My first job after university was in the IT department at Royal Insurance, working in one of hundreds of pod cubicles and doing whatever the business dreamed up that day (think Dilbert cartoons and you’ll be frighteningly close).
A car crash approach
Royal Insurance at the time had a mantra of being “the biggest insurer in the UK”. They sold policies to anyone and everyone in order to achieve it. IT were tasked to build and adapt systems to facilitate this, and also to create applications based on completely random ideas.
Justifications for requests could be obviously hooey, such as a plan to spend 3 months making something that would save people 10 minutes per day. In the business case, this multiplied out into saving x number of headcount across a year.
Whereas in reality people saving 10 minutes a day would just go home a little earlier or spend slightly longer on something else. 10 minutes is not enough to make a difference, though that was no obstacle in those carefree days.
Even straight out of university, I could see that this approach was a car crash and made no economic sense. But I was just a graduate trainee so I kept my mouth shut and did as I was told.
Finally, some sanity
Eventually, someone at the top realised how much money was being lost by this whole approach and changed the mantra to being “the best insurer in the UK”. Still a high-minded vision, but now the aim was to be profitable rather than just to sell a lot. And they shared this vision with the whole company in one very easy to remember target KPI to give us a goal to aim at:
103.5%
In company briefings, management explained this random number and opened our eyes to a whole financial structure we’d never known about. At its simplest, insurers charge premiums and they pay out for claims plus all the costs of running the company. In those days, insurers did not expect premiums to actually cover the outgoings. Instead, there was so much money paid upfront by policyholders and savings rates were so generous that the investments made enough interest to turn the loss into a profit.
Royal Insurance were now faced with falling interest rates, and the ratio of claims plus other costs was about 107% of the premium income. They could no longer sustain big operating losses and still make a profit after investment.
So they set a KPI target to get that ratio down to 103.5% and shared it with everyone. To be clear, the outgoings would still exceed the premium income by 3.5%. But that drop would be enough to let the interest rates create a bottom line retained profit.
Making it real
That single figure of 103.5% was used widely on posters and company templates. A simple reminder that even in a big company, each person can make a small difference.
And they tied the annual bonus structure to achieving the target as a company. We all had to work together to receive the reward.
Now the claims handlers felt they were making a difference when they paid attention to potential fraud. The sales staff felt it mattered if they offered random discounts to buy business. And back office staff like myself felt empowered to query whether projects were worth the expense they involved. We could point to the 103.5% and the shared goal helped us focus.
In a big company, each person can only make a tiny difference. But when we all made tiny differences in the same direction, it all added up to significant movement. At each company briefing we heard our progress until we successfully reached the target and received the bonus.
At which point of course they moved the goalposts….
Why it worked
The days of high interest rates are now long gone, and all insurers now have ratios well under 100%. But at the time, Royal Insurance’s approach was revolutionary. Not just by setting a goal to bring the ratio down, but by sharing it with all the staff and encouraging them each to play their part. And by clearly tying individual success (a bonus) to the company success (better profitability).
I have worked in big companies with 100,000+ employees, and in smaller ones with less than 20. Aligning everyone around a shared goal is so much easier in small companies. People see the difference that they can make and are more motivated to do a little extra. But I always remember the power of making a single KPI very easy to understand and relate to.
Setting your own target KPI
If you would like assistance in creating worthwhile target KPIs, schedule a no-obligation call. We can help you with training to make strategy and finance easy to understand for all your staff, so that they will be motivated to help you achieve your goals and vision.