New Jersey Insurance

Magnus Holmström

Linkoping University

Case 4-2 New Jersey Insurance Company

The New Jersey case focus on the problem of controlling discretionary expense centers. In this type of responsibility centers it is difficult to find a relevant efficiency measure because the lack of relevant standards to compare the outcome with (lack of std. cost). Therefore most of the control should be on the quality of the work. The cost control should be limited to the ability to stick to the budget. And a compatible budget level can be found in industry statistics or benchmarks as a percentage of total costs or revenues.

I have the following recommendation how to evaluate the performance of the legal department in the case company;

1. Focus on the budget dialog to find a competitive budget level to compare the actual cost with. Use statistics and benchmarks to find a relevant cost.

2. Non financial measures as “number of contracts” are not useful to evaluate the performance of the legal department.

3. Develop quality measures to evaluate the services delivered from the department. Customer satisfaction, delivery time, competence index and complaints are some useful measurers.

4. Overrun of budget at the individual loan section may reflect a heavy workload and a too small budget. I would investigate this situation carefully before I approved any new recruitment. I would also remind the manger of the importance of holding the budget and ask him “what did we miss in the budget dialog?”

Discretionary expense centers such as LAW, HMR, R&D and GMA are best controlled by a combination of budget cost and quality measures.

A relevant cost level can be found in industry statistics and benchmark. Quality of work is normally measured by customer satisfaction index, lead time and number of complaints.