The New Gulf War

There’s an ever-widening gulf developing in the restoration industry and it’s beginning to show. A very small number of firms are pulling away from the rest when it comes to professional management. This positive development will eventually benefit everyone in the industry.

It wasn’t too long ago that the typical restoration firm derived its strategic decisions from the accumulated experience of its founder. This worked well enough in the Canadian restoration market in the days when all that was required was to react to the dictates of insurance companies. Forward thinking wasn’t very important.  

Then, a few years ago, insurers made two decisions that have had unexpected results:

They started to favour national networks over regional operators. The thinking behind this was simple: vendor programs work best with fewer participants – a balance between not too few and certainly not too many. Retain just enough vendors to meet claim volumes and to keep everyone on their toes.

They decided to encourage owned networks. This was partly to create a single line of accountability (it’s easier to deal with one owner than many) and partly to overcome the perceived weaknesses of the franchise model (many owners; little consensus). 

It didn’t take long to spawn some large restoration networks. Initially, their focus was on size and reach. Some are still at that stage; however, a very small number of firms realised that increased scale was producing new challenges. These new challenges couldn’t be fixed by applying old experiences. 

Some of the challenges were to do with marketing, others with operations, and still others arose from finance and accounting issues. Whatever they were, many were new problems. A few firms set about finding fixes while others fretted and fumbled. 

Over the past five years, four corporate-style Canadian networks have grown at a relatively extraordinary rate considering the threats of recession, low claims frequency, and eroding margins that have bogged down many restoration firms. These four networks have swum against the tide, have seen the benefit of scale and they have, for the most part, been rewarded for their pluck. A couple of franchise-type networks have taken a similar (but slower) route. This handful of firms has pulled ahead of the others.  

Between them, they account for just under $1b a year in insurance jobs. That means about 40% of the total Canadian insurance restoration market is in the hands of just six aggressive, well-managed, focussed, and forward-thinking firms.  

If that description sounds vaguely familiar, it is – it almost mirrors the breakdown of the insurance market in Canada. Yes, the major restoration firms share the characteristics of their most successful insurance partners. That’s adaptability at its best! 

There are a couple of common threads amongst almost all of these restoration networks. First, all have extremely capable leaders at the very top: CEOs who soak up stress, demands on their time, and volatile business partnerships and still push forward.  

There’s a second characteristic of this elite group, however, that has yielded greater returns: a few have hired seasoned managers from outside the restoration industry – and what a difference that has made! Fresh ideas, new solutions for old problems, clear thinking, and new intellectual networks have entered the restoration industry’s C-suite. 

The results of such leadership changes are apparent: a very small number of major restoration firms are quickly expanding through acquisition. That means an ever-increasing number of restoration locations are coming under the umbrella of corporate excellence and that can only be a good thing for them, insurers, and above all, policyholders. It sounds like a gulf war with no losers.

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Reciprocity – Why it is a thing of the past

Reciprocity is a word that describes a state of mutual dependence or exchange of privileges and commercial benefits. It often describes relationships between countries; it should apply to the state of affairs between insurers and restoration contractors, too. It doesn’t.

There are many names for the process of reciprocity. People familiar with sales techniques will know how the Law of Reciprocity or the Law of Action and Reaction works. Others will undoubtedly have heard of the Golden Rule. Briefly, treat others the way you want to be treated.

To phrase all this in regular commercial parley, this concept means that you give something of value in order to receive the same in return. It doesn’t have to be of the same monetary value, just the same perceived value. It all takes an interesting twist when more than two parties are involved and when the system includes services.

The field of play here is the partnership between insurers and contractors. Therefore, this also is about how that relationship benefits policyholders.

Let’s break it down: Most people cannot afford to repair the property they occupy if it is damaged beyond a small degree. In addition, they likely don’t have the skill or resources to do so. They pay a contractor to take care of this. They pay an insurance company a premium to cover most of the cost of repairs.

In the olden days (before estimating programs and vendor networks), front-line adjusters handled relationships with a few restoration contractors in their area. Reciprocity thrived. Of course, it was not always handled 100% appropriately and cynical people will speak of donuts, free lunches, hockey tickets, and rounds of golf – sometimes worse. On a positive note, supporters of the principle of reciprocity will insist that the personal relationship between the adjuster and contractor resulted in better policyholder service.

Then things got complicated and those vendor relationships were dragged into the corporate office. This resulted in a change in the principle of reciprocity. It went from contractors and adjusters working on mutual benefits to service a policyholder to contractors and vendor managers working on executing the terms of a service contract as closely as possible. The benefit to the vendor department is efficiency and cost-savings; the benefit to the contractor is a flow of jobs.

Somewhere along the way, policyholder management by both parties slid off the tracks. It went from ‘happy-insured-at-any-cost’ to ‘happy-insured-at-contractor’s-cost’. This subtle shift of perception has tilted the system considerably. Vendor managers will argue that this shift in responsibility is a fair trade for a contractor selected for a vendor program. This is a fair statement if the contractor gets a steady stream of business from the insurer. This is not always the case.

There are, of course, good reasons why insurers cannot direct a steady stream of business to their preferred vendors. The vagaries of the weather are a good example. However, there is one reason that warrants a closer look: poor results on a vendor scorecard. Contractors often get sidelined (and sometimes removed) because their results fail to meet a minimum standard.

Adding to the imbalance, insurers have mandated the use of software programs that produce very little value. This is not a failure on the part of the software programs. Every one of them is an excellent product that more than meets the needs of the industry. The failure lies in the end user. A complete inconsistency of data entry means that the output of useable information is impossible. To make matters worse, a number of vendor programs rely entirely or in part on this data to measure the performance of vendors. It brings to mind the old joke about the surgical procedure being a success but the patient died.

It doesn’t stop there. In an effort to extract information and provide customer service, most vendor programs rely on bloated instructions. Few insurers realise the impact of the shock-and-awe manuals that contractors must follow. Every vendor program is different so there are many different hoops for the contractor to jump through. A successful contractor is a true multi-tasker.

Back to the principles of reciprocity: vendor programs have tilted the advantage almost entirely to insurers. The one thing that consistently kept contractors attached to these programs was the flow of jobs. That started to change a couple of years ago when weather patterns across much of the country reduced the number of water damage losses. By this time contractors had painted themselves into a very tight corner by surrendering on prices on structural jobs in return for relatively high margins on water damage work. Most made a critical error in the process of doing this: they failed to control the operational cost of the structural jobs. Water damage jobs subsidised the cost of structural jobs. When the intake of water damage jobs declined, operating costs suddenly shot up.

So what, most insurers will ask. True, the contractors who fell into this situation have themselves to blame. However, what good is a broken network? Are insurers planning to move into this space themselves? Yes, if rumours are true. No, if they have any sense.

Wishin’: Impossible? Making estimating software really work for vendor programs

It has been over a decade since the introduction of estimating software into property claims management systems yet discomfort, distrust, and disagreement between contractors and insurers on how to use these programs are still rampant. 

A major reason for this regrettable state of affairs is the unwillingness of the software users to take responsibility for the many issues they have created. Instead, both insurers and contractors point to the software providers for solutions. 

Let’s make a couple of things clear at the outset: There are several software programs available that do a commendable job of facilitating standard job estimates, provide a means of collecting and manipulating data, and allow some standardisation of costs. Each program does these things to varying degrees but all are relatively simple, robust and add value in terms of their user cost. Let’s also make it clear that a significant ratio of users (possibly a majority) operate these programs without any complaint whatsoever. 

Let’s also lay out a few caveats: First, this article is about the issues around using software for standard property mitigation and restoration jobs. This means the 80% or more of property repair jobs that involve residential or small commercial premises, that may include some degree of water damage, and that usually take less than 2 weeks to complete (excluding scoping, paperwork, estimate approval, payment, and so on). 

Secondly, let’s assume that the ‘old way’ of estimating and costing is truly dead. In other words, it is no longer feasible or desirable to have every contractor scope and estimate typical jobs according to their own standards of performance and cost. 

Thirdly, this article refers to insurer:contractor relationships governed by the terms of a preferred supplier program. Thus, it is assumed that services have been sourced through a selection process, that performance is monitored by agreed indicators, and that price is regulated by a standardized mechanism. 

With that said, let’s examine some common issues and offer solutions: 

Costing conventions

Preferred supplier programs take one of two approaches to costing property claims. They either follow a performance-based method or adopt a cost-based system.  

A commonly used performance-based method of job pricing is the square foot (or cubic capacity) pricing protocol. A pre-agreed, all-inclusive cost per unit of measure is applied to losses falling under an agreed description and it’s up to the contractor to get the job done for that cost. Thus, job cycle times take precedence over job quality. 

An example of a cost-based system is time & materials costing that has been in use for many years and is still commonly used for larger losses. This method is the backbone of estimating programs. In this system, job cost is paramount while job quality is determined by audit or complaint-tracking. 

A few insurers use both approaches. They apply square foot pricing to water mitigation and standard estimating program costing to all other property losses.  

Current costing issues

Performance-based systems: A serious gap in these systems is defining what falls within the pricing matrix and what doesn’t. Vendor agreements are never detailed enough to cover every contingency. Often, a great deal of time is lost while the adjuster and contractor negotiate small variations. Also, the emphasis is always on hitting the minimum requirement to get the job done. Contractors quickly realise that they’re paid for competence, not excellence, and perform accordingly. 

The real benefit of performance-based systems is that they enable insurers to set up claim reserves rapidly, run through standard claims with little resistance, and close files and pay suppliers relatively quickly.  

These systems, for the most part, favour the insurer. That’s because the emphasis is on pre-agreed units of scale. Balancing time, labour, and productivity are the contractor’s problem and little technical knowledge is required to run these models. 

Cost-based systems: Much of what passes for vendor management in Canada is built on cost-based systems. These systems are notoriously difficult to manage. The core problem is that determining a fair price is a very subjective exercise. Factors such as technical knowledge, years of experience, and skill level create significant differences in hourly rates. Then there’s the contractor’s skill at running a lean business – they may be excellent restorers but mediocre cost managers. There’s a significant overhead variance between the most cost efficient contractors and the least and there’s a tendency for insurers to seek contractors with the lowest apparent overhead. Little effort is made to determine who offers best quality. 

Add additional variables such as the choice of replacement materials as well as type, quantity, and duration of equipment deployed and you end up with a flexible price mix for every job.  

Cost-based systems, for the most part, favour the contractor. That’s because the sheer volume of trade types and material SKUs and productivity factors make it virtually impossible for adjusters to stay on top of the final costs. Contractors who do this for a living have a great knowledge advantage. The disparity in capabilities creates an unstable theatre of operation. The result is a push-pull system: contractors compute prices that support their individual operational costs and insurers claw back components that they deem non-standard or higher-priced than average.  

It’s an extremely subjective environment and this is where estimating software seeks to offer objective solutions. 

As stated above, performance-based and cost-based systems handle job costs relatively consistently (though not necessarily accurately). However, both conventions have a huge weakness – although they can influence cost and/or time, they cannot promote quality. Therefore, from a policyholder’s perspective, the single most important factor in damage resolution – quality – is beyond the reach of all current preferred supplier programs. At best, via audit or reinspection or complaint resolution, they offer a means of looping back and fixing whatever went wrong. 

The role of estimating software

Having established some of the weaknesses inherent in current costing systems, let’s investigate the role of estimating software.

All estimating programs contain a degree of data and performance management capability. However, there’s little evidence that the information currently available offers significant value to insurers or contractors. Most contractors that track their performance do so via other means. Most insurers that use the performance data obtained from estimating programs are operating in a fog. They have themselves to blame. Pumping garbage in at one end of the data pipeline means the same will emerge at the other end. The software is fine; the data that users have loaded isn’t. 

However, there are other data contained within these estimating programs: pricelists. These data are different because they are managed by the software supplier. Great care is taken with their composition. Objective research is carried out on regional prices, sound data manipulation techniques are applied to outliers, and periodic updates are conducted. Let’s be completely unambiguous about these pricelists: They are 100% accurate. The science and methodology applied are largely beyond criticism. 

Trade wages are the main component of these pricelists; however, some programs also include materials. In some cases, wages and materials and equipment are combined with a productivity factor to produce a unit cost (usually expressed per hour of labour to complete a task). Several other factors may be added to further customise the price to reflect localised total costs. 

Creating job estimates is quite easy once a scope has been agreed. Each job component is listed by the estimator in the electronic estimate using pre-loaded options and the software adds the fully loaded price. Most software will allow some price adjustment if required.  

The result is a good indicator of what restoration contractors charge in the area. And that’s the problem. 

Estimating software issues

First, there are no issues with the way most estimating software presents estimates. Detailed tasks, components, equipment, materials, measurements, quantities, qualities, trades, and uplifts are all listed, summarised, and tabulated by the software. Some offer drawings, as well. There’s almost universal endorsement of the way jobs are recorded and presented. There’s also the promise of really useful data derived from all the estimates recorded. 

The trouble starts far from the contents of the estimating software programs. It starts in the minds of the users. It’s a perception thing. Here’s how it all starts to unravel: 

Insurers: Insurers don’t have the skill, inclination, or resources to check the validity of every single cost component within the software as it applies to their preferred vendors. Indeed, why should they? They pay for the software and assume it will meet all their pricing needs. However, as we stated earlier, all vendors do not carry the same cost structures. Owned networks, franchises, associations, affiliations, member groups, local firms, regional vendors, and national vendors all make up the restoration industry in Canada. Some market heavily to acquire new business; others don’t. Some train their staff frequently; others already have fully-trained employees. Some have invested in in-house capability; others operate as true GCs and sub out virtually 100%. Some pay fees for referrals, others get their business direct, the list of variations goes on and on. The software developers are very, very clear on one thing: Their calculated costs are indicators, not absolute. They do not claim to offer the ‘right’ price. They offer the researched price that was available at a particular point in time in a specified area for a varied group of contractors (all the types described earlier in this paragraph). Users are encouraged to amend these prices to reflect their particular circumstances. In fact, doing so will improve the quality of data that is fed back to the software developers and ultimately help everyone. Most insurers forbid any tinkering with the standard prices. As a result, some categories of contractors prosper (you know who you are!), others suffer the pain of a thousand cuts every day – or get extremely creative with estimating. So, the core issue here is that insurers fail to match their preferred vendor list to appropriate price amendments. 

Contractors: Contractors are caught between a rock and a hard place. Most (in Canada) want the security of a vendor program knowing they’ll traverse more hoops than a circus lion on opening night in return.  

Most contractors have a very clear understanding of their costs but struggle to (a) explain these to adjusters and, (b) embed these in their estimates in a plausible way. 

All contractors defer to estimating software when it spews out a higher unit cost than they actually incur and complain when it doesn’t. No blame here, though, as they’re usually bound by the terms of a vendor agreement that stipulates they must follow a given price list no matter what. 

There is, of course, a type of contractor that sails through these programs with little or no compromise. They’re the lucky few that have an operational cost load roughly equal to that contained in their local estimating program pricelist. However, this is pure serendipity and has nothing to do with intelligent selection.  

In summary, there’s nothing wrong with the software pricelists and there’s everything wrong with the way these pricelists are used. 

Solutions

There are two primary issues for contractors and insurers

1. Managing quality in a vendor program that relies on estimating software for data
2. Amending estimating software prices to match the actual costs of specific vendors

 There are a few solutions available. First, insurance companies have to understand that there’s more to vendor programs than scope-creep, price-control and reinspections. ‘Quality’ is at the forefront of every customer-facing statement and yet is almost never managed proactively. In fact, most insurers haven’t really defined it properly. Quality is about these things:

1. Appropriate scope
2. Speed of completion
3. Once and done
4. Value
5. Documentation

 All of these factors are measurable. All of these can be analysed and improved over time. None of these is easy to embed. For example, ‘speed of completion’ is not merely a matter of having the contractor work flat out until the job is complete. Many delays occur because adjusters fall behind on approvals and communication. In fact, it is an established fact that first estimates are usually approved very quickly but inexplicable delays set in when an adjuster has to approve a revised estimate. Many contractors can track these delays but hesitate to inform insurers for fear of alienating adjusters.  

Similarly, ‘value’ is not just a matter of price. Instead, it should be an indicator of what the contractor had to do to get the job done properly – and this may mean at a higher cost than contained in the estimating software. 

Quality should be seen from the perspective of the policyholder, not the insurer. 

Secondly, (there’s no easy way to put this) there’s a certain type of restoration contractor out there who either has to change or leave vendor programs and operate in the direct market. It is senseless to get into vendor programs unless one is prepared to play by the rules set by the program owner. Insurers run businesses and they have the size and clout to do so on their terms. What they fail to do is optimise their influence. It is futile for the contractor to worry about this. 

The most complex step (difficult only because it is virtually unknown), is for insurers to get to grips with true overhead and for contractors to help them do this. Standard pricelists from estimating software just aren’t accurate enough for every type of contractor operation. Slapping on the customary 10% + 10% (or not) isn’t a solution.

 Insurers have to strategise about what type of contractor they want and understand the effect on pricing as they make their selection from the various types available. This is neither unrealistic nor difficult. It is merely different from what has transpired over the last decade.

Relevance

The recent past has seen new restoration contractor networks formed, new restoration vendor programs deployed, and other restoration vendor programs slip into a lower gear or disappear altogether. The immediate future promises a major vendor review and another new service offering. Of course, evidence of action is not necessarily proof of relevance. The question to always ask is whether change leads to relevant progress or is it merely action without value.

The root issue to examine is the reason for the activity. There are a couple of possible motives:

First, industries that contain very limited competitive differentiation tend to repackage the same old services under the guise of creativity. Thus, every now and then, contractors’ marketing departments or insurers’ supplier management departments find little evidence of value in their current practices and decide to do things over again – making a few tweaks to the old staples of ‘price control’ and ‘customer satisfaction’.

Secondly, there are widely-held beliefs that (a) major networks of restoration contractors offer the best service and price solutions and, (b) the largest insurers make the best partners. Yet it’s crystal clear that the major contractor networks have limited service uniformity and to depend on the largest insurers for consistent, sustained revenue is like sitting down for dinner with a grizzly – you’re likely to be the main course. However, even the repeated failure of this ‘bigger is better’ business model fails to deter the key players.

What has happened to the industry? Trying to create a new cloak from old cloth just does not work. What is missing is the importance of relevance in the strategic process. Let’s take a closer look at two notable examples of where the industry is off-target:

Price

It is pointless to attempt to control the price of a service while ignoring its overall cost. An example of this is insurers demanding rebates and discounts while implementing all sorts of operational rules that add to a contractor’s operational workload – thereby driving up their operating costs. It is short-sighted to brush this off as “the cost of doing business”. It is not.

Simply put, when an insurer cuts prices and drives up a supplier’s operating costs at the same time, they’re creating a financial vacuum that has to be filled one way or another. The choice for the insurer is to drive significantly higher business volumes to the vendor to trigger additional marginal revenue. If this doesn’t happen, the contractor must resort to price creativity and recover costs that way. Obviously, the better approach is to work on marginal revenue but which insurer has bothered to work out marginal costs with a contractor? Significant things happen to a contractor’s business model when a combination of discounts and higher business volumes come into play in the short, medium, and long term. Incurring involuntary profit loss and enduring revenue uncertainty are not costs of doing business.

Insurers’ supply chain departments have failed to properly connect the relevance of price management to cost control. Ignoring the ramifications of tinkering with pricing models is inexcusable on the part of insurers (this is the financial industry, right?). If insurers continue to wonder why they struggle to prove the financial benefits of their vendor programs, they should consider abandoning their price obsession and undertake a study of true costs.

Contractors, too, need to brush up on their communication and financial skills. Their reaction to the various pricing conventions is either automatic acceptance or cynical re-tooling under the cover of complicated estimating programs. In my personal experience (during my vendor program days), only one contractor ever attempted to explain to me how price changes affected their overall costs.

Major Players

Dealing with major contractor networks is always preferable. Not.

It would be the way to go if the major networks consisted of branch offices reporting to a head office. This is rarely the case. Franchises, associations, affiliations, alliances, buying groups, and member networks almost never offer any consistency beyond that provided by a collective logo. The control mechanisms just aren’t there. Also absent is the commitment or the business acumen on the part of members (but not the leaders of these entities) to be prepared to sacrifice for the common good. It’s a dangerous combination.

Networks appear to be created on the notion of what is advantageous to the contractor. However, both the contractor and the end-user (the insurer) quickly see the gaps. The member contractor realises that new business is not pouring in or, if it does for a while, it brings a combination of low-ball prices and high-demand service that produces little net profit; the insurer is left managing relationships direct with the member contractors and not a ‘head office’.

What’s missing is relevance. Restoration contractors sign-up to networks and insurers create vendor program for exactly opposite financial reasons: one party expects profit to flood in; the other expects to hold it back. Neither wins. It’s a marketing shell game. It’s a front-loaded promise with no back-end support. Like all gamblers, insurers and contractors suspect they won’t win in the long term but hope to strike a jackpot at least once. This is not what sustainable business is about.

A vendor network has to be relevant to the customer, not just to its members, if it is to succeed. Of course, one must define ‘success’ first. If success is seen as longevity, a wide membership, relationships with major insurers, and a well-known brand, most of the major players are doing quite well.

If, on the other hand, success means that the entire network offers uniform, measurable service, that the members of the network benefit from bulk purchasing, that revenue streams are predictable and consistent, that the members support each other, and that profit margins are adequate, then we may have a slight problem. In any given network, about 20% of the members are happy with their situation; the other 80% range from mildly cynical to deeply despondent. To put it from the customer’s perspective, 20% are relevant, 80% are not. This is exactly how vendor programs play out. An insurer will ostensibly sign up most members of a network and then feed business to only a few. It happens again and again and, amazingly, the networks put on a surprised face every time. “Why do you pick and choose from our members?” they ask.

The answer again lies in relevance. The few ‘chosen ones’ offer what insurers need. The rest are in it for the ride offered by a well-known logo and by persuasive marketing departments.

There’s a huge gap in this segment of the business and there is enough leadership, experience, and intelligence around to take up the challenge of creating a truly relevant and effective network. My guess is that this will happen sooner than later and others will wonder why they ignored the many lessons learned over such a long time.

Let’s see if the next few months finally bring relevant progress to the industry.

Value-Add or Valueless?

There was much discussion about value on a LinkedIn Group recently – specifically, how restoration contractors who participate in PSPs (Preferred Supplier Programs) prove the thing to their insurance partners. The primary issue is that PSP networks consist of very similar contractors – they employ identical trades and tools, acquire the same certification, use the same estimating software, and so on. The argument is that verifying value (as opposed to merely declaring it in a marketing brochure) is a critical component of demonstrating differentiation in a saturated market. The reward for proving value is achieving a leadership position in the eyes of the customer who, to avoid burdening this article with too many themes, is the insurance company operating the PSP.

The ‘value’ factor is not necessarily the monetary value of the service – it is also the perceived value. There’s a big difference. An extreme example of monetary value vs. perceived value is this: The monetary value of the human body is under $5 whereas the perceived value of a life is priceless to most people.

There is often a muddling of things that are done to show value with things that must be undertaken to prove value. Demonstrations of value are often taken to mean showing up promptly on job sites, recording all sorts of data, employing qualified staff attired in suitable garb and projecting an appropriate demeanour, fulfilling needs of all sorts for various stakeholders, helping adjusters to ‘look good’, saving time, and the oft-stated chestnut: making everyone happy.

Just to be clear, there’s an obvious difference between undertaking all the commendable actions listed above and actually proving

1. That these actions are what the customer wants
2. That one undertakes them in a consistent manner
3. That these actions produce a worthwhile benefit for the customer
4. That the benefit to the customer leads to a benefit for the      contractor (thereby assigning a purpose to the whole exercise).

Let’s investigate each of the four conditions listed above:

1. Actions that the customer wants can only be ascertained through      discussion with the customer. Furthermore, the actions have to be      prioritised to match the customer’s needs. Thus, for example, harping on      services and equipment lists and accreditations is nice but non-critical      to a cost conscious insurer. On the other hand, when dealing with a      service-oriented insurer, dwelling on the cost benefits of, say, extensive      in-house job capability is less important than the resultant service      controls. It is important to work out the customer’s priorities and then      make sure you focus on the key ones.
2. Having decided what to focus on, the next step is to maintain and      analyse related data regularly and feed information to the customer that      proves one is doing the right things in the right manner. Typically, data      will deal with time periods (such as cycle times), geographic areas (for      multi-location operations), and job category (such as water, fire,      emergency, structural, CAT) and each of these categories has to be tracked      and reported consistently. There is little doubt many contractors have      this data available to them but how many make meaningful use of it?
3. There has to be a strong connection between the data and what the      customer sees as a benefit. Otherwise it is a pointless exercise. The      benefit does not always have to directly relate to cost. For example, it      is a given that low cycle times save dollars therefore the contractor focuses      on proving cycle times and leaves the dollar conversion to the insurer. Also,      a major contributor to a positive perception of value is ease of doing      business. This quality is not always quantifiable and sometimes relies on      word of mouth but is very often a significant reason for repeat business.      It’s important to note that ‘ease of doing business’ is usually related to      a ‘less is more’ approach – the service provider’s customers don’t have to jump      through hoops to get what they want because the provider has intuitively      created (translation: thoroughly      researched) processes that ease the way for the customer.
4. The circle is completed when the ultimate result is an increase in      profitable business for the contractor. This is important. This is also      the point where most contractors will state, “The insurance company does not care if I make a profit; in fact,      they actively discourage this happy outcome!” This usually means there      has been no discussion in advance about what the contractor will gain      through consistent and successful performance.

By this point a majority of contractors will have thrown their hands up in despair. “The real world does not operate like this!” they exclaim. In reality, insurers suspend vendors for no reason, ‘Head Office’ (where Dr. Evil resides) demands discounts for sheer sport, scorecards are calibrated to prove only failure, and shadowy relationships pollute the program.

One answer to the ‘realities’ described above is that each of these is explained by either poor communication at the onset of the program, inadequate data, a lack of understanding of what drives vendor programs, and sheer misunderstanding. Insurers and contractors share the blame. A lack of respect and deeply embedded distrust are no way to operate a relationship. One party or the other has to make a move to fix things.

Another response is, “So what?” This is a better retort. It’s ridiculous to wish for level playing fields, cooperative customers, easy paths to success, and rosy relationships. Don’t live the insanity of hoping for change while repeating the same mistakes (Einstein said it better). Entrepreneurs are risk takers, market shapers, mould breakers, success makers. Are you?

Eru gögnin þín rétt

Data are considered deadly boring so we tried to be clever with the title of this piece. It’s Icelandic for “Are your data accurate?” We hope our choice of language makes the subject sound cool.

Insurers love data with a passion. Some of the stuff is accurate, most is open to varying degrees of interpretation. However, per Clifford Stoll, “Data is not information, information is not knowledge, knowledge is not understanding, understanding is not wisdom.” In other words, you can own terabytes of statistics, figures, numbers, and records and still remain utterly uninformed. It’s similar to a gym membership in a way. Just having access to all that exercise equipment isn’t going to make you fit; nor is just using it occasionally. You have to set goals, be consistent, and work to a plan.

The trouble is, coming up with a plan to utilise data is quite difficult when the goal is vague. For example, insurers have a very difficult time choosing between cost savings and customer service (contractors have done a first-class job of asserting that these are mutually exclusive aspirations). So they jink. Adjusters push on cost, vendor departments pull on customer service. Loosely related “data” fly like popcorn in a vending machine. Contractors go crazy.

This lack of consistency is a direct outcome of poor data coupled with feeble purpose. Contrary to popular belief (strongly held by vendors), insurers cannot flick a switch and instantly see which vendor is being nice and which is being naughty. In a nutshell, insurers have no readily available statistical information on contractors. It’s there but getting it is like digging out fossils. That’s because the claims department in most property insurance companies relies on outdated enterprise software that offers nothing to the modern-day procurement manager seeking succinct data on individual vendors. Incredibly, most insurers cannot even readily state what they pay individual contractors over a period of time and, therefore, have no factual idea of who their largest contractor partners are in terms of revenue. In fact, most insurance companies will struggle to come up with anything more than very rough estimates of their entire annual spend on restoration work performed by restoration contractors. It’s mixed up with all sorts of outlays including the cost of contents replacement, additional living expenses, engineer and environmental fees, and even claims adjustment fees. Really. As a result, many insurers cannot accurately state what their average water damage claim, restoration job, or rebuild cost actually is let alone identify their most effective restoration partners. Some actually believe that the answer lies in their estimating software database even though it is riddled with duplicate entries, unclosed files, and multiple bids.

It’s a lot worse when one considers the situation from a restoration contractor’s perspective. That’s because most haven’t seriously started managing their supply chains yet let alone proving their value to their customers. Therefore, current practice is mostly about achieving adequate margins and this is not something to share with others. Of course, contractors do have access to very interesting, significant, and relevant data – all sorts of statistics about costs, resource-utilisation, and timelines but this is buried deep and is rarely mined with a view to collaborate more effectively with their partners.

We believe that one of the most astonishing wake-up moments in the industry will occur when an insurance company assembles what they think are their average water-damage, restoration, and rebuild claim data and asks each of their vendors to provide the same. Worlds will collide … unless both parties mine their estimating software data for the information; in that case the status quo will prevail and the moment will pass peacefully.

It’s little surprise, therefore, that virtually every restoration contractor has chosen to rely on services as a means of differentiation instead of sharply-focussed analytics. This in an industry where every single contractor employs exactly the same trades and tools, acquires the same accreditations and licences, operates the same estimating software and works off roughly similar margins. Little effort is made to prove how they excel at operating effectively, to demonstrate how they outclass their competitors at managing their time or verify how efficiently they plan their jobs. There’s a big difference between knowing the numbers that you need to run your business properly and understanding the statistics that prove this to stakeholders. That’s the difference between having data and using it wisely. In fact, there’s every reason to believe that most contractors run their businesses to their entire satisfaction. That would be fine and dandy if contractors and insurers had identical goals but that’s not the case.

Relevant analysis of accurate data is the only route to successful collaboration in a complex environment. Will you take it?

Through The Crystal Ball

Tracking trends, reflecting on discussions, and creating new strategies with clients over the past few months have produced a list of themes that we predict are likely to be the focus of attention in the short to medium term. True to form, we’re sharing this information rather than treating this as confidential market intelligence as we hope this will get people thinking and talking. Here goes in chronological order – 10 predictions and a disclaimer:

More non-PSP work. Many contractors will decide to reduce their dependency on PSP revenue for all sorts of reasons. Timeframe: Ongoing. This will leave the field open to true PSP vendors who do nothing but.

More mobile capability. This is a no-brainer. Someone will figure out a way to match large fingers with tiny keyboards (voice commands, anybody?) and on-the-fly scoping and estimating will finally happen. Timeframe: Now. The technology is already out there.

PSP vendors will learn to do the limbo resulting in lower operating costs. The days of 45% gross margins are over. 35% to 40% is pretty much the norm now. There’s going to be a period of largely futile effort to protect the 35% threshold but that’s not going to happen in the PSP environment. Timeframe: 1 year. This is already well underway. Once PSP vendors accept this, they have two choices: cut back on operating costs (and there are definitely areas where ‘spot fat’ removal is an option) or leave PSPs and go direct to market.

More training. Much more training. Training for adjusters and training for frontline restoration staff (including the legions of cheerful but clueless salespeople that contractors send out to stupefy insurers into signing them up on PSPs). The key is relevant and consistent communication and cross training between insurers and their vendors. Timeframe 2 years. The industry has to move beyond the “Contractor Manual” and emailed notifications of change. It’s just too confusing and wasteful to produce dozens of pages of written instruction and then have to explain everything again and again. Perhaps fewer “marketing” people and more communication experts is the solution.

Full service contractors will extend their advantage over the classic GCs. However, ‘full service’ will come to mean something different as a number trades will be treated as non-core. Thus, flooring, roofing/siding, demolition, rebuilds, environmental, doors/windows will be dealt with direct by insurers. We believe contents will become a core service along with restoration work and will be handled in-house by full service contractors (that’s because technology is making contents restoration less complicated). Timeframe: 2 years. Already, there is growing evidence that full service contractors operate at lower overall cost compared to the sub trade-dependent GC. They will drive home this advantage.

Quality related to work performed and customer care will be more accurately and consistently measured and scorecards will largely become standardised across the industry. Timeframe: 2 years. We already have numerous scorecards in use with varying degrees of accuracy (the only real limitation being the quality of data available). Third party quality assurance trackers have an opportunity here.

Estimating software programs will develop full financial, operational and CRM capability and become true enterprise management tools. More importantly, users will deploy them intelligently. Timeframe: 5 years. Even if these programs are offered today, actual deployment in an effective manner will take years. Contractors and insurers have access to huge volumes of data. They don’t use them effectively.

Someone will figure out and offer preventative service (as opposed to restoration service). This is a tricky one but there’s a definite revenue and service opportunity here. PSP vendors are particularly well-placed to offer services to an insurer’s customers that reduce the likelihood of loss. Timeframe: 5 years. Likely to be focussed on eliminating structural water ingress.

Large loss/rebuilds will offer new opportunities. The building boom has created many more structures and average size and costs have risen. A lot of builders will be looking around once the boom subsides. Timeframe: 5 years. This is a small but lucrative segment of insurance claims.

CAT events will continue to occupy the nightmares of claims managers. The solution to how best to handle these events is some way off. Insurers cannot decide whether it is rock bottom costs or lavish service levels they want. You can’t have both. Part of the problem lies in trying to commoditise these events – it seems sensible to treat all CAT losses the same way as it is just too time-consuming otherwise. However, to do this properly requires a full mapping process that will expose true costs and actions. This is impossible without complete collaboration between insurers and their PSP vendors. Time frame: over 5 years. The solution does not lie in banging vendors over the head. But that’s a habit that’s proving hard to break.

Seven of these predictions will not come about in the manner or timeframe described above

Is the GC’s Goose Cooked?

Do you remember the story about the gifted goose – the one that delivered a daily golden egg? More to the point, do you recall the crux of the story? Greed leads to short-sighted behaviour whereby the future is forfeited for immediate gain. Let’s see how we can weave GCs into this cautionary tale.

Let’s start with CATs. You have heard the openly-stated fact that GCs can knock a few dollars off a regular claim (if asked) since they mop up more than water every time a CAT comes around.

After grinning and bearing this for years, insurers decided it may be a good idea to look into those CAT costs. Surprise! Square foot costs, fixed costs, stringent limits on how long equipment could be stored deployed at a job site, and a lot of nose thumbing at IICRC S500 followed rapidly. All of a sudden, CATs aren’t quite as lucrative.

Next up is sub trades and associated overhead uplifts. A lot of crumbs were swept under rugs before flooring programs showed up. Once again, insurers got curious about costs, looked a bit more closely and nearly passed out. Personal experience: Some contractors (NOT you, intrepid reader, not you) were found to be tacking on an additional ‘fee’ (anything up to $1,500) to every flooring claim in addition to the ‘customary’ 10&10. All of a sudden, direct invoicing from flooring vendors became the norm.

Roofing is the latest object under the microscope. It’s just a matter of time before this segment, too, goes the way of the 10-day-dehum. However, for now, some lucky contractors still get to slap the ‘customary’ 10&10 on the roofer’s total invoice in return for some supervisory input.

Now this isn’t small stuff. Flooring and roofing account for possibly one-third of the overall dollar value of property claims across the country. The loss of the ‘customary’ 10&10 related to this from the GC’s bottom line will be felt. Furthermore, it will never come back. That’s because no matter how bad the service provided by the flooring and roofing trades is and no matter how much adjusters complain about having to manage additional parties, the money saved will be a tangible benefit and that trumps complaints any time.

Another factor that cannot be ignored is the fact that many of the vendors in these trades can provide service at a lower direct price than that contained in the estimating programs mandated by insurers. Not always and not for every job but it does happen pretty often. Food for thought.

And that’s just the beginning. Demolition, environmental, and other highly specialised sub trades will all get their turn under the spotlight.

Every GC will disagree with some part of this article. And every GC knows that there’s enough truth and fact here for insurers to really get their teeth into – possibly for all the wrong reasons. And every GC (NOT you, heroic reader, not you) knows that your compromised margins, your faultless service, and your patience with adjusters means nothing because you didn’t engage insurers productively when you had the chance.

Would you like some gravy with that goose?

Are Vendor Programs Dying?

Restoration contractor vendor programs have been around for years. They started out as informal relationship management processes and evolved into insurers’ weapon of choice in the fight against rising costs and falling service standards. However, we now seem to be in a period of reflection as insurers make up their minds about these programs. It has become apparent that professionally run vendor programs are difficult to sustain. That’s because they need constant attention – which means they compete with other programs for limited resources. Another issue is the difficulty in measuring the benefits these programs are supposed to deliver – an extremely complex undertaking that has surprised every insurer.

Make no mistake: these programs are a definite improvement over the freewheeling relationship-based systems they replaced. However, although they always start with best intentions, they sometimes deteriorate into a miscellany of muddled initiatives. Goalposts move with bewildering frequency; frustration and disappointment pile up in a familiar pattern. Contractors moan, “Here we go again!”, adjusters throw up their hands and grumble about confusing instructions, and the ‘head office’ boffins declare everyone else is stupid or corrupt  or both. Why does this happen again and again? There are four principal reasons:

Communication

The single biggest cause of failure in vendor programs is ineffective communication. It’s the first thing to break down and the last thing that’s properly planned. Vendor programs are created with meticulous attention paid to the exact wording of RFP’s, the precise meaning of contractual terms, the accurate definition of key performance indicators, and the strict definition of service standards. Yet when it comes to informing, training, and notifying key stakeholders, everyone assumes telepathy will kick in and complete understanding will spontaneously occur. Effective communication is difficult stuff. To work it right, one has to put themselves in the place of the other party and this doesn’t happen when neither party understands the other in the first place.

Training

Close on the heels of poor communication as a cause of failure is inadequate training and development. Professionally run vendor programs are still new to insurers and contractors. It isn’t enough to pour everything into two documents – the ubiquitous ‘Contractors’ Manual’ and ‘Adjusters’ Manual’ – email these out to the appropriate parties  and expect common sense and harmony to prevail ever after. In all fairness, most insurers will get their training departments to participate in some internal training but this is always done as a one-off project and once the training sessions are done, they are never repeated. People forget stuff, new employees join the team, and practices change but the training department never returns and the vendor program starts to corrode. Blame it on tight budgets and scarce resource mixed with short-term thinking. It’s like applying a single coat of cheap paint on a wall and expecting it to last forever. It just doesn’t sense.

Data management

Next up on the list is data management. The industry is awash in oceans of data. Sadly, most of the data intended for property vendor programs are not very good. There are a couple for reasons for this:

First, most insurers have legacy data systems that provide useful high-level financial information – traditionally the closest insurers ever got to managing knowledge. This worked well in the past. However, effective vendor programs demand detail. They need transactional data broken down to the individual vendor level and they need a robust service-measurement process. Insurers have realised this and moves are underway to implement better systems but these take time to deploy and embed.

Secondly, there just has not been enough attention paid to inputting worthwhile information in the (mostly) very good estimating programs used by the industry. These programs run alongside existing legacy systems but do not interact with them in any way so there are absolutely no data validation opportunities between the two. It is virtually impossible to take a batch of information from one system and match it to a similar batch of information from the other. So, almost inexplicably, insurers have poured millions of dollars into license and user fees in return for head-scratching information. There’s every reason to believe that no insurer has ever made a sound decision as a result of analysing data from a commercially available estimating program. The industry is several years away from really understanding data and that’s assuming contractors and adjusters immediately start collaborating on the proper use of these expensive software programs.

Internal issues

Now for a somewhat arcane cause of failure: Most insurers run their vendor programs under a different management line from their operations department. In other words, the people who manage the RFPs and select vendors and populate scorecards and discuss improvements with contractors are in a different department from the adjusters and supervisors and claims managers who approve estimates and issue indemnity payments and settle vendor invoices. So what? Well, this is a huge issue. Here’s why:

(a)  Split Control: The vendor department has to prove that all the clever stuff they do with selecting the best vendors, creating price lists, and scoring vendor performance actually creates a few ongoing benefits such as lower claims averages and improved customer satisfaction indexes. The trouble with this is that actually doing the things to achieve these benefits sits squarely in the hands of adjusters – and they don’t report to the Vendor Department. They report to the Operations Department. Competing priorities kick in. The result is that all the metrics the vendor department comes up with rarely hit their mark because adjusters are too busy scrambling with file workloads, irritable claimants and lippy contractors. The vendor department wants everyone to focus on vendors. The operations department wants to streamline operations and extract more files from fewer adjusters. The last thing they want is more directives, more forms, more work. Somewhere in the turmoil the vendor department’s stuff gets shoved into the bottom of the pile and the program starts to slide sideways.

(b)  Competing Budgets: As anyone with corporate experience will tell you, departmental survival depends on budget allocation. The claims department gets a chunk of change and has to allocate funds to each department within it (operations, finance, training, vendor management, auditing, auto, accident benefits, property, and several other subsets exist within the overall claims umbrella). Matters usually work out reasonably well but funds slow down in lean times. That’s when blending departments starts to make sense. Since vendor departments are usually the last to be created, they’re often the first to be trimmed or even disbanded.

(c)  Old Hands vs. New Cowboys (or Cowgirls): It’s guaranteed that every contractor has heard a complaint or a snide remark or a derogatory comment from an old-school adjuster about the new ‘desk-jockey’ vendor-fella. Things like how the new rules make no sense, how the new hire doesn’t know a soffit from a Smurf, how life has been irreparably damaged. This is undoubtedly one of the most unprofessional things an experienced adjuster can do – but it happens.

So, is the demise of the vendor program imminent? Absolutely not. Even though most vendor programs have failed to live up to their lofty objectives, they have still produced results far superior to anything in the past. They have also attracted a new breed of professionals to insurance companies and these people continue to influence and lead change. Similarly, many forward-thinking restoration contractors have hired from the insurance industry and they will benefit from the new perspective and insider knowledge that these people bring. These changes will start to make an impact in the near future and vendor programs will develop into their next phase where realistic and sustainable benefits are achieved under the leadership of knowledgeable people.

Management structures will change, data acquisition will improve, dependency on off-the-shelf software will reduce, and training and development will advance. Vendor programs have been around for years and they’re finally about to develop. Are you?

Another Year

We’re a couple of weeks into the new year and it’s now safe to move from cheer and goodwill back to reality. So, how was 2010?

Well, by most accounts it was sort of OK for most in the insurance restoration industry. Business volumes didn’t follow the usual pattern so it was uncomfortable for part of the year waiting for claims to get back to normal frequency. Claims happened in the end but not entirely in the right places at the right time. The good news was that the economy righted itself in comparison to the US.

However, an absence of setbacks doesn’t mean there was progress.

Questions that come to mind are: Was there any noticeable improvement in 2010 in the restoration industry’s business processes, management systems, commercial relationships, long-term plans, customer service, or competitive strategies? A few organisations have had some success but, overall, the industry hasn’t matured much at all. In fact, there are arguments that support the premise that the industry’s standards are moving backwards in relation to the available opportunities. Let me explain that.

Issue: Global warming has created a new industry fad. There’s a veritable tsunami of water-mitigating, contents-drying, IICRC-certified, ASD-trained, water-expert wannabes ready to leap into action at the mere hint of a dripping tap. For good reason: Water damage losses bring in the bacon. They’re relatively quick to turn around and insurers have little idea what they’re paying for. Most contractors don’t want to repair structures any longer but just to dry them. In return, insurers focus on reducing prices by moving from unit prices to square foot prices (and back again) but often fail to actually reduce overall costs. In the end, it’s the same old price thimblerig and industry standards haven’t budged at all.

Opinion: The few contractors who put their resources into full service instead of relying on increasingly unpredictable weather patterns will continue to prosper; the H₂O contingent risks being hung out to dry.

Issue: Every contractor is an estimating software expert. Estimating programs serve two purposes: (a) to allow a consistent approach to estimating a loss, (b) to accumulate data to with a view to identifying opportunities to improve service or costs. It’s been about 10 years since the industry started using these programs. Yes, the industry has achieved some consistency in creating and presenting estimates. No, these programs offer absolutely no useable data. Zilch. Not a shred of information has ever been extracted from a commercially available estimating program that has led to any improvement in service or cost. It’s not that the programs are flawed. It’s because filling in all the fields and forms just takes too much time. It’s odd that despite paying license and user fees for these estimating programs, neither insurers nor contractors actually make an effort to derive benefits from them.

Opinion: Estimating software programs offer a huge opportunity. Unfortunately, this is completely ignored. Unless someone figures out a way to obtain value from estimating programs, insurers will drop them as part of future cost-cutting initiatives.

Issue: Every contractor has ‘proven’ service standards. This holds true particularly for the major contractors who track all sorts of arcane data that only they understand. Yes, it’s great to know how well your business is doing but don’t expect your customers to see the value of what benefits you! Customer-centric businesses collect data that their customers need. They do this because they’re confident they offer real value. Then they regularly share that data with their customers and work out ways to make the relationship better.

Opinion: Until contractors make the effort to agree with their customers what needs to be tracked and then do this diligently, the industry will continue to slide backwards on the trust scale. The hesitation to do this is inexplicable and indefensible. One cannot expect a successful partnership where there’s no evidence of value.

And that’s the way I see it: The greatest opportunities lie in providing complete services, using estimating programs intelligently, and tracking and managing worthwhile data. All of these are readily achievable and yet all are largely ignored.