Analyzing strategic changes for a
consulting firm in a changing
insurance industry
Amsterdam Business School University of Amsterdam, The Netherlands
June-August 2017
Patrick Been
Content
0. Introduction ... 4
1. Key challenges for the Insurance industry ... 6
1.1. Impact on Insurance Value chains ... 6
1.2. Need for IT Integration partners ... 8
1.3. Regulatory Changes ... 9
1.4. Partnerships on knowledge and IT ... 11
1.5. Some company specific challenges ... 11
1.6. Conclusion ... 12
2. Analyzing the impact of Insurance industry challenges on a consulting firm ... 14
2.1. Analysis ... 14
2.2. Conclusion ... 15
3. Current situation – Redmore Group – Triple A Risk Finance ... 17
3.1. Corporate Strategy perspective ... 18
3.2. Triple A Risk Finance ... 19
3.3. Conclusion ... 23
4. Impact in terms of the elements of the Balanced Score Card ... 24
4.1. The Balanced Score Card ... 24
4.2. Balanced score card as a causal chain ... 28
4.3. Learning and growth perspective ... 29
4.4. Internal and Process Perspective ... 31
4.5. Customer Perspective ... 33
4.6. Financial Perspective ... 34
4.7. Balanced Score Card: a critical note ... 35
4.8. Conclusion ... 35
5. Desired situation – Alignment and gap identification ... 37
5.1. Alignment and gaps: Learning and growth perspective ... 37
5.2. Alignment and gaps: Internal and process perspective... 39
5.3. Alignment and gaps: Customer perspective ... 40
5.4. Alignment and gaps: Financial perspective ... 41
5.5. Conclusion ... 42
6. Closing the gaps ... 44
6.1. Defining strategic themes ... 44
6.2. Supportive measures for Strategic themes ... 46
6.3. Conclusion ... 48
7. Conclusion ... 49
Appendix ... 54 Redmore Group - Label information ... 54 Technology providers ... 55
0. Introduction
The insurance industry is facing significant challenges and changes in the coming years (PWC, 2017a & b; Financial Times, 2017). These challenges and changes are related to both internal and external factors. Internal factors can be found in cost reductions at insurance companies to embed efficiency and maintaining strong financial metrics, developing innovative products that support new business and implementation of regulatory changes. External factors can be found in changing customer preferences, disruptive technologies and innovative start-ups. Key challenge for any insurance company in the insurance industry is how to manage both factors and adopt to changes that are beneficial to the insurance company both in the short, medium and long term while maintaining competitive advantage (Gartner, 2016).
For any consulting firm providing services in the insurance industry, it is key to adapt to the changes and challenges the insurance companies are facing. First of all it is about delivering the right services at the right time and secondly in order to keep their competitive advantages towards their own competitors. The fact that competitors are competing for the same customers in an insurance industry that is changing due to internal- and external factors creates tensions in competition by itself and at the same time the Big 4 companies and some smaller consulting companies are positioning themselves as experts on knowledge intensive topics like data analytics and as partners in managing and executing change processes throughout the whole customer value chain at insurance companies. For some of the challenges and changes we already know what the most likely reaction of the insurance industry and individual insurance companies will be e.g. need for external advice and consultancy services on the rather new topics to assess where the company stands now and what needs to be done to make the required changes, or postpone any decisions due to topics not being on the strategic agendas at the moment and continue with “business as usual” activities. We also see that investments made by the insurance companies in IT systems over that last years to cope with regulatory requirements are starting to pay off. But we do not know what exactly the new challenges will be, which consulting services will be in high demand and where insurance companies will invest first. Consequently there will be an impact on the demand for services provided by consulting firms. Consulting firms would want to know what services are most likely being asked for, in what form and how to organize both internally and externally to best prepare themselves. A consulting firm that is doing this assessment is also looking for any strategic changes necessary in order to keep competitive advantages and continue to be seen as a valuable partner in the changing insurance industry.
A consulting firm that is noticing and aware of the abovementioned challenges and changes in the insurance industry, would want to assess if their current strategy is fit and aligned to face the changes and challenges ahead while keeping their competitive advantages. In the process of a changing insurance industry, a consulting firm wants to avoid a situation where it cannot keep up with competition due to the (lagged) result of not noticing the changes or failing to react accordingly. The management of the consulting firm wants to acquire relevant information about the changing environment and the organization itself, to implement and monitor strategic decisions. For the alignment of the resources, internal processes, systems and employees to the strategic objectives, the consulting firm can use the processes of performance management systems (PMs). PMs aims to turn strategy into objectives, targets, and KPIs and monitor progress against these. More precisely, the consulting firm can use strategic performance management systems (SPMs) to incorporate the strategy re-formulation processes to include the link with the company’s strategy (Gimbert et al., 2010). SPMs are a subset of PMs and are characterized by four main attributes, as mentioned in Micheli and Manzoni (2010): integration of long-term strategy and operational goals, presence of multi-perspective indicators, inclusion of cause-effect linkages, and presence of a sequence of goals-targets-action plans. Within the set of available SPMs the Balanced Score Card (BSC) framework can provide useful mechanisms for addressing these attributes by making the link between strategic
In this thesis we will apply the BSC framework to a consulting firm that is confronted with the described challenges and changes in order to assess what strategic changes are needed, to determine possible gaps and define actions to close these gaps. The BSC framework consists of four dimensions that provide a useful interconnection for the total customer value proposition that is aligned at delivering services within a consulting firm. We will use the BSC framework to make an analysis of the needed changes in strategy and corresponding actions. Outcomes of this analysis are defined in terms of the impact on the dimensions of the BSC and provide an answer to which strategic changes are necessary, which services need to be given extra attention and how to align a consulting for the changing insurance industry. In that sense we will apply SPM in two of its main applications and contributions; an initial structured analysis and a set of (one-off) strategic (short term) actions and secondly the implementation of a system that is supportive to capture future relevant strategic information and define corresponding actions, maximizing the long term contributive value of SPMs implementations. Main questions in this thesis are therefore:
- what are the most relevant changes and challenges in the insurance industry - what does this mean for the services of a consulting firm and in terms of the BSC
- in what way is the company already aligned for changes and what gaps do currently exist - what actions and measures to take to close the gaps
In systematically answering these questions we follow a step by step approach to analyzing which strategic changes are necessary for a consulting firm in a changing insurance industry.
1. Key challenges for the Insurance industry
With the growing possibilities of technology in the insurance industry new applications of the digital transformation are starting to make an introduction in key processes at the insurers. Digitalization is one of the biggest potential sources of cost reductions and developing new products and solutions. Integration of technology, data and analytics is key to unlock the full potential. At the same time these topics can require significant and sustainable investments made by the insurance companies in order to keep their competitive advantages. We currently observe insurance companies rethinking their operations and only investing in projects that are supportive to strategic goals. This also means that insurance companies are abandoning projects that are not on the strategic axis within the companies. Insurance companies need to have a very clear vision on not investing in short-term fixes for long-term problems and challenges.
The impact on both revenues and costs can be enormous. An analysis by Bain and Google shows that a prototypical property and casualty (P&C) insurer in Germany, that has implemented full digitalization of its operations, could increase its revenues by up to 28% within five years, reduce claims payouts by as much 19% and cut policy administration costs by as much as 72% (Naujoks et. al, Bain 2016). Although this report is about a prototypical P&C insurer, the expected benefits in non-P&C segments are similar with maximum benefits in automation of internal processes, underwriting and claims management (McKinsey&Company, 2016).
In this paragraph we will mention some of the changes and challenges we see in the insurance industry today.
1.1.
Impact on Insurance Value chains
In its December 2016 report on the impact of digitalization in the insurance industry, The Geneva Association (Schanz and Sommerrock, 2016) provides an example of an insurance value chain that is affected by digitalization as shown in figure 1.1
fig.1.1 The virtualization of the insurance value chain, source: Swiss Re As can be seen in the figure above a full digitalization of an insurance value chain would have a significant impact on current internal processes and IT systems at an insurer. Additional
Straight-Through-Processes (STP) would be added to the digitalization process to standardize and optimize the total insurance value chain. This includes processes regarding (regulatory) reporting, risk management and valuation processes. The use of big data and data analytics would also allow the insurer to offer more client (and prize) differentiation and multi-channel distribution. Examples of “digital-born” insurers show that these insurers operate at a much lower cost level, with higher efficiency and can provide a higher and more effective client interaction in a multi-channel environment.
Parallel to doing investments in digitalization and initiating projects that fit this strategy the insurance industry also needs to be aware of disruptive forces that impact the Industry as a whole, examples can already be found, e.g. www.friendsurance.com which is a platform based “shareconomy” approach. They describe their approach as “Friendsurance is taking a step by step approach to disrupting the insurance industry”.
In executing changes in the insurance value chains the insurance companies are faced with several challenges. Challenges that require consideration prior the actual execution and related projects that are part of the changes in the insurance value chains. In an overview by Schwartz, G. (Bain & Company) some of the key challenges are mentioned:
How much to digitize
Key for answering this question is determining the actual status of the insurance company, is the company a beginner, an intermediate or a company based on best practices. And secondly the company needs to determine what the final purpose of the changes is. Are the changes related to cost reductions or customer loyalty. The combination of the actual status and purpose determines the initiatives and focus the company chooses as part of the strategy. Additionally one can add that the company also needs to determine how ready the company, or parts of the company, is for change. Determine the pace
Determining the pace relates to the readiness for change and the company seeing itself as a follower or an early adapter. The tendency is that the bigger companies tend to be the more early adapters or at least want to be involved in external changes that can have a future impact, although this depends much on the individual company.
Integrate digitalization into the business or treat separately
The core processes of an insurance company will be affected by digitalization and the related changes in the insurance value chain in the pace chosen by the company. The main question that needs to be answered is about the place and integration of innovation in the company. Treating innovation as a separate development or outside the company might be a choice that gives the insurance company more flexibility and better time to market.
Mitigate the risk of the transformation process
The transformation process itself is not without risks for the organization, depending on the impact on the core processes. This requires a good monitoring process that incorporates regular capacity and capability management activities and checks. Risk mitigation also requires getting the right stakeholders on board.
Transforming insurance companies through the digitalization process and facing the described key challenges means that insurance companies also need advice on the execution process. When
companies set up the program management for the related projects often external advice and expertise is brought in. This external expertise can be both knowledge based (supportive to how the knowledge and expertise should be built into the systems) or more IT solution driven. Typically the Big 4 consulting companies are involved, but also companies like Accenture, IBM, Microsoft etc. are asked for advice and delivery of services.
1.2.
Need for IT Integration partners
When analyzing the changes in the aforementioned insurance value chains, one can wonder what the drivers are behind the need for the use of new technologies and the strategy for digitalization. Some of the main drivers are (Morgan Stanley & BCG, 2016):
Offer increased (digital) client interaction through various channels Faster time to market
Need for low cost policy management and claims processing systems Protection against disruptive innovation and competition
Ability to integrate, manage and analyze data
In the insurance industry the IT spending per employee are among the highest of all industries, meaning that in times of cost reduction and restricted budgets it is crucial for any insurer in the insurance industry to find the right technology- and integration partner(s) that fits their long term strategy. An integration partner capable of doing this, has to demonstrate the following attributes that support the drivers of the insurer (Morgan Stanley & BCG, 2016):
Offer modular products that allow migrations in a controlled way that align with the desired pace of the company, see also 1.1 regarding the state of the insurance company
Be a partner on innovation, rather than documentation
Work towards creating environments with one single version of consumer data Offer future proof systems so that Cloud and Internet of Things (IoT) are able to
integrate
Make launching of new products quick and cheap
The data challenges for the Insurers can be more complex due to the legacy systems and customer data silos that have been created of the past. Actual analyzing of customer data would mean initial investments and projects to do data cleaning prior to fully optimizing the use of big data and data analytics (Avanade, 2017).
Key challenges could also be solved by outsourcing of core systems and processes, due to cost savings but also run off scenarios for closed book business and optimizing the current IT environment. Although outsourcing might sound as a logic step, many projects in the insurance industry have shown that outsourcing creates different challenges on interfacing, data integrity, legal issues and service level agreements. Here also a pre-phase of making processes “outsourceable” would be a wise consideration. Optimizing the current IT environment done “in-house” would involve some key focus elements (Morgan Stanley & BCG, 2016):
Getting the right people on board: this means even hiring new people from leading digital companies
Focus on digitalization and ecosystems Focus on a 360-degree view of the client Create an “open innovation centre”
Dealing with the legacy systems in a cost effective way
If insurers choose to do an “in-house” transformation key focus would be on consumer centricity, operational excellence, IT, innovation and employee culture, as we see in the case of the insurer Allianz (Morgan Stanley & BCG, 2016). Allianz is an example of an insurance company that is leading in the transformation from a “traditional” insurer to becoming a digital company. This German company has created Allianz Worldwide Partners (AWP) as an innovation driver within the Allianz Group. Not only did this company embrace digitalization, but it also created an employee culture of outside-in thinking found in leading digital non-insurance companies (e.g. Google, Ebay, Amazon). AWP has created a platform that ensures digital readiness of product offerings, Multi-access customer experience, use of big data and data analytics and automation of operations and processes, as presented in the figure below (Allianz, 2014).
Source: Allianz Capital Markets Day 2014 Main drivers behind the AWP are (Allianz, 2014):
enabling digital readiness of product offerings provide a multi-access customer experience (24/7)
use of big data and advanced analytics to drive decision making automation of operations and processes
The drivers behind the need for the use of new technologies and digitalization show that insurance companies need IT partners that support this vision and can deliver key services for this transformation.
1.3.
Regulatory Changes
In the insurance industry regulatory changes provide a constant challenge for insurance companies both in terms of requirements, deliverables and supporting processes. Often the (big) changes themselves are announced a few years ahead of the day the regulation becomes into effect. During the time until full effectiveness insurance companies prepare themselves to meet the
requirements. The last big regulator change that had a significant impact on the (European) insurance industry was Solvency II, announced late 2009 and being effective in the beginning of 2016. According to the European Commission the total estimated costs of implementing Solvency II in the EU was between $3.4bn and $4.5bn.
Looking back at the way Solvency II was implemented we see the following impacts and requirements:
IT impact
The IT landscape in the insurance industry is diverse, depending largely on the IT architecture and IT vision of an individual insurance company. Many insurance companies have legacy systems in place and are (constantly) doing investments to optimize policy administration systems and surrounding processes. Regulations, mergers and acquisitions and multi-branding make the total IT architecture complex.
The implementation of Solvency II showed that initial minimum investments with the expectation to comply with the regulations eventually resulted in much larger IT investments to full comply with approaching effectiveness deadlines.
Data model and calculation engine
Solvency II required insurance companies to gather data from multiple sources. Gathered data needed to be stored in data marts or data warehouses, asking for additional IT resources and data requirements. Next steps were calculation engines that needed to calculate complex calculations and risk elements. Robust modeling requirements included high performance calculations and a high level of flexibility in parameters.
Reporting
Requirements on the Solvency II reporting were on different levels and had multiple internal and external stakeholders. Regulators demanded a robust reporting process showing that companies were in control regarding the overall process to comply with Solvency II. IT investments in reporting tools were made, but not all tools showed alignment with the IT architecture and still today Solvency II tools are being replaced for better fit within the companies IT vision and architecture.
After the full effectiveness of Solvency II in the beginning of 2016, the next regulatory change has already been announced: IFRS 17 as issued by the International Accounting Standards Board (IASB). IFRS 17 will be in full effect in 2021 and is aiming to improve financial reporting by providing more transparency and comparable information. As with Solvency II, IFRS 17 will require insurance companies once again to invest in the IT landscape, data quality, control and management. Data requirements are very similar but do differ significantly in detail, and companies must be able to provide different level and types of data. IFRS 17 is principle based, meaning that an insurance company can consider different approaches when reporting. Having thorough understanding of accounting, reporting and disclosures is therefore required.
It is expected that the total costs of implementing IFRS 17 will exceed the costs of the implementation of Solvency II. It is important to notice that even more than Solvency II, the implementation of IFRS 17 requires knowledge about how the methodologies work as well as knowing how to implement this knowledge in the IT systems.
Prudential’s CFO Nic Nicandrou describes the implementation of IFRS 17 and the relation with Solvency as follows: "Some observers misdiagnose that - as the IFRS 17 requirements have certain
therefore the effort and associated cost of the new standard will be modest, however, the notion that IFRS 17 amounts to Solvency II with a few adjustments is incorrect. In practice, extensive re-engineering of data storage and actuarial and finance systems to generate all the necessary information will be required. We are talking about fundamental operational as well as technical accounting change" (Cadle, 2017).
1.4.
Partnerships on knowledge and IT
To implement Solvency II many insurance companies invested in actuarial software to make the required calculations. To be able to process the required data additional investments were made. From an IT architecture perspective this extra software (and hardware) had to be maintained, managed and updated. If companies were not struggling enough with the IT landscape, Solvency II created extra stress, costs and maintenance activities. Data was needed from many sources and only through many process steps, with interfaces that require maintenance, data would move from one system to another system.
In the insurance industry we observe strategic partnerships that can lead to integration of systems that would normally work stand-alone in a very inefficient and costly way. Having stand-alone systems would also prevent a long term goal of full integration towards single systems that would define an insurance company. We define this strategic partnerships as “partnerships on knowledge and IT”. By this we mean that one company brings in the knowledge how the methodologies work and how the IT systems in place make extensive use of this knowledge. Another company brings in a strong IT system that has another core competences on some other methodology. Both companies are suppliers to the industry and would benefit greatly from a strategic partnership, leading to synergy effects for both companies and more importantly the industry.
A good example of these types of partnerships has recently been announced between the two companies SAP and FIS. Both companies are joining forces to implement IFRS 17 and are aiming to improve the integration and interaction between actuaries and finance. SAP is a strong leader in enterprise applications including financial applications, FIS is a leading company in providing actuarial (projection) software. It is not uncommon that one of the Big 4 companies joins this partnership to be able to provide both consultancy services on the complete range of implementation and the implementation itself.
We see these type of partnerships as steps towards full integration of existing silos within insurance companies that are starting to integrate and become smaller and more efficient.
1.5.
Some company specific challenges
The challenges and observations we presented in paragraphs 1.1-1.4 are to a large extent valid for the insurance industry as a whole. Every individual company will be faced with these challenges and observations in some way to be able to survive and keep their competitive advantages in the industry. We will present some challenges that are more company specific, meaning that it depends on the insurance company to what extent these challenges are on the companies agenda.
Budget limits
Some insurance companies are very limited in hiring external support due to budget limits. Reason for budget limits can be many e.g. unit costs being too high compared to peers
(McKinsey&Company, 2015), disappointing P&L and solvency numbers or the demand by C-level executives to solve the problems internally, and thus reducing costs and demanding more company self-learning capabilities. Only projects that are of strategic value to the company are approved for (limited) external support.
Cost and personnel reduction programs
Additional to budget limits some companies even took more drastic measures to their internal organization. As the impact of the changing economy became more apparent, these companies started (dramatic) cost reduction programs resulting even in reduction of personnel. Key ratios like costs per policy or activity based costing methods showed that some companies are operating at relatively high costs compared to their peers.
New Business decrease
Not being able to sell enough (profitable) new business products is another challenge for some insurance companies. Companies are looking at ways to innovate their products, and failing to do this can cause another wave of cost reductions and efficiency initiatives.
Attracting young graduates and technology experts to replace both senior personal and consultants As part of the personnel reduction programs the insurance companies replace senior personnel with young graduates who are more adapted to the new concepts of market value valuations and related risk management topics and bring in better IT skills. Even hiring personnel from leading technology companies is done before getting (the more expensive) external support.
1.6.
Conclusion
By having made the analysis of the most relevant changes and challenges in 1.1-1.5 we are able to answer the question what the most relevant changes and challenges in the insurance industry are and will be. We clearly see the following relevant topics:
Topic Summary
Insurance Value Chain impact Digitalization is a major driver of a changing insurance value chain. In the Insurance industry there is a need for knowledge about the
transformation processes towards a new digital state and new high-end technologies like data analytics, modeling etc.
Service providers need to understand the path and state of transformation
Need for IT integration partners IT partners need to show that they excel at the technologies that are enabling the
integration, they need to show understanding of IT integration paths and be a strategic partner on innovation.
Regulatory Changes Regulatory changes have a significant impact in the insurance industry, optimization and preparing for the next change, IFRS17, is key for any insurer.
Partnerships on knowledge and IT Strategic partnerships are steps towards integration of existing silos, making insurance companies more efficient and integrated.
Company specific challenges Finding the right balance between
investments, cost and external expertise is on many strategic agendas.
Next step is to analyze what these changes and challenges mean for a consulting firm that is providing actuarial and risk management services to a changing insurance industry, as we will present in the next chapter.
2. Analyzing the impact of Insurance industry challenges on a
consulting firm
In chapter 1 some of the major challenges in the insurance industry were presented. Next step in the analysis of determining the impact on the services of a consulting company, is to determine which area or topic the changes relate to. This information is key to a consulting firm in order determine which services are required in the changing Insurance industry. Choices made here are directly linked to the consulting firms strategy. We chose the perspective of a consulting company that is providing actuarial and risk management services for the insurance industry, so this consulting firm is confronted with the challenges presented in chapter 1.
2.1.
Analysis
There are several reason why a consulting firm needs to closely examine the impact on their actuarial and risk management services, products and the current organization. Firstly the type of requested services can change, meaning that competitors that are able to better offer this type of services will eventually win customers over their competition. Secondly the type of services might stay the same but the demand is decreasing due to shift in focus within the insurance industry, meaning that lower demand for services might lead to the need for the consulting firm to offer different services and innovate. It is also possible that both reasons occur simultaneously. And finally the consulting firm needs to asses if the current organization is aligned at and has the ability for delivering the services and products.
We will base our analysis on the topics we described in the conclusion of chapter 1 and assess the impact on the related services and products. For the impact we want to assess if and how the consulting firm can deliver on this topic and by which means in terms of required knowledge and skills.
Topic Related services and products Impact
Insurance Value Chain impact
Data analytics, predictive modeling, Artificial Intelligence, Cognitive Computing, Fraud detection.
Type of consultants and understanding current state of transformation
Relates to:
data analytics services and having the right people on board to deliver on data analytics pricing methodologies being perceived in the
market as a
knowledgeable partner on data analytics Being able to advice and deliver on (elements) of the
transformation process
Need for IT integration partners
Data analytics, data cleaning and data optimization
Relates to:
data analytics services low cost policy
management systems, deliver on projects that are part of lower costs strategies
Understanding IT integration path
Partner on innovation
Being able to advice on (elements) of the integration process
Being perceived in the market as a knowledgeable partner on integration processes. Being able to deliver on the key elements of the innovation paths
Regulatory Changes Solvency II remaining optimization projects
IFRS 17
Being able to identify and deliver on bottlenecks in current Solvency processes that need optimization related to
expansion towards IFRS 17.
Being perceived in the market as a knowledgeable partner on IFRS 17 processes. Being able to deliver on the key elements of IFRS 17 methodologies and techniques (data, calculation engines and reporting)
Partnerships on knowledge and IT
Strategic partnerships
Mixture of knowledge and IT on strategic projects
Be able to provide combined knowledge and skills in
transformation processes. Form partnerships, be on shortlist. Being perceived in the market as a knowledgeable partner on both knowledge intensive projects and IT capabilities
Some company specific challenges
Demand for specific expertise that is unique, of high quality and niche. Companies are willing to pay for these services despite business constraints.
Offer high quality results
2.2.
Conclusion
Summarizing the analysis made in 2.1 leads to a set observations that the consulting firm needs to evaluate and incorporate in its strategy to able to continue to create sustainable value. Creating sustainable value means that the consulting firm incorporates short term actions that are aimed at delivering the right services and products that are supportive to the changing insurance industry and
secondly that it evaluates how to it is able to consistently delivering the right services and products in the long term. We summarize the observations that impact the consulting firm as follows:
offer specific knowledge and methodologies in high quality on a selected number of topics being able to advice on transformation, integration and innovation on a selected number of
topics that are changing the insurance industry
investigate which partnerships would create (long term) synergies be able to deliver from a high performance organization
In the next chapter we will introduce the consulting firm that is confronted with challenges and changes in the changing insurance industry and needs to incorporate the observations we made in this chapter.
3. Current situation – Redmore Group – Triple A Risk Finance
In this paragraph we will introduce Triple A risk finance (Triple A), a consulting company that is part of the Redmore Group. After investigating some of the most important challenges and changes in the insurance industry in chapter 1 and analyzing the impact on a consulting firm in chapter 2, we will now introduce and describe the consulting firm the analysis applies to.
Triple A risk finance (Triple A) is a company specialized in providing actuarial and Risk Management Services. These services range from Interim Management, project-based solutions to advisory. The company was founded in 2006 by three partners who are still managing the company, currently there are seven managing partners. The initial founding of the company was based on the need for a consulting firm in the Dutch market that was able to transfer and implement risk management services based on a “hands-on” approach, both combining theoretical knowledge and practical solutions. Supported by several large insurance companies that had a direct need for this type of consultancy, the company experienced rapid growth. Eleven years later the company has 90 employees and a solid client base, total revenues exceeded 16 million Euros in 2016. Triple A is know in the Dutch insurance consultancy market for its young and entrepreneurial team, capability of delivering solutions and fair pricing for servicing.
In 2014 Triple A became a member of the Redmore Group. The Redmore Group was an initial merger of Triple A and Talent&Pro. This merger was done to better service the Dutch insurance industry with combined solutions and services. Solutions and services for institutions in the financial industry and the large corporates. Both companies continued with their own brands. In the time period from 2014 until 2017 two more mergers took place that gave the Redmore group more volume, revenues and solutions. Now in 2017 the Redmore Group has four labels (figure 3.1).
Figure 3.1: labels within the Redmore Group Redmore Solutions is a label that is especially created to offer solutions based on synergy effects between the other labels, including Triple A. Combined solutions relate to software, Business IT, outsourcing and consulting. Redmore solutions is still in the early stages of business growth.
Information on other labels, Talent&Pro and Profource, can be found in the appendix (Redmore Goup - Label information). Both companies are not included in the analysis done in this paper. With Triple A being part of the Redmore group creates an additional dimension, that we will explore from the corporate strategy perspective.
3.1.
Corporate Strategy perspective
(based on handwritten final paper for the course “Corporate Strategy”, Been (2015b))
The Redmore Group is aiming at a corporate configuration that delivers an above average performance based on a set of key core competences. This corporate configuration can also be seen from the perspective that top management in Redmore Group should not be an accounting consolidation, but should provide guidance for the architecture that built (and maintains) core competences and market-focused Strategic Business Units (SBUs), see also Prahalad and Hamal (1990). In this paper they describe the corporation as a tree, based on core competences and products combined with strategic SBUs. This configuration of the corporation can be seen as a fundament to competitive advantage and sustainable growth for the corporation as a whole. In order to built competitive advantages on corporate level (and the underlying SBUs) and defining strategies that expand, built and maintain the competitive advantages Redmore Group can face several strategy issues. Strategic issues are driven by paradoxes that exist by strategic tensions. Strategic tensions can be described as conflicting strategic pressures or demands that need to be dealt with simultaneously. Strategic tensions are in that view also dynamic, changing over time.
Ron Meyer (2007) addresses the strategic issue of Corporate Level Strategy. He defines that Corporate Level Strategy is about selecting an optimal set of businesses and determining how they should be integrated in the corporate whole. The tensions that arise with the development of the Corporate Level Strategy can be found in the following two tensions (polarities):
Responsiveness
Synergy
To understand why these two polarities are important for the Redmore Group we will take a closer look at Triple A (we will not look at the others companies of the Redmore Group in this paper). Triple A was founded in 2006 and rapidly showed growth in both personnel and revenues, yearly profit margins have repeatedly been exceeding 10%. In an earlier analysis of the core competences of Triple A (Been, 2015) we argued that the organizational climate, especially the Open System Model, as described in Quinn and Rohrbach (1983) is a core competence that is key to the success of the company. It is the more entrepreneurial way of thinking and acting, having flexibility in both organization and resource that formed Triple A. Furthermore elements of ambidexterity (the ability to find a balance between short term alignment (doing profitable business) and adaptability to an ever changing environment) and strategic agility as described in Birkinshaw and Gibson (2004) can be found present at Triple A. From a organizational point of view, Triple A can be seen as a SBU within the Redmore Group.
From a portfolio organization perspective the responsiveness of Triple A should be kept intact within the Redmore Group. In this perspective managers want to have autonomy and be able to quickly react to market demands. Basically what the company has in its DNA from the beginning. From an integrated organization perspective the emphasize is on the importance of synergy, as we also see in the definition and activities of Redmore Solutions.
One of the first synergies that can be expected is cost synergy. Cost synergy would for instance mean to eliminate redundant costs to lower overall total costs, increased bargaining power and avoidance of transaction costs. From the cost synergy effect one can expect the start of integration mechanisms like standardization. Other integration mechanisms can be found in centralization and coordination, e.g. sales force combinations. Key questions remaining is where to expect other synergies and what path to follow to explore synergies without endangering responsiveness that can
be found at SBU level. Finding synergies in multi-business firms like Redmore Group also creates challenges that Redmore needs to be aware of:
slower decision making strategy incongruence dysfunctional control
Decision making for (major) investments is done at Redmore Group board level, this means that where in the past the decision making was based on quick entrepreneurial response at Triple A, now potentially more management layers and final improvement is needed. Strategy incongruence might arise when the corporate strategy fits some SBU more than others. Internal adapting and compromising to the corporate strategy by a SBU might lead to a misfit (and extra costs) with the specific business demand for that individual SBU. Dysfunctional control is the effect of the top of the corporation not having the specific business knowhow needed to judge the SBUs strategies, activities and results. In order to have control over the SBU the cooperation might potentially steer the SBUs in an inappropriate direction.
Another strategic issue to consider is the trade-off between exploration and exploitation, as described in March (1991). Exploitation is about further refinement and extension of existing competencies and exploration is about experimentation with new activities and topics. Exploitation is less risky and has higher chances of success in the short run. It helps in the field of developing distinctive competencies, but in a changing environment, it can also lead to a trap of suboptimal but stable equilibria. Exploration is more risky, with higher chances of failure, but it allows for a company to be more adaptive and responsive to changing market environments (Sudhir, 2016).
3.2.
Triple A Risk Finance
Triple A is a consulting firm that currently offers services in five strategic business units (figure 3.2). Each business unit is defined to offer the best services in selected customers segments and match market segmentation. In terms of maturity the Pensions and Insurance business units have been there from the original founding of the company in 2006. Later joined by the Risk and Strategy Consulting business unit, whereas Banking and Benefit Consulting have only been added in recent years due to both growth and market opportunities.
Figure 3.2: Strategic business units Triple A The company has two geographic locations, Amsterdam and Warsaw. In total ninety consultants work at Triple A. Additionally to the five shown business units, smaller units are defined around the strategic topics of data analytics and actuarial risk modeling, which are both part of the BU Insurance. In this paper we focus solely on the BU Insurance, that includes data analytics and actuarial risk modeling. To further describe the current business environment at Triple A we will use the ten elements described by Kraaijenbrink (2015) that together define a strategy, figure 3.3.
Figure 3.3: Kraaijenbrink’s Strategy Sketch
It is important to notice that, we will not define the strategy at this stage, we will only describe the elements that together can span a strategy. The purpose of describing Triple A in the framework of the ten elements is that we can later refer to the elements as we analyze Triple A in terms of a proposed strategic performance management framework (chapter 4), identify gaps (chapter 5) and propose initiatives to close these gaps to make Triple A better fit for a changing insurance industry (chapter 6). We will use parts of the analysis that was defined in a competitive strategy analysis for Triple A (Been, 2015).
Resources and competences
For Triple A, having excellent resources and competences have always been the driver behind the growth of the company before joining the Redmore Group, and still today. They define for a large part the value perceived by customers and can be seen as an important (intellectual) asset. Supportive to these assets, in maintaining and increasing their value, and perceived as important (internal) resources and competences are:
Organizational climate
Triple A has created a way of working together that has been very efficient and effective for both personnel and the ability to adapt to external changes.
Highly skilled and motivated consultants
The right mix of individuals with the right skills and teams have been at the core of the resources of Triple A.
Strong network in the insurance industry
Key individuals have a strong network that serves a significant business driver.
Partners
Being part of the Redmore group creates an extra dimension related to (strategic) partners. Each member of the Redmore Group can be seen as a direct partner although a partnership only makes sense if it creates a valuable (sustainable) relationship. Customer relations and the associated personal relations can also lead to partnerships and being listed as “preferred suppliers” of services.
Additionally Triple A also works with a flexible group of freelancers that can be hired for specific knowledge and in case a project needs to be staffed on short notice.
Customers and needs
Insurance companies rely on at least two types of consultancy services. The first being technical services related to (large) software implementation projects. These type of projects are often related to hard- and software changes and have a long implementation time before being fully operational and are able to replace legacy systems. Examples of these type of projects are replacement of existing policy (data) systems. The second type of projects are the (knowledge related) smaller projects that relate to a specific topic that needs to be dealt with in a limited amount of time. These projects can vary from a few days to more than thousand days work. Examples of these type of projects are performing specific calculations to large validation projects of a complete market value process or advisory on regulatory topics.
Triple A has not been very active in the first type of projects and mostly provides services that have always been supportive. Triple A has so far not been perceived as a “solutions provider” on implementation projects. Being part of the Redmore Group does change this perspective, especially when considering Redmore Solutions and the type of services they are offering and are planning to offer in the future.
The second type of projects are the main revenues for Triple A. The need for this type of consultancy, around specific topics in the past years, has been the driver for the growth of Triple A. It is expected that this type of consulting need will keep existing, although there are some uncertainties that are related to the changing market conditions and the type of services that are needed from consulting firms as we mentioned in chapter 1.
Decision makers within the customer organizations are C-level executives and managers of departments.
Competitors
Triple A is among the top 5 consultancy companies in the Netherlands. Direct competitors can be defined as the “Big-4” companies, a limited number of smaller actuarial consultancy firms and freelancers. The competitors should also be aware of current market conditions and compete for the same customers. Depending on the type of service there is more or less competition. Being aware of what the competition is doing now and is planning for the future on strategic topics is of significant importance to Triple A.
Value proposition
Directly related to the core competences of triple A and core of the strategy is the value proposition. The services provided by Triple A are perceived (and measured) by the customers as “high quality for a fair price”. Triple A consultants are able to think “out of the box” and are recognized “partners” in the challenges insurance companies face. Being part of the Redmore Group does increase the total value proposition, but at the same time should not shift focus away from the core value proposition and “true” competitors of Triple A. By true competitors we mean the competitors to Triple A if Triple A would not have been a member of the Redmore group, these competitors offer the same type of services as Triple A and are therefore direct competitors. Being part of the Redmore Group does not change that the services and products of Triple A still have the same direct competitors.
Being part of the Redmore group does extent the overall value proposition by the services of Redmore Solutions. Redmore Solutions is a label that acts as an integrator (figure 3.4). Meaning that
where Triple A is a more knowledge driven company with only a limited offering of software, Redmore solutions is aimed at offering a full range of IT related solutions for the insurance industry. Triple A will provide its (knowledge) resources to Redmore Solutions as they are supportive to the products and services of Redmore Solutions. Triple A can therefore also provide services to its customers through the Redmore Solutions label.
Figure 3.4: Redmore Solutions: IT-integrator Revenue model
The revenue model for Triple A is mainly based on hourly rates that are paid for the services. The hourly rates depend on the skills of the consultant, experience and required tasks. Part of initial growth of the company was based on acquiring projects and market share by offering services for lower prices than the competitors at higher quality. In the last years the hourly rates have stabilized. Some projects are based on fixed fee prices or as “for free services”. R&D activities indirectly support the revenue model.
Risks and costs
When the main source of revenue consists of selling billable hours by your consultants, there is always a risk that revenues decline by not being able to achieve to required chargeability rates. If this state is temporary and only applies to a few consultants, this is not a direct problem. The same applies to hiring new consultants. The company has to be sure, the new employee will eventually be able to achieve the desired chargeability rates and contribute to healthy profit numbers. The recent years have shown that Triple A has achieved high chargeability numbers, directly producing high profit numbers. The costs involved are investments in laptops, hr-department, overhead and building costs. To a large extent the costs have shown to be “scalable”. For Triple A some degree of concentration risk is visible, given that large insurance companies can at a certain point in time run projects that require external capacities on a large scale, followed by a (longer) period of almost hiring no external capacity. These change moments can be seen as critical and require extra attention.
Values and goals
From the startup of the company Triple A has had strict values and (internal and external) goals. The goal can best be described as “built up a financial risk management consultancy firm” that is recognized by its customers for the “high quality and fair prices” and people enjoy working for. In doing that Triple A wants to bring added value to its customers. Internal values can be summarized as “being fair and loyal to its employees” and also let the employees benefit from “growth and success”.
Organizational climate
The core competences, value proposition and customers need all point to the necessary condition of having an organizational climate that is “agile” and well incorporated enough to support a successful
consulting company. This success has been shown in that latest years and it is key to continue and improve the internal organization for future success.
Trends and uncertainties
In chapter 1 we listed some of the main changes, challenges and uncertainties Triple A can face in the near future. For Triple A it is important to recognize these changes and uncertainties and react accordingly. Triple A has to be able to “breath” with the market uncertainties and built-in and maintain the right sensors to enable this.
3.3.
Conclusion
In this chapter we introduced and described Triple A and the main characteristics that define the company as part of the Redmore Group. From the corporate strategy perspective we highlighted some of the tensions and challenges that Triple A needs to be aware of by being part of the Redmore Group. Being part of the Redmore Group also creates extra possibilities for the overall value proposition of Triple A. By describing Triple A in terms of the elements of the strategy sketch we see current strengths in the resources and competences, value proposition and organizational climate. Regarding the value proposition we see an extension in overall proposition by the role Triple A has in the label Redmore Solutions.
In the next chapter we provide a framework that can structure and be supportive to incorporating strategic objectives, targets and initiatives for achieving and structuring a consulting firm in the (changing) insurance industry: a framework that is able to pinpoint where the changes we described in chapter 2 have an impact and be supportive to continuous future alignment.
4. Impact in terms of the elements of the Balanced Score Card
To determine how the observations we made in chapter 2 would impact the consulting firm we described in chapter 3, we are looking for a framework that systematically pinpoints to all the elements that together would define a strategy that manages these observations leading to sustainable value. This framework should be able to define objectives, targets and initiatives on the levels of:
people and skills management
how to internally analyze, organize and align an organization customer interaction
financial objects
providing a congruent framework that connects strategy to a view of the organization and its operations
As mentioned in the introduction of this paper, strategic performance management systems (SPMs) are characterized by the following attributes: integration of long-term strategy and operational goals, presence of multi-perspective indicators, inclusion of cause-effect linkages, and presence of a sequence of goals-targets-action plans. We want to be able to set up a system that takes into account the observations we make and defines both short terms actions for immediate response to the observations and captures future relevant strategic information to be able continuously evaluate the execution and drivers of the overall strategy. For institutionalizing this system we choose the framework of the Balanced Score Card as we will use this framework to pinpoint where the impact of the insurance industry changes has an effect on the consulting firm.
4.1.
The Balanced Score Card
The Balanced Score Card is a management framework that organizations use to map the mission and vision of the organization and define four perspectives to view the organization. Within each perspective objectives, measures, target and initiatives are defined to be able to actively manage and steer the organization towards reaching the overall strategic themes. Strategic themes are areas in which a company must excel at in order to achieve strategic goals. These themes affect all four perspectives of the BSC. This means that a company can define several strategic themes simultaneously and treat each theme as a “pillar” that is supportive to the overall strategy. Examples of strategic themes are “operational excellence”, “sustainability” or “product innovation”.
The framework also provides key insights in the linking between each perspective. An example of this is the customer perspective being supported by the internal perspective, which itself is being supported by the learning and growth perspective. The picture below provides a high level overview on the interconnection between the goals and perspective.
Fig. 4.1 Balanced Score card: interconnection (source: balancedscorecard.org)
The BSC framework provides a powerful tool to align strategic goals with actions and measurements on these actions. The framework can provide ways of creating an organization focused on executing strategy. Using this framework to analyze the impact of the external changes on the consulting firm relies on the strong interlinking of each perspective as elements and drivers of the overall strategy. The perspectives need to be evaluated continuously and simultaneously to be able to capture any future relevant strategic information on the execution and drivers of the overall strategy.
In the paper Mastering the Management System, Kaplan and Norton (2008) provide a framework for using the balanced score card in an integrated view for linking strategy and operations. They argue that success of strategy depends largely on the ability to execute the strategy, by having the operational capacity and by understanding the link between strategy and operations. Failures in executing strategy have an origin in tensions between strategy and operations, and according to Gresham’s law: “Bad operations drive out discussion about good strategy implementation”. In their closed-loop management system they see the BSC as one of the means to translating strategy, so making the link between the developing of a strategy and the actual planning and execution of the operations.
By having the BSC as link between strategy and operations we clearly see the indirect importance of the four perspectives with the BSC framework. For the closed-loop management system to successfully work, a company must be able to steer, control and monitor the four perspectives of the BSC framework. As can be seen in figure 4.2, the closed-loop management system consists of five stages that form a loop for successfully strategy execution, steering and monitor.
Fig. 4.2 closed-loop management system We will list the five stages and describe the main questions and topics of each stage and its relevance for evaluating the changes related to the changing insurance industry and impact on a consulting firm.
Stage in Closed-loop management system
Main questions and topics Relevance for consulting firm in a
changing business environment 1: Develop the strategy Developing a strategy involves at least
defining and answering the following questions:
- What business are we in ? - What are the key issues we
face in our business (both internal- and external forces) ? - What is the value proposition
that distinguishes us from our competitors ?
- What human capital is required to excel at our key processes ? - What are the key technology
enablers of our strategy ? - What are the organizational
enablers required for our strategy ?
When defining or assessing the strategy, awareness of key issues influencing strategy is critical to a consulting firm. Changes in key issues immediately can have an impact in the value proposition, the related human capital and key internal processes.
Basically by defining and assessing the strategy, the four linked key perspectives of the BSC are effected and might need refinement and (re-)evaluation.
2: Translate the strategy - Defining strategic objectives based on the information from stage 1
After defining the (impact on) strategy at stage 1, in this stage it is key to identify the impact on the
use a strategy map to visualize the interlinking of strategic objectives
- Identify and allocating of key resources that are part of the translation of the strategy - If necessary theme-based
strategy maps can be
developed with different owners and accountability
what exactly is needed to change from the financial-, customer, internal- and learning and growth perspective. The more precise the impact on strategy is defined, the better impact on one of the four perspectives can be identified.
3: Planning of operations
- This stage is about the planning of actions to accomplish the strategic goals.
- It is about the definition of strategic metrics and targets - What process improvements are needed ? Improvements can be related to e.g. speed of operations, responsiveness, quality, costs etc.
- Definition of a resource capacity planning, sales plan and budgets.
The planning of operations is the final step of setting out the actions for execution of the strategy. This planning can both be used to execute a rather new strategy or for closing gaps that have been identified by doing an “IST versus SOLL” type of analysis. We will later on use this element when we define steps to close gaps that can be identified by assessing the current environment of the
consulting firm, confront it with the changes and define steps to close the gaps.
4: Monitor and learn - This stage involves operational and strategy review meetings. During these meeting the leading indicators and numbers are evaluated to monitor progress and learn about the rollout of the strategy. - The quality of the monitoring
and interpretation of results is most important, not the number of meetings itself.
The monitor and learn stage is an important stage in the closed-loop management system because it involves not only the activity but also the quality of the monitoring. How good a company is at monitoring how the strategy evolves has a significant impact on what is being learned. Poor monitoring might result in not sensing changes needed in strategy and might lead to gaps that at a later point in time need to be closed.
5: Test and adopt the Strategy
- Final stage is the testing if the strategy is working according to expectation. Cost and
profitability reports and statistical analysis provide relevant information for progress and steering. Adapting the strategy can be done if the reports disclose a need for change or a new strategic opportunity arises or in case of disruption. In the
Testing and adaptation of a strategy is important to have as a well defined step in the processes of the company and the periodical reports and meetings. More important here is having the sensitivity and monitoring ability in place to sense new strategic opportunities and disruptive forces.
latter case the company might be too late in its ability to sense changes and disruptive forces.
As mentioned, the closed-loop management system provides an iterative framework for strategy execution and constant monitoring, learning and adaptability to change. At the core of the translation of the strategy in objectives, planning and impact, we see the four strategic perspectives of the BSC. The interlinking between this perspectives provides the needed steering in defining changes needed to execute and monitor a strategy. Before we start with examining each perspective in more depth, we will examine the inter-linking between the perspectives that can lead to assumed causal effects.
4.2.
Balanced score card as a causal chain
Initially the BSC by Kaplan and Norton provided managers with a holistic view on the organization without clearly demonstrating how the various strategic objectives fit together to form a company’s overall strategy. Emett and Tayler (2013) describe this evolution of the BSC from BSC “1.0” to BSC “2.0”. They denote BSC “1.0” as balanced without predicted causal connections between the objectives and “2.0” as a causal chain. Figure 4.3 shows the BSC 1.0 representation.
Figure 4.3: Balanced score card 1.0
BSC 2.0 (figure 4.4) reflects that performance in one perspective causes performance in another perspective. We will use this interlinking and cause-and-effect relationship between perspectives when we analyze strategic changes in a changing business environment.
Figure 4.4: Balanced Score Card 2.0
Additionally the cause-and-effect relationship between the perspectives is visible in the Strategy Map, figure 4.5, as presented by Kaplan and Norton (2001). This map describes how a company creates value in terms of the interlinking of the elements of the BSC perspectives.
Figure 4.5: BSC strategy map
We will examine each perspective in more depth and start with first element of the casual chain, the learning and growth perspective.
4.3.
Learning and growth perspective
The learning and growth perspective is one of the fundaments of the BSC framework. Its elements of learning and growth include key elements like knowledge and ability to innovate. In this perspective we find the human capital, information capital and organization capital. Both knowledge and innovation are vital resources for any company and are seen as intangible assets. The learning concerns not only the individual learning of the employees but also includes organizational learning, the ability of the company to continuously learn as a whole. Both can be regarded as intellectual resources that contribute to the company’s revenues either in form of a product or as a service. By this we mean that when a company is quickly learning and transforming this learning into applicable knowledge, this asset is marketable and therefore contributing to the overall revenues of the company. This especially applies to a (knowledge based) consulting firm. At the same time, companies become known in the industry for their knowledge and thus creating entry barriers for competitors. The same applies to being able to innovate as an organization. Especially in a changing environment where the competition is basically doing the same, the ability to innovate both in products and services can give a competitive advantage and future growth. How a company organizes the processes to optimize value creation and steering can be summarized in knowledge management.
We will explore the four main abilities of knowledge management as mentioned in Jelenic (2011) and assess the relevance for a consulting firm in a changing business environment.
Ability of knowledge management
Main questions and topics Relevance for consulting firm in
a changing business environment 1: Acquire knowledge and skills The ability to acquire
knowledge and skills is about doing market research, R&D and having the right processes in place to hire new (young) talent that fits the strategy of the
Acquiring the right knowledge and skills is vital to a consulting firm, and many processes in a consulting firm are knowledge driven. The link between strategy and having the right
