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Corporate procurement departments are playing a greater role in purchasing risk management services as companies try to cut spending in the struggling economy.
Brokers and insurers warn, however, that having procurement—which is responsible for negotiating and purchasing the best deals on everything from staples to real estate—involved in the broker selection process can commoditize their services and result in clients not receiving the best advice and insurance program available in the market.
The process works best, they say, when risk management is on an equal footing with procurement and factors other than price, such as expertise and market information, are included in the decision process.
While having procurement involved in requests for proposals is not new, brokers say more large companies are going this route as they try to reduce costs in a difficult economy.
While procurement has long been involved in insurance purchasing decisions at public entities, the real shift in the past couple of years has been at public and private companies, said Melissa LeRoy, managing director for major accounts at Liberty Mutual Group Inc. in Chicago.
In the few cases in which she was directly involved in the procurement-led bidding process, “risk management was not given the option to invite procurement into the process. It was a corporate mandate,” Ms. LeRoy said.
“There was a time when we would be surprised procurement was involved. We're not surprised anymore,” said Kevin McDaniel, president of Lockton Cos. L.L.C.'s St. Louis office.
Brokers say about 50% of their large-account clients use procurement in the RFP process vs. about 20% a few years ago, which has pros and cons.
On the positive side, procurement officials have the skills and resources to organize the broker selection process well and efficiently, brokers say. They make sure the process is fair and all competing brokers get access to the same information so no one has a distinct advantage.
“When we are involved in an RFP where procurement is involved, we know it's a fair process and that what we're getting everyone else is getting that too,” said Adam McDonough, president of Lockton's San Francisco office.
Warren Mula, chairman of the U.S. retail business of Aon Risk Services in New York, said when the process is handled really well, “we have the opportunity, win or lose, to go back to procurement and find out what we did wrong or how we measured up against competitors...It really gives you valuable information.”
In addition, risk managers are assured that the process is as objective and as ethical as it can be so they don't get questioned why they've had the same broker for the past 20 years, Mr. Mula said. “Procurement gives them that independent oversight.”
The downside to having procurement run the process, however, occurs when risk management is kept at a distance and price is the determining factor, brokers say.
“In many instances, once the (RFP) process is initiated (by procurement), if you're not the incumbent, you're not allowed to have contact with the risk management team,” said B. Scott Davis, executive managing director of broker Beecher Carlson in Brentwood, Tenn. “We really have to vet those RFPs coming from procurement to make sure we understand what the decision-making criteria is and, if it's pure price, whether we want to participate.”
Lockton takes the same approach. “If we feel that the procurement officer is not evaluating the intellectual capital, we may not participate,” possibly leaving a “diluted pool” of brokers from which companies have to select, Mr. McDonough said.
Indeed, one challenge is how to fit a quantitative and qualitative risk management purchasing process into a more commoditized procurement-led process, Liberty Mutual's Ms. LeRoy said. “Every insurance carrier, claims service provider and insurance broker tries to differentiate themselves on the basis of quality and service. It's a much more challenging purchase to do that in a commodity environment,” she said.
That is why the process works best when risk management remains involved, brokers say.
“Just because (an RFP) comes from procurement doesn't mean they just want cheap insurance,” said Nick Anthony, managing director of strategic accounts for Willis Group Holdings Ltd. in London.
Some firms that use procurement to purchase risk management services “buy on the basis of value,” he said. “There, we are not worried because, while procurement will run the process, the decision-maker will be the person who really needs the end product and value out of it,” he said.
“When we've seen it work very well, which I would say, thank God, is the majority (of the time), there is very good interplay” and balance between the procurement group, which runs the “professional competition,” and the risk manager, who can influence some qualitative aspects of the RFP process, Aon's Mr. Mula said.
One risk manager at a company where the purchasing department has run the past two broker RFPs says it's worked out well.
“I think in a lot of ways it really is better,” said Karla Weinsenburger, Provo, Utah-based risk manager of software provider Novell Inc. “In the beginning, the treasurer was very antsy about purchasing coming in. There was some fear of them taking over because purchasing is used to looking at a contract and negotiating a contract, and you really can't negotiate insurance policies like that,” she said. “I feel like the purchasing relationship within Novell's structure has worked really well, but I think it's really important going in that purchasing is to help with what they do well, which is sending out RFPs, gathering data, populating spreadsheets...and they give us the decision-making ability and also the ability to say, "That's just not the way it works in insurance, sorry.'”
Opinions varied among risk managers who do not directly involve procurement in RFPs.
“While I think, to a certain extent, that price is an important consideration...it's not the only consideration,” said David S. Hershey, Portsmouth, N.H.-based risk manager for Sprague Energy Corp. and its holding company Lexa International Corp.
The best approach would be if procurement devised a model and helped risk management develop an RFP “because there are certainly rules to their trade that, frankly, would probably benefit the risk management community,” Mr. Hershey said.
Carolyn M. Snow, director of insurance risk management for health care provider Humana Inc. in Louisville, Ky., noted that her concerns “would be around reducing the selection of professional services to a commodity-buying process when company assets are at risk.”
“If I were an independent director for a publicly held company, I would be concerned if the (directors and officers) coverage was selected through a process that leans heavily on the lowest possible price,” she said.