Few things can bring an efficient, well-managed risk management department to a grinding halt like the dreaded broker-selection process. Some unique law of physics seems to turn this process into a black hole of productivity, and it can consume the time, resources and morale of the most well-oiled risk management department. While periodic broker selections will always be an element of corporate stewardship, they do not have to be an exercise in waste and frustration.
Inefficient or not, broker selection is necessary because of the inherent conflict of interest between brokers and their clients. It is this conflict of interest that drives much of the inefficiency of the selection process. Brokers want to tell the client about the superiority of their company's products and services in order to obtain the highest price. They need to obtain as much of the risk manager's time as possible to do so. The risk manager, on the other hand, needs to ascertain which broker will provide the best fit and service at the lowest price with a minimum of time and resources expended.
The major pitfalls arise from a disparity in understanding the process. The broker wants to communicate all that she sees as good and worthwhile about its organization. A risk manager wants to know what differentiates the broker from competitors, including service, knowledge and price.
For example, most brokers have a similar lineup of services. They all claim that they can use their leverage to get the best rates, and will always promise the best, brightest and deepest talent pool.
But a 130-page RFP outlining all the details creates lots of frustration for a risk manager who is looking for the three pages' worth of information upon which he can base a decision. Since the client is the one making the final decision, it is up to the risk manager to set the rules of the process and control it.
There are four main inefficiencies in the broker-selection process: brokers providing too much information, meetings and presentations that are too complex, burdensome information requests made by the brokers and RFPs issued without the intention of actually changing brokers. For brokers out there who want a piece of me, of my time (and a piece of my company's spending), here are a few steps to follow:
Limit RFP length. A reasonable approach is to give three to eight pages per line of coverage. A 120-page opus with the history of the broker and flowery descriptions of its ability to get an insurance quote will be truncated with this type of limit imposed.
Limit in-person meetings and the number of people who attend. Sometimes the claims person is the most important person. For some companies, it will be loss prevention.
Create one standard data package. Broker requests for information are burdensome and a waste of time. If each broker receives different data, there can't be a true apples-to-apples comparison of their services.
Make it clear whether you are truly willing to move the business. Remember that the selection process is an investment for the broker too. Some brokers perceive that RFPs are just for show, and a way for the risk manager to justify staying with the incumbent.
By imposing limits, the risk manager can help the brokers provide useful information while also displaying their strengths without wasting time. Making the process effective and efficient is one area where there is no conflict of interest.
manages risk for Sun Microsystems Inc.
February 1, 2006
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