RISKVUE ARCHIVE | FEATURE STORIES

How To Choose, Use, But Not Abuse A Risk Management Consultant, Part 1

By C. C. (Bud) Griffin, CPCU

Whether your organization is a public or private corporation, public entity or other organization, chances are you have used or considered the use of a consultant for expert and objective assistance with a particular risk or insurance problem. If you have never used a consultant or would like to learn how to maximize results of your consultant, this article is for you. Part I of our series discusses what risk management consultants do, what to look for in a consultant and how consultants charge for services. Next month in Part 2, we will cover how to select and get the best performance from a consultant. (While these articles focus on risk management consultants, the principles discussed generally apply to any type of consulting activity.)

What Is A Consultant?

A consultant is an expert who can be hired on a part-time basis to help the organization solve specific problems. From this point of view, nearly everyone has used a consultant. For example, doctors are consultants in medicine, lawyers are consultants in law, and accountants are consultants in accounting. Some insurance agents and brokers call themselves insurance consultants, although some people feel that ethically one cannot serve as an insurance consultant and at the same time place insurance coverage for the client as an agent or broker.

In most states anyone can be a consultant in the field of risk management. Although some states have licensing laws regulating risk management consulting, they usually are poorly drafted and specify educational requirements too low to have any real meaning. This situation is not surprising, due in part to the wide range of disciplines that can fall under the mantle of risk management.

Some people call themselves risk management consultants even though much of their income is derived from sources other than client fees. These include (1) agents, brokers and others who sell insurance and insurance-related services, (2) college professors and risk managers who “moonlight” by accepting consulting assignments, and (3) specialists in risk-management-related fields such as safety, environmental, fire protection and claim management.

Today there are numerous risk management consultants who can provide advice not only on conventional insurance but also on topics such as self-insurance, claim management and loss prevention. Many of these are one- or two-person shops; a few are large, multiple-office firms.

What Do Risk Management Consultants Do?

The work performed by risk management consultants typically falls into three general classes: audits, retainers and special projects.

Risk Management Audits

Audits are used to assess the overall effectiveness of an organization’s risk management program. Their goal is to identify significant risks and to objectively determine the adequacy of protection, the reasonableness of costs and the appropriateness of internal administrative functions, including services performed by outsiders such as agents and brokers.

Retainers

The retainer, which usually is designed to provide the client with expertise on call, may be used by:

(1) Large organizations having full-time risk-management departments, to obtain additional technical resources and objective viewpoints, or

(2) Smaller firms without full-time risk management staff, to obtain professional skills tailored to the activity needed.

Special Projects

Special consulting projects include assignments such as evaluation of risk-funding alternatives; design and audit of claim administration programs; owner controlled insurance program (OCIP) feasibility studies; administrative studies and personnel evaluations; pooling and captive-insurer feasibility studies; assistance in selection of insurance brokers, claim administrators, safety specialists and other service providers; training; and development of insurance bid specifications.

What To Look For In A Consultant

There are two main qualities to look for in a consultant:

Objectivity. A consultant must be truly independent. The consultant’s advice must be free from the direction or influence of others and detached from the risk of financial loss or gain as a result of his or her conclusions or recommendations. To maintain complete independence, the consulting firm should not be owned by, nor own an interest in, nor receive any fees or other compensation from insurance companies, brokers or other entities whose services may be the subject of the consultant’s evaluation.

Expertise. In addition to his or her education and background, a good consultant brings the knowledge and experience gained from working with many different types of clients and problems, with most of his or her time spent in analysis rather than in sales or routine administration. Continuing education should be part of every consultant’s annual plan.

How Much Will A Consultant Cost?

Most consultants will discuss the proposed scope of work with the prospective client and prepare a written proposal at no charge. The proposal should define the objectives of the study, the scope of work to be performed, the plan of action, and the personnel to be assigned to the project. Billing rates should be quoted for each consultant, along with a probable range of costs. If the project can be clearly defined, a maximum cost may be quoted. Occasionally a flat fee may be quoted for small assignments.

Hourly rates typically are based on (1) the consultant’s annual base salary, (2) the fringe benefits, office overhead, promotional costs and profits that must be loaded into the billing rate to enable the consulting firm to stay in business, and (3) the number of hours available in a year for billing. Because the income of consultants their overhead and experience varies considerably, billing rates can range from $100 or less for junior risk management consultants to $250 or more for the most experienced senior consultants.

Consultants whose charges are based on a percentage of savings should be avoided. This approach is considered unprofessional by many, because it places emphasis on apparent short-term cost reductions rather than on long-term benefits. It also may encourage unethical consultants to recommend the lowest cost alternative rather than the one that best meets the client’s needs. 

EDITOR’S NOTE

Next month we will review, in detail, practical strategies for selecting the best consultant and methods for getting the bests results. If you have questions regarding this article or would like to offer readers other tips for dealing with consultants, please submit your ideas to us at gary@griffincom.com.

riskVue | The webzine for risk management professionals
August 2002