Allstate leverages sourcing to better serve customers
"Our most important role is to improve the competitive position of the company," says George Ruebenson, vice president, procurement governance (center). With him is James Osborne, assistant VP, procurement governance (left), and Richard Zuza, also an assistant VP.
By Susan Avery -- Purchasing, 2/10/2000
Strategic sourcing practices are not limited to major manufacturing industries. In fact, strategic sourcing can be applied to the buying operation of a financial services company--with success.Keys to success are the same as in manufacturing industries: A true understanding of the marketplace for commodities the operation is purchasing and determining requirements of internal customers, says George Ruebenson, vice president and head of procurement governance at Allstate Corp., Northbrook, Ill. Efforts of Ruebenson and his buying team at establishing and implementing strategic sourcing practices at Allstate have resulted in savings of $300 million over the past two years.
At Allstate, procurement governance has influence over $2 billion in spending annually. Among the company's largest expenditures are information technology (IT), contract programming services, data line communications, advertising and corporate travel.
Ruebenson has applied strategic sourcing practices to these commodities and others, selecting them based on their significance to the company's overall business strategy. For the company's contract programming spend, for example, procurement governance has consolidated the supplier base from an unwieldy 300 suppliers down to a more manageable 11. The company hires programmers to make rate changes or adjustments to its system. While it has an in-house staff of programmers, occasionally it needs to hire additional workers. To do this, procurement governance posts internal customer requirements on the Internet and works with Allstate IT managers to ensure submitted resumes fulfill requirements. "This has helped to reduce costs more than anyone had expected, by some 20%," says Ruebenson.
Realizing savings on purchased goods and services is only one facet of the role of procurement governance at Allstate. Equally important are efforts to help company employees and processes become more efficient in order to serve customers better, says Ruebenson. This, he explains, contributes to the overall efficiency of the corporation and, ultimately, to the company's growth.
One of procurement governance's key contributions is leveraging the sourcing function to better serve its customers: Because employees no longer spend part of their time performing purchasing duties, they can focus on their core responsibilities. Customers, in turn, benefit from improved service and lower costs.
"Our most important role is to improve the competitive position of the company, not just take expenses out," says Ruebenson. "We do this with the customer in mind. For example, reinvestment of savings into technologies to better deliver and serve our policyholders adds value for our customers."
A $25-billion company, Allstate owns the largest publicly held insurance company in the country. The product Allstate provides to its policyholders "is the promise of making their lives whole after an accident or catastrophe." But goods and services for both the customer and the corporation are behind that promise. Based in Northbrook, Ill., Allstate operates in 49 of the 50 states, as well as Canada, Japan, Southeast Asia and Europe.
Procurement governance
Until 1993, Sears, Roebuck and Co. had owned Allstate for more than 60 years. Allstate's status as a Sears subsidiary meant it operated under a holding-company model. In other words, as long as Allstate achieved its financial targets, Sears allowed the company to buy its goods and services any way it liked. As a result, purchasing was largely decentralized.
When Allstate went public in 1993, it implemented a capital allocation process that, among other things, resulted in the divestiture of non-core businesses and reduction of catastrophe exposure in some states. As part of that capital allocation process, the procurement function was created in 1997 to optimize the value of purchased goods and services.
Now largely a centralized activity, procurement governance's mission is two-fold: Leverage Allstate's purchasing power to ensure the highest quality goods and services are available at the most cost-effective price; design and manage a consistent process that effectively controls purchasing, suppliers, contracts and policies for effective spending.
With the backing of senior management, Ruebenson and his team built an operation that mixes in-house insurance expertise with outside experience.
One senior executive who reports to Ruebenson is Jim Osborne, a 26-year veteran of Allstate's claim department. Osborne provides an understanding of Allstate processes and employees to effectively promote and implement procurement governance initiatives within the corporation. And Rick Zuza, who has held top purchasing positions at General Electric and Gibson Greetings, brings new perspectives and insights to the Allstate framework. Zuza is responsible for the company's technology purchases. Ruebenson, a 29-year Allstate veteran with experience working in the company's finance department, reports to the chief financial officer.
Procurement governance's team approach to decision-making also has helped it gain acceptance throughout the corporation. To select a supplier, representatives from the departments that ultimately benefit from purchased goods and services work with procurement governance to make the decision. Osborne notes that recruiting team members from Allstate's various business units into procurement governance promotes acceptance of department initiatives.
There are 150 people currently working in procurement governance. Of this figure, 45 have responsibility for strategic sourcing or commodity management activities. (Buyers receive 40 hours of training annually.) "We don't simply execute transactions," says Ruebenson.
Take, for example, procurement governance's influence over the company's advertising spend. The department questions processes Allstate uses to pay for these services, determines optimum provider of advertising, etc. Previously, employees who used the ad agency did the contract themselves. Allstate had agreements in place with ad agencies, but the company did not leverage its scale.
"We see ourselves not just as a governing body, but as a key player that uses effective sourcing strategies to enhance business decisions," says Ruebenson. "We are starting to see it happen now with some departments seeking our advice in early conversations about the services or goods that they require. So far, we have exceeded the goals expected by the company. All indicators are that we will stay on that path."
For technology purchases, procurement governance involves representatives of IT in its supplier-selection decisions. "They are the subject-matter experts," says Ruebenson.
Such a team or advisory board would also include representatives of user departments as well as procurement governance. For example, when buying computer equipment for the company's insurance agents, the sales function would provide information on user requirements to the board; IT offers appropriate technology solutions; and procurement secures the best value for the company.
Tip of the iceberg
The supplier-selection decision involves about 90% research and analysis and 10% negotiation, says Ruebenson. Long before negotiation begins, procurement governance conducts extensive due diligence.
"Requests for proposals and negotiations are just the visible tip of the iceberg," says Ruebenson. "We obtain as much information as we can regarding suppliers and the industries they represent. We benchmark companies against their competitors and determine how they make their money. We then look for ways to do business that could be beneficial for Allstate, our customers, and the prospective supplier. Successful deals are a win for all parties."
Upon issuing an RFP (request for proposal), the team will weigh responses based on four or five factors, with quality of service receiving the most weight, usually 40%.
For technology new to Allstate, procurement governance adds a step to its sourcing process--a request for information (RFI) from suppliers. "For a paradigm shift in technology, we need a broader base of information for our technical people to review," says Ruebenson. "Then we whittle down the supplier base. This period could also include some time allocated for testing new technology. We like to check out new technology on about 20% of the company before we roll it out."
Allstate expects suppliers to act like business consulting partners, offering advice on how to eliminate unnecessary costs. For example, the company asked its office supplies provider, Boise Cascade Office Products, for advice on ways that it could reduce costs while maintaining quality. Boise helped Allstate select remanufactured printer toner cartridges that could save $500,000 annually. Allstate spends $15 million annually with Boise.
"We make it clear to suppliers from the beginning that their help in saving Allstate money will be in their long-term interests," says Ruebenson, who explains that generation of cost-savings suggestions means procurement governance is less likely to move business to another supplier. If the company does decide to issue an RFP, then the incumbent's prior service performance is evaluated. In fact, he notes that Allstate does business with many incumbent suppliers. "There's more structure now, however. Our suppliers typically provide goods and services to the manufacturing sector. They know what we are trying to accomplish."
Procurement governance conducts supplier performance reviews on a monthly or quarterly basis, depending on the commodity. "In addition to determining whether the supplier is doing what he said he would, we also check our compliance to the contract to ensure that we are fulfilling our role in sending the appropriate volume to the supplier," says Ruebenson. "We track everything so we can have a fact-based conversation. We also survey our field offices."
"Having a more complicated process in place forces us to look at why we do what we do. A midterm correction, for instance, helps determine whether the team received goods and services that meet its requirements. Procurement governance works closely with business presidents to understand their strategy," says Ruebenson. "We leverage this information to achieve the growth they need."
At the end of the day, our metrics drill down deeper," says Zuza. "Manufacturing looks at sales figures. In acquiring IT or services, we as a financial services company have to work with business units to meet their expectations. We have to go further--to customer satisfaction."
In some cases, Allstate also seeks equity positions with suppliers, which the company calls "financial engineering." For example, it recently negotiated an agreement with a data provider which has grown from a small, niche company to a substantial-sized firm partially as a result of business it does with Allstate and the reputation gained by being capable of handing the data needs of an insurance giant. As part of its contract to obtain business data services, including credit checks, drivers' records and other data, Allstate has received stock warrants that may appreciate in value, based on success of the supplier. The agreement calls for the warrants to be awarded upon the volume of business Allstate sends its way. Says Zuza, "Both companies benefit mutually from this relationship. We each have stake in the other's success.
"With smaller suppliers, our volume can help make a company's size and reputation. For instance, if a software company has a good idea, but it doesn't have a large customer base, we will give it the business if we see the value."
Demand management
Compliance in using chosen suppliers and adhering to demand policies is critical to achieving procurement governance goals, says Ruebenson. Compliance, in turn, is driven by measurement. "While procurement governance can identify potential savings opportunities, it takes compliance by the entire company to realize the actual savings," says John Husted, a procurement governance director.
Effective "demand management" is built upon establishing clear usage policies, then monitoring and reporting compliance with those policies, says Husted. While procurement governance sets policy, each department is credited with resulting cost savings. "Since they are making the usage decisions, they deserve the recognition for these efforts. We help departments save money and track savings, but the credit shows up in their budgets."
Requiring employees to use Allstate contracts with airlines has resulted in 92% compliance. "The business operates more efficiently, and the company receives a greater discount," says Ruebenson. "We also receive compliance reports on who is not following the rules."
For the company's cellular-phone purchase, before the establishment of procurement governance, there was no consistency from department to department as to which employees should be issued the phones. Now, employees need approval of purchasing governance or a member of senior management team.
And for acquisition of professional services, procurement governance considers itself a "gatekeeper." Zuza says that the department evaluates user requirements and determines whether the requisitioner can use in-house resources or needs the services of an outside consultant.
What's next? Looking back over the past two years, procurement governance has sourced 40 commodities and continues to target others. As the department evolves, Ruebenson says he is considering other ways to add value, including working with consortia, alliances with large corporations, bartering for services or e-procurement.
"We are beginning to understand just how much electronic commerce will impact the procurement function during the next five years," says Zuza.
To place orders for purchased goods and services, requisitioners currently use a process that is paper-based, although Allstate is in the process of implementing an electronic purchasing system from SAP. For technology purchases, IT gets involved in the requisition process because it is responsible for asset tracking and management. "IT has to be involved in the process," says Zuza, "to make sure that all parts fit together."
Now, it takes three to five days to process a transaction, with requisitioners receiving delivery from the supplier within 30 days. "Our new e-commerce system will process transactions instantaneously, with the supplier receiving the order shortly thereafter," says Zuza. "We expect efficiency improvements of 50% to 80%."
Ruebenson envisions the role of the department evolving into that of an internal consultant function. Procurement will play a significant role helping to manage the risks of the business. Pre-qualification of suppliers that are entrusted to enter customers' homes and repair or replace their possessions is essential to ensure customer security and satisfaction. Usage of a contingent work force requires that the deals be carefully constructed to ensure that the suppliers, not Allstate, bear the personnel responsibilities.
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