Insurance

Territorial claims

The CPO of Axa, the world's biggest insurance company, talks about the challenges of transforming procurement withoout central control

Spring 2006

In 2002, the company decided to give procurement a higher priority and appointed Alain Page-Lécuyer as its first group procurement senior vice-president. A career procurement professional, he had previously worked entirely in manufacturing, latterly in the telecommunications industry, at Sagem and then Alcatel.

CPO Agenda caught up with him recently to find out how his mission to transform Axa’s procurement capability is progressing.

First of all, how is procurement organised within Axa?

Axa is a very large, very decentralised group. When I joined, my task was to set up a global procurement function, which is based in Paris. Then in 15 of our worldwide entities there is a centralised procurement department. Each of those is led by its own CPO who in some cases is in charge of one country, such as the UK; in other cases they cover several countries, such as Spain, Italy and Portugal. We have a total of 200 buyers worldwide, including administration and support, and 30 of those are in my organisation at group level.

In terms of governance we have a steering committee of all the CPOs called the procurement strategy board, which decides everything about the tools we use, the procurement process, and the areas we will work on at a global level. We also have working groups from an operational point of view, with buyers coming from the local entities and working together to either decide on a tool or negotiate a global contract. Today we have 115 global contracts – not at a worldwide level necessarily, it may be for three countries that decided to work together and negotiate one deal. For example, in the IT domain we negotiated a large deal for infrastructure with IBM, a worldwide deal with Dell for PCs, and with France Télécom for telecommunications.

Do those local CPOs report to you?

No, they report to the local COO or CFO. We are a decentralised group, to maximise efficiency, so there are no direct or indirect reporting lines between local CPOs and myself. In this governance model we must convince our colleagues about what we have decided. It’s more difficult to manage that, it is time consuming, but that is the Axa way today, and it has proven very effective since its implementation. It is based on the willingness of each part to work together with good buy-in to a global and multicultural organisation.

And who do you report to?

I report to Etienne Aubourg, the group executive vice-president in charge of what we call “transversal operations”, who in turn reports to one member of the management board. Three years ago the CEO of Axa decided that while the group would remain completely decentralised, for some functions we needed better synergy and co-ordination. Those functions are IT, procurement, customer care and distribution, global programmes, operational excellence, plus Axa Group Solutions, which is an internal consulting unit.

Prior to joining Axa you worked for many years in manufacturing industries. What struck you most about moving into a financial services environment?

The first thing was culture. The culture of “reduce costs” that is common in manufacturing is not there in Axa. That means we must permanently support the businesses in order to reduce expenses. Although the financial industry in general, and the Axa group specifically, went through a financial crisis between 2002 and 2005, things are better now. All the insurance companies will make big profits. Management is now pushing us to improve the business and generate significant growth. For people within the finance industry it’s difficult to continue to reduce spend when the business is growing.

The second thing is that it’s more complicated to buy IT and general expenses than it is production materials. There is still a view in this profession that manufacturing procurement is more important than financial services procurement. I can tell you that’s wrong, because it’s more difficult to manage the procurement process here. We aren’t only buying office supplies or simple commodities, we are buying consulting, legal services, business process outsourcing. For example, Axa decided to outsource a call centre and transfer 250 staff to an outside vendor – people who would be talking directly to our customers. Managing that RFP process and designing a new pricing model with the users was very, very difficult. The same goes for our infrastructure contract with IBM, which involved five of our people working full time for six months.

The third big difference is that in manufacturing when you buy production materials the level of quality is easy to check – electronic components, for example, are either good or not. But as soon as you are talking about cleaning, catering, consulting, outsourced services, it’s very difficult to assess the level of quality.

What does senior management at Axa expect procurement to deliver?

Three main things. The first thing is clearly to contribute strongly to the cost-reduction process in Axa; we are the catalyst for that. The second thing is to maximise the advantages of the group’s size. The management board understood that it would be better to position Axa as a large, unique customer to our main vendors instead of lots of Axa subsidiaries going to the same supplier. The third mandate is to support the business in selecting the best suppliers, getting the best prices, the best level of quality and so on.

How strong a mandate is it in practice?

The mandate is well known. The group’s executive committee, which consists of the five management board members plus the main business unit CEOs, has agreed to the mandate given to group procurement. In practice, it is mandatory for people at the local level to use the procurement process and preferred suppliers. I don’t say it is done perfectly; in fact, today I would say 70 per cent of Axa employees are supporting the procurement function. Some people are still reluctant, particularly because they are used to dealing with certain preferred vendors and they don’t want somebody else telling them they have to put them into a competitive bid situation. But if we face an issue locally, it’s discussed at CEO level.

Another example that shows the management board is really supporting the procurement process is that at the beginning of 2005 it decided to set up Axa standards to reinforce alignment and co-ordination in the group. Today within Axa we have 11 standards and the procurement function is one of them. The Axa procurement standard defines the organisation, processes and tools and the reporting system. It’s written, everybody knows it and each procurement entity has to implement it at a local level. 

Claims are a huge cost for insurance companies. What role does Axa procurement have in this area?

When I joined Axa, executive management asked me not only to set up a group procurement function, but also to manage insurance procurement. I don’t think any of us really knew what that meant at the time. Every year, Axa pays out billions of euros in claims costs. Behind that you have a lot of vendors – car repairers, painters and so on – but it was regarded within the group as a paying rather than a buying process. At the beginning we faced some resistance from claims, marketing and distribution. We all needed to be convinced because the change involved the customers; Axa’s job was simply viewed as a payment to the customer.

In deciding to change from a paying model to a buying model, we needed to change completely the mindset of our own people. But we also had to sell the new solution to customers – who, if they had an accident, were used to having the right to take their car to any garage to get it repaired – as well as the agents and brokers in our distribution channel, who manage the claims process on behalf of Axa. We are using the maturity of our UK process to convince other entities.

How have you gone about that?

It wasn’t simple, it took time. We decided to change our organisation a little bit. Now we have within Axa a group claims department – a small team at headquarters level – and a separate insurance procurement group of 30-40 people spread around Europe, Japan and Canada that reports into claims and works closely with them.

Two things have helped to convince people. First, pressure from the management board to reduce claims costs. In the insurance business we have a measure known as the combined ratio, which tracks the performance of our property and casualty (P&C) business. It’s a well-known KPI that is shown to financial analysts and so on. The executive management wanted to reduce drastically the combined ratio, and the only one way to do that is to reduce claims costs. That meant a huge target for people in the claims department.

The second thing that helped is that as a procurement group we said that as well as reducing costs we would also improve the level of service quality. If you can improve the process of, say, repairing a vehicle or decorating someone’s home you are helping to ensure better customer retention, so that they buy our policies rather than another company’s. We have to be careful to balance cost and quality, otherwise you are in danger of upsetting the customer. A proper model is to select and contract with the right vendor and to make claims management a competitive advantage.

In France at this time, for example, we had 3,500 selected garages. It’s very difficult to monitor and guarantee quality when you have that many suppliers. Now we have a contract with only three repairer networks and with each of those we have a very clear service-level agreement. They have to follow our target in terms of the level of quality. They have to manage their network of garages, while we have only one provider.

How much of your attention, as a group procurement function, is on claims?

At the end of 2005, about 35 per cent was on insurance procurement. In 2006 it will probably be 40-45 per cent. We are absolutely sure now that it’s possible to manage claims as a normal purchase and save a lot of money. In car repair, we can save more by using the “repair factory” model. With the legal firms we use, it’s more difficult. We have to be careful to find the right balance between cost and quality. It will be the same in the health domain, which we will get involved in and bring value to this year.

Health insurance will be a tougher nut to crack than motor insurance, won’t it?

It will be more complicated, yes. But at the same time Axa procurement is now able to negotiate and contract with doctors and hospitals if they can deliver the best quality at the best price. So why not? When we started out on an RFP process with law firms, I thought 50 per cent wouldn’t want to play this game and so wouldn’t respond. In fact, of the 72 we started with all but one agreed to make an offer, which surprised me.

Overall, what progress would you say you have made in the claims area?

We have passed the first test, in that we have convinced the businesses that it is possible to talk about “insurance procurement”, that it is possible to negotiate and operate in a similar way to general expenses and IT. We are managing roughly €2 billion of claims costs, and for car repair we now have deals in place with repairer networks in France, Belgium and the UK.

But there is still resistance from the customer. We have worked with our commercial and marketing departments to convince customers to call the helpdesk and go to the garage that Axa wants them to use. We also have still to convince many of the agents. And there are supply market issues. For example, finding companies that will handle the entire repair of, say, a flat – all the painting, plumbing and so on – isn’t easy today; that supply market doesn’t really exist yet.

In terms of how the procurement group is organised, we want to integrate the claims procurement team with the other buyers. The only country where we have good integration is the UK.

What are the main objectives for the procurement function this year?

The first is to continue in achieving all categories of savings, and then to improve the procurement coverage while fully implementing the tools and processes. We have spent quite a lot of time designing a common savings calculation methodology that is now used worldwide by all the buyers.

Is this methodology accepted by your colleagues in finance?

Not entirely. The finance community is considering the methodology as a way to assess our performance. We are now trying to find a process to identify the procurement contribution. One of the main problems is that it’s hard to track the price effect and the volume effect. For example, we may negotiate 10 per cent off airline tickets, but if people fly 10 per cent more of the time the finance view is that we didn’t save money. But it’s not my job, or part of the procurement mandate, to tell people when to travel. I don’t want to be a cost killer, because if I have to go to the businesses with that message the doors will be closed.

Our second objective is to improve procurement coverage. This is a very important KPI for us, because to get a return on our investment in a procurement group of 200 people we need to be involved in each negotiation and in all areas of spend. By the end of 2005, procurement coverage was close to 72 per cent. In 2006, the target is to grow it to 80 per cent by moving more into new domains like marketing, communications and human resources – in other words, the typical areas where it is difficult for buyers to get involved.

We also have a target from the management board that is about the effectiveness of Axa procurement versus our peers – not only our competitors in the insurance industry, but also compared with big companies in other sectors. By the middle of the year I have to report back to them on whether Axa is in the first quartile, the second quartile or somewhere else.

What have you spent the biggest proportion of your own personal time on during the past 12 months?

Three main areas. The first is insurance procurement – I’m a member of the claims board, which means I’m talking a lot to the claims managers, the marketing guys, even to agents and brokers, trying to understand why they want to manage the garages and so on. Second, making sure that Axa is represented at procurement conferences and forums. And third, continuing to manage my network of local CPOs; because I don’t have any reporting line, I must constantly call them, visit them and spend time meeting with their bosses.

How do you ensure that CPOs work on both global and local initiatives? Do you incentivise them financially?

We have to make sure that our global targets and our local targets are integrated. Very often I’m talking to the CPO’s boss locally to make sure we are aligned. We don’t incentivise people at all because it’s not in the Axa style. I have opened discussions about this on several occasions with our HR department, with my boss and with the management board, but the view is that it’s too early to incentivise the CPOs in this way.

If you could change one thing to enable you to do a better job, what would it be?

From a pure procurement point of view I think probably the best thing for Axa would be to centralise the procurement process with the different CPOs belonging to the same organisation. If we wanted to be the most efficient, the best in class, I don’t see any other way of doing that. But centralisation is not the model in Axa, and we can be efficient, with a good level of performance, in the current globalisation model.

The difference a centralised structure would make for procurement is that we would have to spend less time explaining things to people and convincing them, and would have more time to negotiate and be involved in discussions about new products, creative ideas, and so on. But at the moment I am quite unable to say that if tomorrow it was decided to centralise the procurement function we would save X per cent more money.

Factfile: Axa at a glance

• The world’s biggest insurance company by sales (ahead of Allianz of Germany and ING Group of the Netherlands)

• France’s second biggest company (after Total); the fifth biggest in Europe

• Operates in 50 countries

• 50 million customers

• 90,000 salaried employees (c.240 in procurement)

2004 financial results:

• €72 billion revenues

• €2,7 billion profit

 Interview by Geraint John