10 Aug 2009
A Case Study on the Organizational Structure and Strategy of Engineering Inspection & Insurance Company (EIIC)
EIIC is a property insurance company or more precisely an equipment breakdown insurance company. It inspects and insures industrial equipment such as compressed air tanks and steam turbines from accidents and physical damages. One of the main features of EIIC as an insurance company is the inspection process or phase undertaken by its engineers before the writing and completion of the insurance policy. Inspecting the property considered a candidate for insurance provides vital information to EIIC in its company decision to insure or not and consequently in the development of insurance contract. EIIC claims to hold the competitive edge of responding to customer’s demands on time. In cases of accidents or breakdown to insured industrial equipment, EIIC boasts of addressing the problem-rendering the equipment functional through restoration, repair or replacement- within desired and reasonable time period. The real customers of EIIC are the insureds being the prime recipients of the benefits and service the company has to offer and not the independent agents which- in function and role- are merely one of the company’s distribution channels.
Much of EIIC’s operations are concentrated on the Pacific Northwest which maintain, as of 1991, over 20 branches. Aside from its main business function as provider of property insurance to industrial equipment, EIIIC also lends its service in its inspection capacity to fellow boiler insurance companies who lack adequate inspection tools and methods.
The company profits are derived primarily from the earned premium and the investment income minus the incurred loss and the underwriting expenses.
EIIC’s Key Managerial Operations and Strategic Problems
In the early part of 1991, EIIC reports a premium income of $65 M dollar a year. This is a clear demonstration of the initial success of the company in terms of profit generation and market competitiveness. However, in mid-1991, problems start to sprout within the organization and this growing unease internally is reflected in the decreasing sales growth and profitability. One of the signs of company dysfunction at EIIC is the increasing employee turnover rate particularly among the crop of engineers (with a turnover rate of 17% in 1990) and underwriters. The possible causes for this include the rising sentiment of being undervalued especially among the underwriters who feel deprived of relevant decision-making power, low to average compensation package (inspectors merely receive a monthly salary of $2,250 amounting to a meager $27,000 income per annum), inadequate perceived career advancement among the underwriters and the acquisition of other jobs aside from the ones they hold at EIIC (a.k.a. moonlighting)-as soon as employees experience the slightest dissatisfaction within the company they can immediately leave since they have other jobs to fall back on. Aside from the increasing turnover rate among the workforce, EIIC notices growing disputes and conflicts between branch managers and the chief inspectors. This stems mainly from the current ineffective organizational structure. Chief inspectors instead of the bank managers make the decision of whether to insure certain risks or not. Furthermore, bank managers do not get to monitor and supervise their inspection staff; only the chief directors are tasked to oversee inspection activities. This kind of organizational set-up becomes a source of internal strife and misunderstandings since in cases when chief inspectors fail in their assigned duties as head of their branches, branch managers are held accountable for unmet goals, losses, and unfulfilled responsibilities. Also, branch managers sometimes disagree with chief inspectors on the basis and manner of accepting risks accusing the latter of tending to go by the book. Another burgeoning problem is the late delivery of insurance policies. EIIC sets the completion time for insurance policy within 14 days on the average. However, in reality, this company goal is applicable for small policies only. For larger policies it takes normally 43 days-the MFG time-to finish (26 days to complete First Inspection Order, 10 days for the approval of supervisory director, 5 days for the underwriting process and 2 days to accomplish all the other miscellaneous tasks). Last, EIIC encounters problems with the planning and coordination of activities among the inspectors/engineers. The issues that EIIC are struggling to confront are not only internal; it also faces challenges from the external environment. There is now a rising trend in the insurance industry to consolidate policies which upon adoption requires faster completion time for the insurance policies.
EIIC’s Business Strategy
EIIC relies on its engineering inspection activities as basis for its insurance policies. It ensures that the services offered by the engineering department are thorough, well-supervised and efficient. To ensure the superiority of its inspection, EIIC has developed an elaborate evaluation scheme, creating several levels of office or position in the engineering department to check and validate inspection reports. Field inspectors do not directly submit inspection findings to the chief inspector instead they approach the supervisory inspectors first. Also in the effort to provide customers and the company an above average inspection, EIIC employs experienced, highly trained ‘practical’ engineers and licensed boiler machinery inspectors.
In gaining new customers, EIIC employs special agents in each branch tasked to deal with independent agents who in turn have direct communication with the clients or the insureds.
EIIC closely manages and directs the overall business undertakings from the top or the head/home office.
Short term and Long-term solutions
In order to prevent profits from spiraling downward, EIIC needs to speed up the writing and submission of insurance policies. This implies shortening the time allotted for each stage in the process-from inspection to underwriting. Although the competitive edge of EIIC lies on its inspection service, it can cut down on the number of inspections conducted especially on the smaller policies, preferring to concentrate instead on the larger ones. In other words, inspectors need not inspect every property or industry equipment only those that really needs or demands inspection. Inspectors, by implication, should be given enough free rein to decide which to inspect and not to inspect without excessive control and intervention from the home office.
Another short-term solution to speeding up the formulation and completion of insurance policies is to flatten out the hierarchy removing unnecessary levels in the organizational structure. If not, just reduce the evaluative functions of certain positions. For instance, instead of requiring the field inspectors to report to the supervisory inspectors, they can submit inspection findings to the chief inspector directly. There is also the drastic measure of taking down the position of supervisory inspector. This downsizing action paves the way for faster decision making.
Aside from quicker completion of insurance policies, EIIC can increase profitability back to competitive level by simultaneously increasing the accounts through the influx of more customers. The tradition of EIIC is to hire independent agents in attracting new clients-this manner of gaining more contracts can be augmented through direct sales. EIIC can employ salespeople to sell its product directly to potential customers without the delaying action of agents.
For longer staying benefits and long-lasting success, EIIC needs to create a culture of people empowerment. This is the more permanent solution to the high turnover rate among the employees. It is about time that EIIC changes its focus from its competitive edge (i.e. inspection service) to its invaluable asset-the people. In order to foster a culture that is centered on the human factor of production, there is a need to overhaul the current management values. EIIC needs to adopt the following assumptions: (a) people have worth and that (b.) they are capable of making independent, smart, reasonable decisions. Underwriters at EIIC, for instance, must be allowed to make choices and decisions on their own without unnecessary regulations from the head office. Part of empowerment is decentralization-letting the staff from the lower ranks take on more meaningful and relevant responsibilities and duties. Higher compensation packages should also be extended not only to the engineers but to the rest of the employees from the five functional areas (agency, engineering, underwriting, finance and legal).
Another long-term solution is the restructuring of the organizational design. Removal of certain positions is needed, making the organizational structure cleaner and more efficient. There is also a need to redefine functions and relationships between managerial levels. The branch managers at EIIC, for instance, should be allowed to participate in the inspection activities of the engineering department instead of the chief inspector solely shouldering the responsibility. Furthermore, the chief inspector need not report to Roger Cutler, the Vice President for Engineering only the branch manager should communicate with the home office being the branch representative to avoid duplicity. Also, in changing the organizational structure, the top officials of EIIC need to regulate less, loosening its grasp over the components of the business. It should encourage dialogue, better coordination and planning between and among the functional areas. Also, reporting relationships should be lessened to save time and effort.