Deming's Point #4 as Applied to the Insurance Industry
John Pryor | September 1, 2004
End the practice of awarding business on the basis of price tag alone.
Source: W. Edwards Deming, fourth principle
This has particular relevance to the insurance industry when looking at the relationship between the agent/broker and the insured.
As an insurance broker, W. Edward Deming's fourth principle is "music to my ears," as you might imagine. However, it's important to take this point in its full context as explained by Dr. Deming. Admittedly, there's much greater depth to this important, and intriguing, point. Here's a summary of his expansion on this point—edited only to make it additionally relevant to the insurance industry and its intangible products and services.
We can no longer leave quality, service, and price to the forces of competition for price alone—not in today's requirements for uniformity and reliability.
Price has no meaning without a measure of the quality being purchased. Without adequate focus on quality, business drifts to the lowest bidder, low quality and high cost being the inevitable result. American industry and the U.S. government, civil and military, are being rooked by rules that award business to the lowest bidder.
Economists teach the world that competition in the marketplace gives everyone the best deal. This may have been so in days gone by, when the baker has his customers, the tailor his, the cheese-maker his, and so forth. In those days, it was fairly easy to make an intelligent purchase.
It is different today. The price tag is still easy to read, but an understanding of quality requires education. The purchasing department [or CFO] must change its focus from lowest initial cost . . . to lowest total cost. [Italics mine.]
Advantages of a single source and long-term relationship. A long-term relationship between purchaser and supplier is necessary for best economy. How can a supplier be innovative and develop economy in his production processes when he can only look forward to short-term business with a purchaser?
Purchase of commodities and services [such as insurance and risk management services] should also move to the single supplier. How does a supplier qualify? … Let suppliers compete to be the chosen one, not on price tag, but at the right stage, on the basis of qualifications that have meaning. Let suppliers present evidence of active involvement of their management with the 14 points—especially Point #5, never-ending improvement of processes along with abolishment of the diseases to be learned.
The "diseases" mentioned by Dr. Deming are:
- Lack of constancy of purpose;
- Emphasis on short-term profits and thinking;
- Performance reviews;
- Job hopping;
- Management by objectives (without managing the processes and systems that produce the objectives);
- Excessive medical costs; and
- Excessive legal liability costs "swelled by lawyers that work on contingency fees."
These were "deadly diseases" in the 1970s and 1980s when Dr. Deming first articulated them, and they're every bit as "deadly" and relevant today!
Relevance to the Broker/Insured Relationship
All brokers have clients—especially construction/contractor clients—who live in a "bidding-for-jobs-culture" and for whom short-term projects and relationships are the norm. These clients typically see only the "price tag," as Dr. Deming calls it. The notion of value doesn't seem to be part of their mindset. (There are exceptions, of course.)
At the same time, we have been fortunate enough to see—and to have—clients who understand the importance of value in the services of their broker, value that exceeds the price they pay. They are typically the clients who value long-term relationships.
For example, I've noticed a trend in the not-for-profit sector where movement is toward longer terms for the chairman of their boards instead of the traditional 1-year term. Now many recognize the benefit of a 2-year term for such leaders.
At the same time, some of these same organizations recognize the value of not putting their insurance program out to bid every year. Instead they create an agreement—formal or informal—with their broker for a 3-year term. They don't entertain proposals from other brokers until the 3-year term is about to end. This work with a single broker and creation of a long-term relationship frequently continues for additional 3-year terms and works to the benefit of all concerned.
It's no secret that underwriters are usually disinterested in working on accounts they know to be "shopping" year after year after year. The long-term relationship of an organization's decision-maker extends through brokers to carriers. Insurers clearly benefit from Point #4 when it's practiced properly with continuous improvement in the value—and perhaps even the price—of insurance and risk management services offered over time. Loss control efforts, claim personnel relationships, even the auditing functions improve when a long-term relationship is experienced.
Some insurance buyers think they should split their account between brokers to "keep them honest" or for some other rationalization. This is really working against the best interests of the buyer. Recently, I observed a situation (not as one of the brokers but in a consulting capacity) where a firm's general liability was written with one broker and their professional liability with another. A loss occurred that ended in costly litigation. This entire lawsuit—as we all now see it in retrospect—could have been avoided had the same broker written both coverages.
Industry Examples
In the 1980s, Ford Motor Company created a prestigious award for its suppliers called the Q1 Award. It stood for "Quality First." Not only was it a very difficult award to win, but Ford also kept raising the bar. Then in the 1990s, all suppliers were required to have earned the Q1 rating or they would no longer be able to do any business with Ford.
It's fascinating to me to think about the possibilities of applying this kind of criterion or standard to the companies to be represented by brokers. For example, GE's insurance subsidiaries encourage, but don't require, its managing general agents (MGAs) to practice Six Sigma quality.
The Risk and Insurance Management Society (RIMS) is going through this kind of process from the other direction. As buyers, it is helping brokers and risk bearers to better understand what their customers—RIMS members—expect. The RIMS Quality Improvement Process focuses on expectations such as:
- Trust and reliability
- Building internal and external partnerships
- Engaging in two-way interactive communication
- Operating efficiently and competitively
- Developing and providing expertise
- Identifying customer needs and creating solutions
It's not by accident that "trust and reliability" head this list. These criteria significantly transcend the price of a broker's service. They can only be realized if a long-term relationship is established and true long-term costs reduced … not just front-end cost reductions seemingly realized.
Conclusion
When we talk about Dr. Deming (who died in 1993) and Ford in its early years of employing Deming disciplines, we're talking about 20th century discussions and actions. When we talk about RIMS, we're clearly moving into the 21st century.
Here's a quote, dated 2003, well into the new millennium, from Tom Peters in his book, Re-imagine! Business Excellence in a Disruptive Age. (This is a very unique book in terms of both format and content in Mr. Peters' inimitable style, and I highly recommend it.) He writes on page 229:
One of the surest signs of a salesperson-going-nowhere is continual complaining about "losing sales on price." Because, ultimately, what you're selling is no "ordinary" product or service. Once again: You are selling an Opportunity … a Solution … an Experience … a Dream To Be Fulfilled … In a world where "services added" are becoming more and more significant … the only game in town is to "Add an Armload of Intangibles" that will allow you to charge a healthy premium for what you are offering. Bottom line: Those who say, "It's all a price issue," suffer from rampant immaturity and a shrunken imagination.
At the risk of being presumptuous, I think Dr. Deming would concur with Tom Peters' 21st century restatement of his Point #4. The question is: What do we need to do to make it happen? The next segment of this series on Point #5 is part of the answer (as alluded to by Dr. Deming in his above writing) in addition to avoiding the seven "deadly diseases." These are issues still debated in the media and trade press today. I submit that Dr. Deming is winning these debates. Why aren't more in the insurance profession on his side of this debate?
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