July 25, 2007

Some tips for managing change

By Peter Larocque

AON REED STENHOUSE INC.

Have you ever wondered why some people put a damper on your great plans to try to make a difference?

Why are you at full throttle and they are throwing out caution flags?

Walk in a bond underwriter’s shoes for a moment.

Their caution revolves around sudden change and its usefulness as an early warning sign of potential problems.

Change in the type of work undertaken — How can your competence cover all disciplines? What have you done to bridge this gap?

Change in volumes of work undertaken — Too much may strain not only financial resources but also staff, controls and equipment.

Change in the geographic location — So you think the grass must be greener elsewhere? Without knowledge gained by partnering with a local, you may be investing some of your hard earned money just to be able to work on a level playing field.

Change in the size of contract undertaken — Why must they question? Can’t they see that this is the “perfect” job for me?

Change in bank usage — Maybe that receivable isn’t as good as you’d like.

Change in bidding ratios — Improved success may mean job buying is taking place

Change in sureties —Three bonding companies in five years can’t be all that bad!

And the list goes on.

Peter Larocque

The essential point here is that higher risk does exist when contractors move from what they know and do well into new areas.

This does not mean that change is wrong.

Indeed to grow, a contractor must introduce change. It means that when change occurs, make certain that underwriters understand it and show confidence in your abilities to assimilate this change.

OK — it looks like you can manage this change. You have truly partnered and made certain that your surety understands your thought process.

After all, isn’t that why you have invested all of those hours to guarantee their support at your time of need?

Then the unspeakable happens — no support and no time to go elsewhere.

The market has changed and you have not changed with it. In fact, this takes you by surprise.

All the time spent managing your change left you in the dark when it came time to manage the market.

Unless you have positioned yourself adequately, it is not who will be affected but when will you be affected. It is just a matter of time.

What haven’t you noticed in this marketplace?

— Capacity becoming an issue;

— Less competition for business;

— Decisions will become more black and white;

— More information required more frequently;

— Huge accounts need pools, big accounts need partners, small accounts are the easiest to discard;

— Re-underwriting becoming the norm;

— Back to basics is the catch word.

Do you understand the relationship between reinsurers and the impact of poor loss ratios in the USA affecting Canadian underwriting?

Can you appreciate the current mind-set of an underwriter worried about his job?

Worried about the marketplace?

Worried about alternative products?

This is not so unlike the early 1990s where complete classes of business were excluded under treaties.

Today, we have seen environmental, real estate, curtain wall and mining becoming ever so difficult to place.

So how do you manage something out of your control?

Make certain that the underwriter really understands your business by ensuring that you share a mutual plan going forward. Review their analysis, ratios and benchmarks. Know the negatives on your balance sheet and how to address them. Understand the need and use of specific information. Know what is typical margining for your business. Know where you are in relation to your peer group.

It is incumbent upon you to know the ultimate decision maker. Relationships are paramount — insist on regular meetings; social meetings can be better than business.

Tell the underwriter the issues. They will find out eventually. If something is coming, tell them early — they are capable of providing great insight if given the chance. Understand the psychology of losses — back to back bad years spell trouble with a capital “T”. Seek underwriter input on major financial decisions. Different types of contracts can provide relief to your program. Know your alternatives and back up plans. By managing not only your change but also that of the marketplace, you will be able to maximize the greatest support possible. The surety market will survive this cycle. There may be a few tough years ahead but you too will survive. If there is no business targets for underwriters then there is no market. It is up to the brokers to keep alternatives alive. We look at this as an opportunity not a problem.

Peter Larocque is an account manager in the Construction Services Division at AON Reed Stenhouse Inc.

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