Insurance companies must effectively manage expenses to thrivein today's increasingly competitive marketplace–some will need todo so to survive. The trouble is most companies struggle with theprocess.

Company “A” executes one chainsaw layoff massacre after another,resulting in a permanent morale malaise. Conversely, Insurer “B”avoids the chopping block like the plague, periodically trims, andgets a few short-term, painless gains.

Both achieve band-aid solutions, but neither solves itslong-term competitive problems. Where do you cut, how much isenough, and will it ever make a difference?

Insurers can look to nature for answers here. Arborists knowhealthy trees require a sound fundamental base of good soil,nutrients, climate and proper planting. Given this, trees flourishbut eventually need pruning. Otherwise overgrowth occurs, newbudding is hindered, and disease and weather threaten. Soundfamiliar?

Given an efficient organizational structure, competitiveproducts, market potential and talented people, an insurer shouldcompete well. Yet even growing, profitable companies need along-term expense management plan. However, leaders often make thesame mistake my dad made pruning in the backyard–they hack too muchoff. The resulting shock sometimes causes permanent damage.

When today's employees hear cost-cutting rumors, most react ashorrifically as mom did when she caught sight of old pop, sawingtree limbs.

In Company “A,” office doors get closed, anxious speculationmounts, and people gulp antacids. Productivity drops like a rock.Some CEOs eventually become casualties. A merger or acquisition isanother's fate.

Meanwhile, benevolent Insurer “B” avoids sacred cows and cutscarefully, but like the timid backyard pruner, nothing meaningfulis attained and the organization never reaches its potential.

All this angst is unnecessary. Companies can achieve long-termfixes. I learned literally at dad's feet in the backyard.

Arborists now trim and care for my trees. The upfront expenseisn't pleasant, but well-pruned trees look good, and the expert iswell worth the cost. Likewise, insurer CEOs can seek outside helpto analyze their companies and design solutions to long-termorganizational challenges.

However, whether firms go external or internal, it is importantthey avoid a dictatorial top-down process. Employees will buy-in aslong as they understand the need for long-term efficiency and canparticipate in the planning and implementation phases.

Let's assume your company's fundamentals (mentioned earlier) aresound, and you want to tackle expenses. A three-step approach tomanage this is often helpful.

o Step one, make sure all employees understand what's expectedof them. You need–if you don't already have it–a long-term expensemanagement goal.

It all starts with an annual expense ratio target. People mustunderstand why this objective is needed so they can do their partto contribute.

“Expense allowables” help employees grasp this concept. Anexpense allowable is a formula that determines how much money yourteam or unit can afford to spend, based on what they do and thevalue they bring to their stakeholders.

These numbers should tie into your company's strategic plan andproduct pricing assumptions. Your teams or units eventually evolveinto mini-profit-centers that manage revenue and expenses to attainoperational profits.

Expense allowables get people focused. They translate intomanageable individual and team goals.

o Step two requires you to give your people the properorganizational structure, processes and tools needed to do thejob.

This is critical to achieving your expense goal. Step tworesolves such problems as self-serving fiefdoms, fractured workprocesses, poorly designed jobs, inefficient computer systems, toomany managers, and dead-end career paths for technical people.

Your employees, guided properly, should create and implement thedesired changes for best results.

Companies often struggle with this second step. Most are oftentraditionally structured companies with defined functions such asunderwriting, claims and loss prevention. These areas typicallyevolve into fiefdoms that resist change, protect budgets andcommunicate poorly with their functional peers.

The result is an internally focused silo. Frustrated customersdeal with multiple insurer contacts, and often the left hand isn'tsure what the right is doing.

Fractured work processes plague other insurers. A claim filepasses from one employee to another, then gets buried in amanager's paper stack. These firms have more handoffs than anOlympic relay race.

Many carriers suffer from dead-end career paths. Giftedtechnical people get promoted to managers in these organizations.Sometimes, these technicians-turned-supervisors are successful.Usually they're not, the Peter Principle gets upheld yet again, andthe employee goes elsewhere with their expertise.

The good news is these problems are solvable, and you don't evenhave to uproot the tree. An expert can guide you. They'll useindustry experience, best practices and your brightest employees tohelp create and implement the desired changes.

Once you've implemented the first two steps, you've planted theseed for the next initiative in this process.

o Step three for effectively managing expenses is creating anownership culture. Translated, this means employees who aremotivated to mind the store and turn a profit.

How in the world does one do that? The answer is team-basedincentive compensation programs that reward profitability withindividual quarterly bonuses for all team members.

Once people understand how their contributions and those oftheir profit center impact the bottom line and their ownpocketbooks, private enterprise instincts take over. They designmore efficient work processes and eliminate hand-offs. Slackersdisappear as peer pressure mounts to work hard.

Amazingly, interpersonal conflicts even diminish. You refereefewer squabbles as teams settle their own differences to preventquality issues. Customers get excellent service because it makessense to do so.

Your teams develop a bottom-line mentality and a hunger forunderstanding insurance company finance, so you teach them. This isnot a traditional profit-sharing program where employeesmysteriously receive or miss annual payments. People know wherethey stand, what they must do, and naturally operate as truebusiness owners.

The old “it's not my job” mentality disappears as peoplecross-train, pitch-in and work together.

The result is happier customers and a healthy bottom line.

Put it all together and you have a perpetually self-pruninginsurance company. Large periodic hacks become unnecessary becauseeach branch of the organization naturally trims the fat as theygrow. Now, if only my backyard tree could do that.