What’s the problem with ‘best practices’?

By Bruce Brodie, managing director in PwC’s Advisory Services and Paul Livak, director in PwC’s Advisory Services.

In our recent non-scientific sampling of top U.S and Global personal lines and commercial lines executives, representing the entire gamut of functional areas, we asked – what’s the problem with best practices? We listened to their struggles and heard some success stories as well. 

Risk Manager’s strive toward best practices, and it’s a long hard road.

Risk managers, whether accountable for their companies’ risk exposures across the board or a particular set of risks, struggle with the same core issues: (1) Have we properly identified the risk, and (2) Have we properly categorized the accumulation of risk (in kind or in correlation with other risks)?

To answer these questions, risk managers can spend their entire careers looking for new insights and approaches to evolving and emerging issues. At the core, we see the need to correlate third-party information to company information in order to glean insights and find actionable data-points. Given the disproportionate time and expense that it takes for companies to locate, cleanse, array and analyze date, we find risk managers at risk of analyzing suspect information. And this is the challenge for risk managers. What are the core capabilities they need to enable them to make the right calls in a timely way.

What’s the problem with best practices?

Best practices can help companies gain a competitive advantage and lower their risk profile. However, the opposite is often true. There are various reasons for this, but we observed three major problems with implementing what a company perceives to be best practices.

There is a new speed of doing business that has changed customer expectations, and requires businesses to perform in unprecedented ways.   While many underwriting, actuarial, risk management and claims functions are driving toward investments in the advanced analytics and information strategies that they will need to compete, we are seeing a reluctance on the part of the business owners to fund the investment in IT capabilities and underlying information assets that are needed to derive benefits from the models, tools, and business intelligence.

As companies introduce changes to products and services in increasingly short timeframes, lagging companies that are tied down by practices that have historically delivered systems and process improvements in the context of large, massively interdependent and controlled ecosystems struggle to compete. Therefore, best practices need to change and some are already obsolete and serve only as obstacles to adaptation and innovation. Traditional information technology and business roles will need redefinition as jobs require the knowledge and skills of both. Companies will need to adopt new practices which enable the brokering of services, assembling of solutions, and enable immediately responsive research, adoption and governance.In addition to needing to accelerate go-to-market delivery – social, demographic, technological, economic, environmental and political trends place insurers under significant pressure to make growth and efficiency gains. This translates into ambitious strategic plans. As companies translate strategy into action, management teams pull on the levers available to them. They may change the operating model, improve capabilities, cut expenses or shift investments to better adhere to business strategy. However, these levers are sticky and resistant to change. Management teams find it difficult to obtain funding to invest in transforming their operating, customer experience, and service models. It also is difficult to change embedded job descriptions, role definitions, organizational design, short-and-long-term objectives or the nature of the annual budgeting process. And, after finally investing time and money in select best practices, rather than take a step back and consider alternative scenarios, companies too often double-down and apply an even-more stringent application of the best practices that wind up appearing less than promising. The end result is typically an organization that is frustrated by its inability to successfully tackle its most important strategic goals.

In our experience, we have observed three major problems with implementing what a company perceives to be best practices.

• First, the benefits are elusive. They are often difficult to measure, with no baseline or true comparison, and the costs to implement them are often excessive and misunderstood. This often means there are significant implementation costs and effort with few tangible results.
• Second, best practices exist in the rear view mirror. By the time you have adopted them, business conditions and the practices effective for implementing them will have changed.
• Third, once adopted, these practices can be very difficult to change. The organization has invested emotion, credibility, time and money, and it’s very difficult to abandon a practice even if it doesn’t work or needs to adapt.

Yet, some companies succeed, prioritizing the most critical practices, with patience and focus, and by tracing the impacts and benefits. Here are a few success stories…

Organization redesign and LEAN

• At a midsize insurer, the company was lagging behind its competitors and was slow to move. Management undertook a comprehensive program to institutionalize organizational discipline and selected engineering-practices. The company implemented a top to bottom de-layering and span of control cleanup. Staffing models were designed for every function and throughput was modeled. The most visible change was a management-style change deploying visual management techniques at all levels of the organization. The result has been a significant alignment of objectives and resultant savings and service improvements.

Alignment of the IT & operations investment portfolio

• At a large global multi-line carrier, the company was under tremendous pressure to rationalize its operating model and improve its economics. It concluded that, among other things, the IT and operations portfolio investments were misaligned. The company undertook a multi-year transformation to gradually shift investments in the portfolio from local to global initiatives, from business to divisional initiatives, and to significantly reduce the number of projects while maintaining consistent investment levels. The projects were aligned with the company’s strategy and vision, and a roadmap guided prioritization. A cross-divisional governance counsel considered both local and corporate needs to affect a balanced result.

Accountability focus

• At a large Global multi-line carrier, the company had created a control structure that had slowed decision making to the point of competitive disadvantage. Forward progress was hindered by over-matrixed decision-making, excessive controls and reporting. The company decided to reengineer its control structure to establish stronger accountability by aligning responsibility, resources and authority. Decision-making for funding of investments in the operating model tied into P/L and committed benefits were tied directly into to the annual plan. The result was the elimination of hierarchical non-value-added approvals and a clear focus on benefits that could result from thoughtful IT and operations investments.

What we’ve concluded

• Best practices are about performing better and therefore adding strategic and operational value while lowering risk.
• Accordingly, because of the highly subjective nature of “best,” we suggest the term “value added practice” (VAP) instead. By putting value at the center of practice improvement efforts, a company can better plan and implement new practices. Frameworks for investment and continuous improvement are crucial, especially at larger organizations where budgets, controls and approvals tend to be complex.
• Before embarking on a new best practices initiative, we recommend that a company perform a quick self-diagnosis. Are you trying to implement a best practice for its own sake or are you clearly focusing on the value you hope to realize? If you plan to invest in new capabilities without tying them to specific business objectives, then you should step back and determine just how implementing new best practices will benefit the company.