Procurement’s historic role in many companies is based on waiting for activities and requirements be tossed “over the wall” by the business as product and service lines, as well as taking action only when internal requirements change or are added (e.g., tracking new information such as diversity status, risk, environmental, and regulatory compliance areas, etc). Yet staying passive is a recipe for sub-optimizing sourcing and total costs results in new or changing areas given the time pressure to execute on activities when a new trigger occurs. One such area that is explored in the Q2 Accenture Spend Trends Report is the changes within insurance and risk management.
As Accenture observes in their analysis, “We have seen a notable increase in client project activity focused in the enterprise risk management area—specifically in insurable areas like directors and officers (D&O) liability insurance, property and casualty, fiduciary responsibility, product liability, and other related areas.”
Under ideal circumstances, what is driving this behavior is a detailed understanding of Total Cost of Risk for executives, board members, and organizations. As Marsh defines it, “The Total Cost of Risk (TCOR) is an equation that captures the total cost of self-retained losses, risk management administration expenses and insurance premiums. Organizations can use it to identify the imbalances in their risk management approach and strive for cost-savings. They may find, for example, that their insurance premiums are not low enough commensurate with their willingness to accept losses.”
In short, as Marsh observes, “Overall, TCOR encourages organizations to look at risk management on an integrated basis.” Accenture notes that an increasing number of companies are focused on TCOR and the associated “risk financing including the internal and external cost factors (insurance premiums, administrative costs, broker fees/commissions, and self-insured [retained] losses).”
But how can procurement help better manage TCOR? Accenture recommends that companies “should ensure that they have a current and accurate view of their TCOR and benchmark whether they are receiving best-in-class broker fees in fixed fee arrangements and program pricing.” The savings opportunities for better managing TCOR can be significant – 10-20 percent Accenture suggests (without any lost sleep for executive).