Take no chances Featured

8:00pm EDT September 25, 2009

Every industry needs to reduce costs in this economy. Therefore, it is essential for organizations to approach this demand in a forward-looking manner, no matter the urgency placed on immediate results.

Risk management tools and practices provide a company with the opportunity to identify areas where improvements can be made, ranging from the coverage held by a firm to its staffing practices, says Patrick M. Lawton, strategic account manager and vice president for Aon Risk Services Central Inc.

“By taking thoughtful and strategic steps forward, you will secure a determined grip on your firm’s future and position your business for continued success,” he says.

Smart Business spoke with Lawton about how companies can identify the areas that need to be fixed and how they can fix them.

In these tough economic times, how can companies meet the needs of a recessed economy?

Organizational and operational priorities are being driven more than ever by the current difficult economic issues. Cost reductions in all aspects of a company are at the top of the list. Three key byproducts of the recessed economy are:

  • Organizations are struggling with reduced product demand, high costs and limited access to capital.
  • The cost of credit will be high for the near term as economists suggest the credit market will remain tight.
  • Most economists believe that corporate profits will decline in aggregate by as much as 50 percent for the year.

Operating in such an environment, companies have little choice but to cut capital spending and reduce the cost of sales. Indeed, recent surveys show a significant number of organizations plan to continue to aggressively manage both costs and staff in the months ahead. Although experts have varying thoughts on how long this downturn will last, most are in agreement that we are not out of the woods yet.

Unfortunately, many companies address these challenges too late in the game, often by drastically implementing only one solution. Instead, they need to strategically integrate these various components, so costs are optimized and managed in an appropriate and realistic fashion. Having a plan in place prior to instituting change is critical.

What are some of the critical factors companies should consider while implementing a plan?

The keys to a successful cost reduction initiative include, but are not limited to, the following:

  • Alignment with organizational strategy: Focus on the organization’s mission and values with an integrated approach across human resources, operations and risk management.
  • Legal defensibility: Follow established internal policies and adhere to local statutory issues at any given location affected by the strategies.
  • Risk mitigation: Identify hidden risks, such as unplanned attrition, sabotage, workers’ compensation and disability claims.
  • Metric-driven approach: Continuously monitor exposures and opportunities in a cost-effective manner. Constantly review newly reported losses and changes in property exposures as the minimum.

Ongoing sustainability recognizes and quantifies exposures such as accidents and disabilities associated with your organization’s workplace, while addressing new and ongoing claims and anticipating future liabilities. Additionally, the incorporation of a standard planning approach to review future decisions in anticipation of change, coupled with ongoing risk assessment, will support the organization’s goals and interests. This is easily accomplished with the engagement of a specialized advisory service and senior executive-level facilitators.

With these mitigation strategies firmly in place, you’ll benefit from maintained sustainability in the following ways: stabilized productivity; ability to meet continued customer needs or expectations and, therefore, satisfaction, loyalty, revenue and cost of sale; retention or transfer of outstanding employees; management and control over employee morale; and minimized disruption of benefits to current disabled workers.

Predictive analysis projects future impacts and estimates future liabilities through statistical analysis. In order to allow an organization the flexibility to consider a number of options in deciding how best to manage costs, it is useful to engage in actuarial analysis. By reviewing historical losses, trends and expert opinions as to future considerations, you accrue for future balance sheet liabilities.

How can a well-designed plan help mitigate the risks companies face?

A well-designed plan will support significant value creation for the organization, delivering a sustainable approach to ensure that resulting workers’ compensation and disability claims costs are handled proactively, grievances are minimized, productivity is not negatively impacted and customer and shareholder confidence is maintained.

Specific to the above facts, data supports that an organization may have increased costs of 30 percent in workers’ compensation alone. This does not consider productivity issues, unplanned attrition and other costs directly affecting the balance sheet in various ways. Therefore, it is imperative to plan for the cost reductions by incorporating all aspects that may prove costly or that were previously not contemplated as a cost. By benchmarking an organization’s data against its peers, it quickly becomes evident where the firm is thriving and where some additional attention may be required.

PATRICK M. LAWTON is a strategic account manager and a vice president for Aon Risk Services. Reach him at (314) 854-0734.