be discouraged.

Few IT organizations manage this balancing act well, but for those that do, the benefits are substantial.

The accompanying table (Making It Work) depicts best practices in a shared service model. These practices are applicable to all shared support functions and are not specific to IT.

Faithful application of these best practices will help make the most of the move to a shared service model.

Implementation Considerations

Patience is the key. Implementing shared services is not an overnight exercise. On average, full implementations tend to take about two years, although select functions can be up and running much sooner. Successful implementations begin with a design phase in which critical issues on structure–which functions to insource or outsource, location and pace of transition–are determined.

From a change management perspective, most organizations are better at handling the transition to shared services in a phased manner, moving a couple of functions at first, learning from the transition, then broadening to other functions when appropriate. Implementing one or two functions and leveraging the experience as a prototype for communications strategy, training, chargeback procedures, service level establishment and governance tends to be the best practice.

As an organization goes through the process of transitioning to a shared services model, the question of outsourcing or off-shoring is often put on the table. While outsourcing is a viable option for many of the functions typically residing in a shared services organization, best practice companies attempt to get their internal costs optimized before outsourcing. Making the transition to sharing functions, reducing headcount and costs establishes a better baseline from which to evaluate an outsourcing alternative in most cases.

As companies continue to strive for operational efficiencies, shared services, implemented well, can deliver cost-effective support services.

Sean O'Neill is a Partner with Bridge Strategy Group, a Chicago-based management consulting firm with expertise in the insurance industry. Mr. O'Neill can be reached at SONeill@BridgeStrategy.com

"Making the transition to sharing functions, reducing head count and costs establishes a better baseline from which to evaluate an outsourcing alternative in most cases."

Sean O'Neill