AmFam Insurance to Develop Project Investing Methodology

Case Type: operations strategy, optimization; organizational behavior.
Consulting Firm: PricewaterhouseCoopers (PwC) Advisory first round full time job interview.
Industry Coverage: health & life insurance.

Case Interview Question #00899: Our client American Family Insurance (aka AmFam) is a private insurance company that focuses on property, casualty and auto insurance, but also offers commercial insurance, life, health, and homeowners coverage, as well as investment and retirement-planning products. A Fortune 500 company, its revenues for 2008 were over $6.7 billion.

The year is 2009. In 2007 (two years ago), we helped the client develop their strategic plan, which would govern the direction of the company over the next five years. The client has explained the strategy to the individual business units, and asked the units to submit ideas for new initiatives that would support the strategy. The business units have submitted approximately 80 initiatives all together. It is now 2009 and the economy is in a recession. Due to the increased uncertainty in the market and the difficulty in accessing capital, our client will have to be more selective with the initiatives that it selects to move forward. The client has hired our firm to help them develop the criteria and methodology to enable them to prioritize the initiatives so that they can move forward with implementation as soon as possible. How would you go about it?

Possible Answer:

Part 1: Case Facts

Behind the Scenes: Let the candidate layout a framework and brainstorm what criteria he/she would consider in developing a prioritization schedule. Ideas might include: strategic fit, financial value, ease of implementation (i.e. low hanging fruit), growth opportunities etc.

The interviewer should reveal the following case information when asked a relevant question:

The strategic plan included 3 main goals for the insurance company:

1. Increasing scale of the business

a. Increasing sales volume of insurance plans.
b. Improving the efficiency of the administrative functions and overall organization enabling them to handle larger workloads.

2. Increasing customer involvement in insurance plan selection

a. Creating programs/tools to enable customers to take more ownership of plan selection (note: this is industry trend that our client doesn’t want to be left behind).

3. Rebuilding the brand

a. Our client is viewed as a traditional brand, and they would like to unveil themselves as a 21st century healthcare insurance provider.

b. Attract more new customers.

* All three of these goals are equally important.
* An initiative can support more than one goal.
* The client wants diversification within all the initiatives chosen, so that there will be an equal distribution of initiatives supporting the three goals.
* Due to the difficult economic situation, it is important to the client to see results/impact of initiatives as quickly as possible.
* There is a steering committee that understands the work of the individual business units and will impartially evaluate the effectiveness of each initiative in addressing the strategic goals.
* The company prides itself on being very data driven and is looking for as quantitative a measure as possible.

Part 2: Developing a Ranking System

Interviewer: So, the steering committee has gone ahead and ranked the initiatives based on their fit with the strategic goals. Exhibit A below represents a sample ranking as determined by the committee, with only 4 initiatives (instead of all 80) and 2 goals (instead of all 3). The ranking applies a higher number to a better fit with the goal (e.g. rank of 4 denotes best fit with particular goal; rank of 1 denotes poorest fit with particular goal).

Exhibit A:

Possible Answer:

The candidate should suggest that a weighted average of the ranks be taken to derive an overall score. Because all of the goals are equally important, the weighting should take a 50% – 50% split between the two goals. If an initiative doesn’t address a goal (as in the two N/A’s), that rank should be considered 0.

Key Insight: Since the ranking system assigns the highest number to the project with the best fit with a particular goal, the ranks for Goal 2 need to be equalized with Goal 1. In this case, the “2″ and “1″ for Goal 2 need to become “4″ and “3″ respectively.

After taking the weighted average, options “C” and “D” tie at 3.5, suggesting the requirement for further analysis in order to prioritize the initiatives. The chart below summarizes the scores (don’t show this chart to candidate).

Part 3: Financial Analysis

Interviewer: So, since two initiatives can tie under this ranking system, what would you do next?

Behind the Scenes: If the candidate does not suggest looking at the financial attractiveness of each initiative, then the interviewer should encourage them in this direction.

Interviewer: How would you assess the financial attractiveness of the initiatives?

Possible Answers:

The candidate may suggest looking at the payback period, IRR (internal rate of return), and NPV (net present value) evaluations. However, due to the tenuous economic situation in 2009, the candidate should primarily suggest a payback period analysis as the leading financial indicator of the attractiveness of each initiative. This analysis could be supplemented with an NPV and/or IRR analysis to understand the magnitude (NPV) and effectiveness/efficiency (IRR) of the investment.

Part 4: Prioritizing the Initiatives

Interviewer: Now that you understand the client’s needs and their ranking methodology, we need to prioritize the list of initiatives. The client’s primary concern is the fit of the initiative with their strategic goals, followed closely by the financial impact of the initiative. Given this information, how would you structure the prioritization plan that we will propose to them for all 80 of their initiatives?

Possible Answers:

The candidate can be creative in developing their methodology, but should consider the key areas of importance to the client (strategic fit with goals, then financials) and develop a structure that is logical, straightforward and intuitive (i.e. not introducing unnecessary levels of complication to the model).

For example, the candidate could move towards stratifying the initiatives into groups. Those initiatives that address all three goals would be in Tier 1, those that address two goals in tier 2, and so on. From there, some combination of the weighted average of the project’s overall rank and payback period or other financial analysis can lead to further stratification within each tier.

Part 5: Recommendation

Interviewer: So, you’re heading into a meeting with the steering committee to present your recommendations for their project investing methodology project. What do you tell them?

Possible Answers:

The candidate should succinctly summarize the methodology that was developed and the criteria that were considered. The candidate should also mention other qualitative considerations that should be taken into account for initiative selection (e.g. synergies between initiatives that may reduce their costs or increase value, political issues of initiative selection between units, bread/diversification of initiatives, competitor responses, etc). The final methodology should be the result of a combination of quantitative analysis and broader managerial thinking.