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Steps To Planning A Benchmarking Study

Benchmarking has increasingly become a standard item in the toolbox of the risk manager — and the trend isn’t unique to our profession. It is a phenomenon that is characteristic of our society as a whole. We are a nation of benchmarkers. Every time we consult a Consumer Reports for a comparison of appliances, Morningstar for the status of stocks and bonds, or J.D. Powers and Associates for ratings on automobiles and credit cards, we are performing a benchmarking activity. As savvy consumers, we want comparative information. We are interested not only in A, but also in how A stacks up to B.

Benchmarking as a means of measuring performance has gained particular prominence in workers compensation forums as loss costs become increasingly important to our companies’ bottom lines. Should you join the bandwagon and embark on a benchmarking study, we suggest the following steps.

Define Your Scope And Objectives

Ask yourself, “What problems am I trying to address and what comparisons will I need to do so?” You will need to first understand where you are and define a baseline for your workers compensation program. Examples of issues you may wish to address:

• Increases in relative or absolute costs
• High frequency of loss
• Inconsistent results across locations
• The need for internal data, external data, or both to analyze the problem

Define Your Plan For The Information You Obtain

For example, you may:

• Change allocations and incentives (i.e., the rate at which you charge the cost of losses back to other locations)
• Invest in loss control (e.g., safety training or equipment)
• Audit your carrier or third party administrator (e.g., if you think your costs are rising too fast, use the information you obtain to question how your claims are being handled)
• Address management and supervisory issues

Define The Data Needed And Ask Critical Questions

Examples of data type include:

• Payroll, hours, other base information (in total, by location)
• Claim counts and dollars
• Claim descriptors and status codes (e.g., class code, severity type, nature of injury, body part involved, legal involvement, open or closed status)

Questions to ask include: Are my own data available and reliable? Have they been restated by acquisitions and divestitures — that is, has the type of industry changed? Are industry data publicly available?

Define Your Investment Levels

Statistical analysis and programming expertise run from $75 to $150 per hour. Consultant expertise starts at about $1,000 per day, plus expenses, and goes up from there. Unless the partner you select to do your benchmarking with has developed “shelf” capability and reports — which may or may not meet your needs — these are the rates for which you should plan to spend as part of your study costs.

Prepare Written Specifications

If you hire someone to do your benchmarking, make sure that you are clear about your specifications and that you provide a clear target for the organization performing the study to hit. For example, you should specify:

• The time periods to be studied
• The maximum time frame and delivery deadline
• How you want the data reported (e.g., graphs, charts)
• What the final product will include and what it will look like

Select Your Partner(s)

Depending on your level of expertise and budget, this step may be part of your first step. Some possibilities include:

• Brokers: some have made significant investments in benchmarking practices and have access to multiple years of data and a significant base of customers
• Insurers or third party administrators: many have introduced benchmarking and data analysis units
• Risk management information systems: some include elements of benchmarking, such as development triangle and point-in-time comparison capabilities
• Independent consultants: these are probably the oldest practitioners of benchmarking, dating from the mid-1980s

Regardless of whether benchmarking studies are conducted by your in-house staff or with the assistance of outside partners, risk managers must be intimately involved in the process from beginning to end. When you have a hand in developing the specifications, selecting and analyzing the data, and monitoring the necessary steps toward implementation, only then can you assure yourself that you are working toward measurable improvements in the work environment and reductions in the rate and cost of loss.

ABOUT THE AUTHOR

The Journal of Workers Compensation is a quarterly review of risk management and cost containment strategies published by Standard Publishing in Boston, Massachusetts. For more information, please visit standard-pub.com, or contact the editor at 800-682-5759, extension 222, or subscription services at extension 228.

riskVue | The webzine for risk management profesionals
March 2000