Answer

Assignment 1: Strategic Consequences of Fraud

            This paper presents a review of strategic consequences arising an employee fraud and recommends possible claims process improvements. Fraud is a deceptive action geared towards offering the perpetrator(s) unlawful financial or economic gain. Like other claim third-party administrators, our firm handles commercial motor fleet claims for various insurers. Recently the company successfully prosecuted one of its employees, a claim negotiator for manipulating the claim process and miss appropriating a total of £350,000. The employee’s unlawful act imposes severe consequences to the firm in regards to the strategic objectives and goals.

Strategic Consequences for the TPA Arising from the Employee Fraud

            Some of the most significant strategic consequences the TPA is likely to face as a result of the employee’s fraudulent activities are discussed below.

Erosion of TPA’s Corporate Reputation

            Business reputation determines how different stakeholders (customers, shareholders, suppliers, and employees) relate to the firm and its service offerings; thus it is a cornerstone of every brand. Conventionally, corporate reputation has been used as a strategic recruitment, marketing, and sales tool. But in the present business atmosphere especially in the insurance industry, reputation is one of the most critical assets that must be managed (Hansen, Samuelsen, & Silseth, 2008). When buying coverage, insurance consumers are not in a position to observe a definitive performance of an insurer on the implicit and explicit promises entailed in their insurance policy. Therefore, these clients rely on the insurer’s reputation to assess the available coverage before deciding on which product to purchase. Since third-party claim administrators’ activities form part of the insurers’ operations, their reputation directly affects the image of their clients. According to Klein and Leffler (1981), clients pay premium to purchase services from organizations with high reputation. This implies that reputation is significant for the achievement of short-term and long-term strategic goals.

            In the financial sector, fraud is one of the reputation risk challenges that organizations face. In this case, the employee fraud imposes damaging effects to the TPA’s business reputation. Firstly, the employee who worked in a regional branch as a claims negotiator added non-existent third-party claimants to legitimate claims, created false vehicle hire claims and submitted forged documents. These actions led to the loss of funds from the clients. By adding non-existent claimants, the employee increased the clients’ expenses thus reducing their profitability and value.  As a result, the insurers might not agree to work with the firm as their third-party claim administrator due to reputational damages caused by the employee’s actions. Furthermore, the exit of current clients sends a negative message to other potential clients. The loss of clients and potential clients due to bad image reduces the firm’s ability to attain its strategic objectives and goals.           

Destruction of Client/Customer Relationships

            The insurance industry is very competitive, and expansion goal of the businesses and retaining existing customers is even more vital. With high customer acquisition costs, managing the relationship with the existing clients is paramount. TPAs must manage their relations with both the insurers and claimants as clients to stand a chance of achieving their business objectives. Clients are the most valuable piece of all businesses; thus the organization must develop a healthy relationship with them to attain success.

            The fraudulent manipulation of the claim process by the employee threatens the existing relationship between the firm and its clients. The Fraud resulted in a £350,000 loss to the insurers and since the employee also added non-existent claims to valid claims, most genuine claimants were not paid as fast as possible. This bad client experience substantially translates into the company’s bottom line. One of the significant roles of a healthy customer relation is that it promotes customer loyalty and retentions (Verhoef, 2013). Customers who have exceptional customer experience in their interaction with a firm are more likely to extend their insurance contract as well as recommend the firms offerings to their friends and families.

            On the contrary, dissatisfied customers tend to switch to other competitors. In this instance, insurers were scammed, and policies holders might have been under-compensated for their claims. All these resulted in customer dissatisfaction that in turn affects the general customer relationship with the company.

            The unhealthy client relation resulting from employee fraud is detrimental to the TPA business operations. According to Beldo (2016), it is twice as easy and less costly to sell to existing clients than to new ones. Therefore, the firm can experience operational difficulties if the existing clients switch to other competitors. With the reduction in customer retention, the firm’s operation cost increases making it difficult for the realization of its goals.          

Diminishing profitability and Growth Rate

            Employee fraud also threatens the TPA’s profitability and short-term growth significantly. Like any other business establishment, one of the TPA’s strategic goal is financial growth. To achieve this goal, the firm must improve its profitability and reduce unnecessary operating costs. However, in this situation, the employee misappropriated £350,000 belonging to the clients. This loss is relatively quantifiable and attracts different cost obligations to the organization. Firstly, the firms used resources to support the investigation and prosecution process that revealed all the criminal transactions and the amount embezzled. Secondly, the employee’s unlawful transactions reveal a significant problem with the claim process that requires addressing. Improving the system and processes may cost the business additional funds. In addition to the £350,000, these direct cost will reduce the company’s profitability in the current financial year.

            Similarly, the employee fraud attracts some indirect costs detrimental to the business’ short-term profitability and growth. As discussed earlier, the case is damaging to the company’s image and reputations. Therefore, some clients may temporarily stop working with the firm to manage their claims. Also, the fraud situation erodes the existing relationship the firm has with its customers especially those that were affected by the employee’s activities. In both cases, the business is likely to lose some current and potential clients. Reduction in the number of clients reduces service sales and profits in general.

            Moreover, the firm also stands to incur recruitment costs to replace the employees released in connection with the fraud. The claims negotiator used the team leader’s credentials to pay out claims above the required maximum of £5,000. This shows that the team leader failed to take the necessary precautions to protect the passcodes thus they should all be released from the job. All these costs reduce the firm’s value by reducing its profitability and expansion.

Disruption of the TPA’s Culture and Morale

            According to Craig (2018), the traditional management style is not viable in the current business environment. For a business to succeed the strategies must be aligned with the organization structure. Strategies alone cannot guarantee business success; thus they must be developed around the culture. However, this also implies that any factor affecting the organization culture equally impact business strategies. The effect of employee fraud on the firm’s culture and morale can be devastating. In his manipulation of the claim process, the employee also disregarded company policies by using team leaders details to initiate limited claim amounts. The employee’s actions can be embarrassing and troubling to the fellow employees and managers that work in the company especially those in the regional branch where the fraud occurred. To management and the executive, it is even more disturbing. It raises the question of remuneration and employee compensation.

            When employees are embarrassed by their place of work, their productivity can drop leading to more performance and financial problems. Similarly, since the claims negotiator used the team leader’s details to pay out claims above the required maximum of £5,000, the management and other team leaders may result into authoritative leadership in an attempt to prevent the situation from happening again. This can bring disruptions in the business operations and consequently employee dissatisfaction. The disruption of the firm’s culture equally disrupts all the efforts geared towards achieving strategic goals.   

Appropriate Responses to the Strategic Consequences

            All the consequences arising from the employee fraud are unfavorable to the attainment of the TPA’s strategic business goals. However, specific measures can be applied to manage strategic concerns.

Response to Erosion Corporate Reputation

            Communication is the first appropriate response to controlling reputational risk. Since the TPA has successfully prosecuted the perpetrator, it should share the same with the clients. The firm should also inform its clients about some possible claim payment irregularities on the motor fleet account and highlight measures put in place to enhance the claim process. As earlier mentioned, clients rely on the TPA’s reputation when purchasing claim administration services; therefore, effective communication with them during such a time show a sense of appreciation of their trust and loyalty. With the availability of social media, negative information about the company can be so damaging if not effectively communicated to stakeholders. The TPA’s reputation faces a significant risk if the news reaches the clients without proper communication. This makes the clients feel unappreciated and post derogatory comments on social media.

            A suitable reputational risk management process should follow effective communication with the clients. According to Eccles, Newquist and Schatz (2007), reputational risk management process involves assessing the TPA’s reputation among various stakeholders, evaluating the reality concerning the fraud situation, addressing the reality-reputation gap, monitoring changing expectations and opinions, and appointing a senior executive to oversee the process.

            Assessing the TPA’s Reputation

Reputation is simply the perception towards the organization, and in this stage, the opinion must be measured at different levels in a way that is objective, contextual and quantifiable. After, communicating to clients and other stakeholders about employee fraud, they will have different perceptions about the TPA and its services. Thus in this stage, the relevant questions to be addressed are: What is the TPA’s reputation regarding motor fleet claims services and other claim management services? How do these perceptions compare to those prior to the employee fraud? Appropriate techniques available for assessing the firm’s reputation include public opinion polls, surveys of stakeholders (investors, clients, employees), focus groups, media analysis and industrial executives (Eccles, Newquist & Schatz, 2007). Even though all these techniques are applicable, structured and detailed media analysis is more effective in the current business environment since the media shapes the opinions of all stakeholders.

            Evaluating Reality

The next stage in controlling the reputational damage is by assessing the TPA’s ability to meet its stakeholders’ performance expectations (Eccles, Newquist & Schatz, 2007). Employee fraud highlighted serious inadequacies in the claims process. There is a system security problem, mismanagement of employee passwords, poor oversight of the claim management process and lack of effective communication between the TPA and the insurers. The question to be addressed in this stage is whether the firm can meet the expectation of its clients despite all the shortcomings.      

            Closing Reputation-reality Gap

When the TPA’s reputation exceeds its reality, the management can improve its ability by improving the claims management process by addressing the challenges or lower stakeholder expectations. Similarly, if the reality exceeds the reputation, the gap can be addressed through more corporate communication channels and investor relations.

            Monitoring Changing Expectations and Opinions

To realize the effect of the employee fraud and effectiveness of the reputational risk management the changes in stakeholder opinion and perceptions must be observed. This is a tough task, but over time a picture of perception develops. For instance, a consistent survey of clients, employees and other insurance industry players can reveal changes in priorities and beliefs (Eccles, Newquist, & Schatz, 2007). From such data, the TPA can determine whether the gap between reality and reputation is widening or materializing.    

            Putting a Senior Executive in Charge

After communicating the employee fraud to stakeholders, assessing the TPA’s reputation, evaluating the reality, addressing the reality-reputation gap and monitoring changing expectations cannot occur naturally. One senior person has to be given the responsibility to make the management process happen. The task can be offered to an executive with management control over resources required to handle the function such as the head of risk management or Chief Operating Officer (Eccles, Newquist, & Schatz, 2007). The appointed executive should submit a periodic report to the board and top management on how the critical reputational risks are being handled.  

Response to Client/Customer Relationships Destructions

            Healthy customer relationship is vital for the TPA’s strategic growth, but employee fraud imposes disruptions to this relationship (Verhoef, 2013). The key the maintaining the relationship the TPA has with its clients is communication. The firms should initiate a conversation with the clients about the fraud situation. This will enable us to find out the needs of the clients and address them before their shit to our close competitors. For example, in this case, the employee misappropriated a total of £350,000 belonging to the insurers. One of the manipulation of the claim process was submission of forged documents. In response to this occurrence, the insurers may require that the claims documents be submitted through a senior official such as a claims manager instead of direct submissions to them form claims negotiators. Through effective communication with the clients, the firm can address such issues to protect its client relations.

            After knowing the customers’ needs through communication, the business should work to surpass consumers’ expectations. The employee fraud affected multiple clients, and after effective communication with TPA, they may have a certain expectation that must be met for them to continue working with the firm. For instance, after the employee fraud, the insurers expect the TPA to address claim process inadequacies. However, the firm should go further and address every weakness exploited by the perpetrator within the shortest time possible. This will ensure client satisfaction and cement the relationship.

            To improve its connection to the customers, the TPA, should ask for feedback from the client (Verhoef, 2013). The fraud affected both the insurers and claimants. After communicating the case to them, many will have different opinions. The firm should ask for these opinions and act on them quickly to show the client that it cares. The feedback can be obtained through surveys or comment cards. The customer comments must be collected and addressed to improve customer satisfaction promptly.   

Response to Diminishing Profitability and Growth Rate

            The employee fraud imposes certain direct and indirect costs for the firm. Since the scandal led to the loss of £350,000, the company may be required to refund the amount to the affected insurers. As management, we can respond to this by channeling the perpetrator’s employee benefits as well as appealing to the relevant authorities to sell the employee’s assets purchased with the fraud money to cover the payment. Secondly, employee promotion can be undertaken to eliminate the recruitment cost of replacing the released employee(s). In addition to effective communication of the company’s situation to stakeholders and various measures to improve customer relations, the TPA can advance its operational efficiency to improve its profitability in the short-run. Also, the company can use already available physical systems to avoid incurring costs of purchasing new claims management systems. As evident in the employee’s manipulation, the process can be enhanced using available equipment personnel.

Response to Culture and Morale Disruptions

            Culture and morale disruption is one of the strategic consequences of employee fraud. Since business strategy is closely associated with the culture and morale of employees, the TPA must embrace the culture of the firms. The clan organizational structure enabled the employee to obtain the team leaders log-in details and participate in different stages of the claims process. In response to financial crime, the management should not try to enforce hierarchical control on employees to prevent the situation from occurring. Instead, it should remind the employees of their contributions in the TPA’s success. Every employee satisfied knowing that they have played a part in achieving the company’s targets.

            To prevent workers from being embarrassed by occurrence, there should be total transparency between the head office and all the employees (Seay, 2019). Once the workers know the details to the situation, they should be given a purpose by reminding them of the organizational culture which outlines participation and collaboration to achieve the set targets. This will enable the employees to come up with possible solutions to enhance the claims process and salvage the firm. This has worked in other corporations. For example, after 9/11 the Southwest Airline embraced its culture and employees before profits and failed to lay off its employees. In response, senior employees decided to work without pay and the firm was able to realize profits for the year.

Recommendations to Improve the TPA’s Claims Process

Exchange of Relevant Information

Exchange of relevant information between the insurers and the TPA is one of the appropriate improvements that should be made to the TPA’s claims process. The claims negotiator managed to add non-existent third-party claimants to legitimate claims, create false vehicle claims, create claims on lapsed policies and submit forged documents because there were no proper exchange channels for relevant claims information between the firm and its clients. With the effective exchange of information, the transactions would have been flagged for potential fraud.

Enhancing Claims Information System Security

To improve the efficiency of the TPA’s claims process, the confidentiality, integrity, and availability of the information must be upgraded using appropriate security tools (Bourgeois & Bourgeois, 2017). The employee added false information to computer systems because there is no restriction to who can access and alter claimants’ information. To prevents such cases from happening, the access control tool can be used as a general information security policy. Access control tool regulates which system users are authorized to delete or add information to the system. For every claims information TPA wishes to manage, list of desired users with authority to take certain actions can be generated. The tool assigns specific capabilities such as adding and deleting information to each user listed in the access control list (ACL). Only users included in the list can perform those factions assigned.  With this tool in the system, the employee could not have added false information because that is not the desired capability for the position. 

Implementing best Privacy Practices in the Claim Management Process Regarding user Authentication

The employee managed to access the team leader’s password details to authorize payments above the required limits (£5,000). This implies that either the log-in details were easily predictable or shared among employees. This provides a significant security issue for the TPA and makes it possible for fraudulent activities to take place. To make claims process, the passwords should be comprised of obscure characters that are easy to remember by the users but difficult to guess (Bourgeois & Bourgeois, 2017). The log-in details should also be managed regularly to reduce security risk. Also, employees should not be allowed to share passwords to limit the possibility of misuse.

Setting up Organizational Checks and Balances in the Claims Process

In this case, the employee managed to misappropriate large amounts of funds because there was no checks and balances in the process. The same employee processed claimants’ information, submitted claims documents and authorized payment. The firm should establish certain checks and balance in the process to make it easy to identify fraudulent transactions, for example, claim negotiators should neither be allowed to authorize payments to claimants nor submit claims document. Instead, the responsibility should be given to the other employees in the finance department.

Enhanced Oversight

For the employee to add non-existent third-party claimants to valid claims, create false vehicle claims, create claims on lapsed policies and submit forged documents without being noticed by the superior employees shows lack of oversight over the claims management process. Since the claim negotiator was working under a team leader, specific actions like adding false information to computer systems should have been noticed.  To improve oversight in the process, Team leaders and other superior managers should also be able to identify any sudden changes in employee behavior and act on them appropriately. Increased oversight also discourages employees from participating in criminal activities.