At Farmers Insurance a while ago…
(Okay, let's be honest. It's getting to the point where any story I tell about something I did at Farmers Insurance is a while ago. I just point this out to make sure that everyone understands that any of the following has absolutely no connection to anything going on in the company nowadays. Let's move on.)
Quite a while ago, the Farmers Insurance Internal Audit department was working closely with our Claims Department on improving a number of their processes. At the same time, an interesting thing happened. The Claims Department brought in the well-known management consultants McKinsey & Co. to do some deep research and analysis of claims operations. Because of the relationships we had developed, we got to see a copy of the final report.
Our first reaction? "We could have done that…and for a whole lot less money."
Looking back, I'm not nearly as convinced that we really could have done all that — accomplished everything McKinsey did in their review. (And I think that, at the time, we also realized we couldn't do it. But one must have one's confidence.) But, I do know there was some of the analysis and research we could have just as easily and competently accomplished. In fact, we were already doing some of that research and analysis. In fact, some of our research and analysis was already leading to the same changes McKinsey suggested.
But McKinsey had "The Name."
This story came to mind because I am busily (frantically) trying to finish my next column for Internal Auditor magazine. It is a discussion of the role of value versus price as it relates to internal audit services. (You want to know more? You'll just have to wait until the December issue to find out what I wrote. And, yes, that is how long the lead times are for magazine content.)
But, as I wrote the piece, I found myself typing these lines, "While there may be some organizations that desire the Tiffany's of internal audit, few (if any) will pay that extra price for a name. The exception is the selection of an outside audit firm, but that is a discussion for another day."
I have a feeling that line will not make it into the final column. But, nonetheless, I think it is a point that internal audit departments need to keep in mind. Organizations pay for some service providers — even for services that internal audit may be able to provide — strictly because of the name.
When boards and executives are choosing external audit firms, price and expertise are obviously part of the equation. But a potentially inordinate amount of attention can be placed on the name that is being purchased. And, actuallly, this makes all the sense in the world. A firm that has a name with a great reputation is expected to bring a high degree of expertise, professionalism, and positive intangibles to the project. If the service provider does not have a name — a great reputation — then they are less likely to be hired. No matter how experienced, no matter how valuable, no matter the benefits that will be gained by hiring them, no one wants Fred's Auto Body and External Audit Shop to be signing off on their financial statements.
And yet, boards (and internal audit departments whose job it is to help provide advice on such matters) need to determine why they are paying the extra price for a name.
And they need to ensure it is really worth it.
Let's go back to Farmers Insurance and McKinsey. Why was McKinsey chosen?
Now, before I give you my made-up answers, I must quickly point out that I was not a part of the decision-making process (surprised?); know nothing about how the decisions were made; and don't even have the vaguest hints, inuendoes, or scuttlebutt on how it all came to pass. The following is just conjecture based on the way I have seen many other organizations make such decisions.
First, it is probably safe to say a significant reason for choosing McKinsey was the reputation behind the name. With that reputation came more certainty that the results would be valuable — that there would be immediate value in the information that was received. (And, having seen those results, I can say that they did provide value in both the short and long terms.)
But, I am fairly certain that part of the reason that choice was made was simply the opportunity to say/brag, "Yes, we brought McKinsey in on that one." It provides fantastic optics with stakeholders, and anyone who gets to make such a statement can do so with just a little bit of swagger. (Compare these two statements: "We had our internal audit department do an analysis" versus "We had McKinsey come in." As proud as I am of the profession, I can see where the latter carries more weight than the former.)
And, there is one more thing — probably not something that was thought about as part of the decision, but part of the after-the-fact proof that a good decision was made.
Boy, McKinsey's final product was pretty.
As I've mentioned, the contents of the final report were very good. But there is no doubt that there was a lot more attention paid to those results because of the beautiful wrapping in which the results were contained. (A lesson for internal auditors — how pretty is your final audit report? And, yes it matters.)
And, as it was with McKinsey, so it is with the choice of the external auditors. It is about what the name — the brand — brings to the table. It is the expertise, it is the panache of hiring a prestigious firm, and it is about the professionalism (the prettiness) of what will be delivered.
So, what about the internal auditors?
First, we are not trying to become the external auditors. And there is no doubt that external experts — consulting, IT, cyber, etc. — are integral to an organization's success. So, none of this is specifically meant to be a call to arms for internal audit to battle external providers. But, internal audit does need to be sure that it is considered in those situations where it has the expertise to do the job.
However, to be considered — to have an equal chance at providing those services — internal audit needs to build its brand within the organization. We will never be a McKinsey. (We don't necessarily want to be.) And, we will never have the name recognition of the major external audit and consulting groups. But, if we market ourselves and our value within the organization, we can build a reputation that, in some instances, will rival those of the name brands.
And one other thing; we can do the job for a lot less money.
How's that for adding value?