CASE STUDY - Activity Based Costing Implementation

Sun Life Insurance by Jim Gurowka

Background
Sun Life Insurance is an international insurance company, providing individual and corporate life insurance, group retirement services and benefit management services. The Canadian operations have offices located throughout Canada, with the head office in Toronto. The Group Claims division provides drug and dental claim management and claim adjudication to companies in Canada through its 4 main centres in Toronto, Ottawa, Edmonton and Montreal. Clients include the Federal Government, City of Toronto, Royal Bank of Canada and Magna International.

Business Issues
Several issues have led Sun Life to undertake the implementation of an Activity Based Costing (ABC) analysis. Increased competition, the introduction of new computing technology, and increasing client demands have caused margins to decrease and costs to rise. The increased costs and decreased per unit revenue have pressured management to seek to reduce costs significantly to maintain profitable operating results. Competition and customer demands have forced the organization to dramatically reduce the length of time to process a claim, while also increasing the due diligence performed on each claim. Each processing center performs tasks using different operational processes, and standards with greatly differing processing times for various types of claims. The organization needs to identify the best practice for each process, and institutionalize that best practice across all their operations. To make management and strategic decisions, senior management decided that a better set of decision-making tools were needed in the group claims division. This includes better costing information and better performance data.

Approach
Focused Management Information was engaged to assist the Group Claims division implement and internalize an Activity Based Costing system, and then tie it in to best practice analysis, process improvement and budgeting. A cross-functional team of eight Sun Life employees representing all locations, including group finance, was formed and guided through the implementation process and the data collection with the ongoing assistance of FMI. After a thorough training on ABC concepts and implementation methodology, the team conducted activity analysis on all positions in the group claims area and then created a consolidated activity dictionary and Cost Flow Diagram, which represents all activities and processes within the area, as well as maps the flow of activities throughout the area. "One of the things weve discovered through our work with Focused Management is the simple act of examining what activities occur in which department has yielded valuable insights and caused us to change the way we perform what we do", explains Henry Kowal, senior analyst at Sun Life.

The team, with the assistance of the systems department, collected resource and activity driver information and entered all the information into their ABC software. Activity, process and unit activity costs were obtained and validated by the team and then by senior division management.

Results
The results of the ABC analysis provided a great deal of insight for the Sun Life senior management team, as well as confirmed quantitatively what many managers assumed, but could never prove. Significant differences in activity cost, process cost, cycle time, transaction volumes and unit costs were found both within locations and between the different locations. In some cases, unit costs for the same activity varied by over 300%. These unit cost results varied by type of claim, as well as the experience of the claims adjudicator. When the team looked at cycle time or FTE required to perform a given volume of claims, large differences were found in the efficiency of the four processing centers as well as in the call centers. Some locations could process a similar amount of claims, with a lot less personnel, than other locations. This has led to a review of the activities, tasks and work flow in each location, with a view towards standardizing process steps as much as possible, as well as learning from the most efficient areas. When compared with industry standards, outsource partners and the different claims processing centers, Sun Life has been able to perform extensive benchmarking analysis. The benchmark or best practice data has allowed them to determine how efficient and effective they are, compared with where they can be, and has shown management where to concentrate the process improvement initiatives. The activity cost and performance results have also allowed operations management to assess the "value" or utility of all the activities performed within group claims. Some activities are performed which do not add any value to the process and are being eliminated. Other activities have been found to be value adding, but are performed too often or cost too much every time they are performed. These activities are in the process of being redesigned, so they will be performed at the right time and cost.

Action Steps
Faced with all this great new information, Sun Life, like all organizations, had to determine how best to use the information and analysis to make changes in the way they run the business. The first step was to present the analysis to operations management in each of the four processing locations, as well as to senior management. This was accomplished through a full-day management briefing and workshop. The workshop provided managers an opportunity to "dive" into the analysis and become comfortable with the results. Once they were comfortable with the results, the ABC project leader then led the managers through an analysis of where further detail is required and what data the managers need to see on a go-forward basis. Management then brainstormed all the uses of the ABC results and prioritized which uses were most immediate. They then assigned responsibilities and resources, to make sure the actions were achieved. We have found that the management workshop is a critical component in obtaining management buy-in, as well as getting management to internalize the next steps with regard to the ABC analysis. Following the ABC management workshop, the ABC team and the operations management set about on several action steps. The first priority was to conduct best practice analysis on their operations. Process and work steps were shared amongst the various locations, and best practices were implemented across the locations. This is an ongoing piece of a larger process redesign and improvement project. Ongoing education has been a key component in the overall strategy to ensure managers understand the data and know how to use the information properly to make decision. The continuous training and working with management has helped management understand the results and has promoted buy-in on a continuous basis.

The ABC results have focused managements attention on the importance of measurement and the management of those measures. The time, quality, quantity and financial data provided by the ABC analysis has reinforced the concept of management through measurement within Sun Life. Decisions are now beginning to be made within an overall measurement and management framework. A major focus for all managers within group claims is now the management of unit costs across all the activities. With claims volume increasing at a steady rate, a reduction of the unit cost of processing claims should result in an overall cost reduction for the division, and an increase in profitability. By using the ABC data, managers have been able to significantly reduce the absolute activity cost, as well as the unit cost of the major claims processing activities. "As a result of the ABC analysis, we have seen over a 10x reduction in expenses compared with the implementation costs of ABC", explains Luc Chouinard, Manager, Expense Management. In order to evaluate the progress being made with all these action steps, the ABC results have been updated several times, and trend analysis has been undertaken to monitor the results on an activity basis. These updates are being completed quarterly.

Next Steps
As a result of the initial ABC analysis, several next steps are in the process of implementation. These include the roll out of ABC within other divisions of Sun Life, the integration of the ABC results with ongoing NQI and ISO initiatives, and the ongoing use in process redesign initiatives. The current ABC analysis concentrated on activities by position and their associated cost, quantity, quality, cycle time and unit cost calculations. As the ABC analysis becomes further refined, individual customer profitability will be analyzed. There is a recognition that customers have different profitability characteristics that have an impact on service pricing and profitability. As a next step, activities will be costed at the unique customer level to determine customer profitability.

Summary
The ABC system implemented within Sun Life Group Claims has helped to realize significant reductions in operational costs within the claims processing areas. The ability to compare the activities performed in different locations has allowed operations management to install best practices observed at each location throughout all the centers. The ABC information has acted as an important driver in implementing a measurement based management system, as well as helped realize concrete results. ABC has been a catalyst for change within Sun Life.