Erwin Mallernee, director of risk management for Starbucks Coffee Company, enjoys a cup of House Blend at the company's Seattle headquarters.
mericans' love affair with coffee is almost as old as the nation itself. Cowboys drink it dark, hot, and strong as iron filings. Hostesses serve it in dainty demitasse after dinner. And millions of us, from park rangers to presidents, rely on a steaming cup of java to clear the fog of early morning, to fight the midafternoon blahs, and to provide the perfect finish to a hearty evening meal.
It wasn't until recently that most of us knew anything more about coffee than the brand we chose from our supermarket shelf. Coffee was coffee, no more exotic or sophisticated than staples like salt, sugar, butter, or bread. In the last several years, however, coffee has made a quantum leap from commodity to gourmet delight. Coffee houses, once the dark, mysterious haunts of black-clad beatniks, now are a familiar part of the suburban landscape. Spearheading this cultural transformation has been a Seattle-based pioneer that not only markets an array of exotic brews, but also strives to make each visit to its outlets a pleasant and memorable occasion: the Starbucks experience.
Since the first Starbucks opened in Seattle's famous Pike Place Market in 1971, the company has diligently pursued its mission of educating and pleasing consumers' palates with a tempting and ever-changing assortment of fine coffees. Whether you crave espresso, latte, cappuccino, or just a no-frills cup of House Blend, you'll find it wherever you see the familiar green and white Starbucks logo. Even if you're a tea aficionado, you're in the right place: choose black tea, green tea, herbal infusions, or a variety of Tazo teas. And every good beverage deserves an accompaniment; that's why Starbucks also offers an appetizing array of fresh pastries, cookies, and biscuits. There's Frappuccino®, a low-fat iced coffee drink, as well as a line of premium coffee ice creams. Customers also can purchase coffeemakers, mugs, gift packets ... even compact discs and books. Starbucks coffees are available in supermarkets, and an extensive array of related merchandise is offered online and via mail order.
Since opening its first store nearly 30 years ago, Starbucks has grown to become an international business with more than 2,900 retail locations in North America, the United Kingdom, the Pacific Rim, and the Middle East. Virtually everywhere we are, Starbucks is ... and its thousands of locations, 37,000-member staff, and variety of operations make for some major risk management challenges. In this article we'll talk with Erwin Mallernee, Starbucks director, risk management, to find out the qualities he values most highly in selecting and working with insurance brokers. Mallernee, who has over 30 years' experience in risk management and insurance, is responsible for insurance, self-insurance, safety and risk control, claims management and self-administration, fire protection, risk financing, and risk management information at Starbucks, where he supervises an 11-member staff.
Challenges and rewards
As director of risk management for the world's leading retailer and roaster of specialty coffees, what are some of the biggest challenges Mallernee faces--and what are the greatest rewards? "Our most important task is finding, developing, and retaining good people to meet the challenges and responsibilities of Starbucks' risk management," he responds. "We need partners (Starbucks' term for employees) who are people oriented and who fit in with our culture." Mallernee recruits staffers from two key sources, one internal and one external. "The baristas (espresso beverage makers) in our retail locations are often good candidates because they understand customers and know how to handle customer situations," he explains. "Also, Washington State University has a fine degree program in insurance and risk management; three of our staff are graduates."
The greatest reward of his work, Mallernee says, is "knowing we've prevented or minimized incidents and accidents to our customers and partners. From the start, we build safety and risk control into our store operations and activities, and we take satisfaction in knowing we're part of the solution, not part of the problem. Our approach is not to say, 'No, we can't do it'; we try to understand the risk and seek ways to mitigate it."
Defining the broker's role
What qualities does Mallernee seek in an insurance broker? "We look for a broker team that will function as an extension of our risk management department," he responds. "These are people I want to work with, selected as I would select members of my risk management department--and people I can trust to get the job done. As a broker, you need to be accurate and deliver what you promise on time; I don't have time to look over your work." Further, "I want to work with technicians who work with markets--not salespeople."
Should a broker be all things to the risk manager? "No," Mallernee replies firmly. "I may not need all your services; I may be very selective." For example, he says, "We have in-house safety and loss control capabilities, and we use staff expertise and a TPA for our workers compensation and general liability claims, so our broker is less involved in those areas. Our broker helps us with property losses and directors and officers liability, where we have lower loss frequency. Our broker is extensively involved in our risk management information system and in helping us structure programs that allow us to assume as much risk as possible and transfer that which we don't want to assume."
What does Mallernee expect from a broker? First, he says, "The broker needs to understand that the risk manager is in control of the program. Some brokers try to control too much; I want to work with the broker on a collaborative basis." In this vein, he adds, "I want the freedom to meet directly with underwriters. I'm not cutting the broker out; I have to be able to sit across the table from the underwriter and present my program-it's the underwriter who says yes or no."
As director of risk management services for the world's leading roaster and retailer of specialty coffees, Erwin Mallernee brews a strong blend of insurance and risk transfer strategies.
Mallernee also expects the broker to be the keeper of underwriting data and copies of policies, "especially liability." Another key service is the preparation of an annual stewardship report; it needn't be elaborate, Mallernee says, but it is essential. The broker also should be an advocate on behalf of the risk manager in the areas of claims, special endorsements, policy interpretation, new exposures, and new markets. "Starbucks is growing fast; our broker and underwriter must be able to dig in, understand our risks, and respond to new situations," Mallernee says.
Just as he knows what he wants in a broker, Mallernee has definite ideas about what he doesn't want. If you're calling on him, don't bring your "B" team, he cautions. "The 'A' team is essential if you really want the business," he asserts. "I want a long-term relationship with a broker; we've worked with the same broker for 20 years." Other bugaboos? "We'd have problems with a broker who tried to control our program, or who made it difficult for us to explore other methods of risk financing--even if the broker would be cut out of the action," Mallernee says. "We'd also be unhappy with a broker who was overeager in trying to sell us an insurance policy without going through the other risk management steps." The solution in both cases is simple, he believes: "Fees versus commissions."
The best risk manager-broker relationship, Mallernee believes, is clearly defined by a formal contract that spells out the services the broker will provide and establishes the basis on which compensation will be paid. A strong advocate of fees instead of commissions, Mallernee says, "I initiate open discussions with our broker to make sure the fees are adequate."
Strategic planning partner
What is the broker's greatest single contribution to the success of Starbucks' risk management program? Without hesitation, Mallernee replies, "Strategic planning. We work with our broker weekly on strategic planning; we start planning for renewals six months in advance so we can take account of changes in the marketplace and changes in our needs." In the strategic planning process, he comments, "Our broker brings extensive knowledge of Starbucks, our industry, and solutions to meet our challenges. They have the ability to match insurance companies with our needs in terms of structuring risk management programs: using TPAs, capping losses to protect the balance sheet, and enhancing earnings per share."
Mallernee offers an example of his broker's contribution to strategic planning at the highest level. "Because Starbucks is growing so fast, I wanted to set up some large deductibles and self-insured retentions so we could take control of our claims," he explains. "At the same time, our chief financial officer was concerned about balance sheet protection; Wall Street was looking at us so closely that we wanted to make sure there were no surprises." Working with the broker, he says, "We put together a program where we could cap losses within the deductible and retention at certain predetermined amounts, and we bought a policy for that purpose, so I could guarantee that my losses would never exceed those amounts."
Broker's changing role
Not too long ago, independent agents and brokers functioned primarily--some exclusively--as procurers of insurance policies for their clients. Thanks to advances in technology, the emergence of the global marketplace, and the increasingly complex needs of businesses, however, brokers now are called on to be much more than order takers. How does Mallernee think the role of the broker has changed over the last 5 to 10 years, and what impact does he believe these changes have had on the risk management programs of companies like Starbucks?
"The broker has become more of a partner with the client, taking on the role of consultant," he responds. "Brokers are asking the right questions and bringing an array of solutions to help treat risks. They're not just buying insurance; they're looking at all aspects of risk management and educating risk managers." At Starbucks, he says, "Our broker is exploring non-insurance tools, working with our financial people to come up with the creative solutions they need. The broker also helps us interpret data from our risk management information system."
Managing growth
By any measure, Starbucks is a rapidly growing enterprise, expanding its stores internationally and entering into new ventures where it may not have a track record. "Because of our ever-changing business--new products, new systems, new markets--it's a challenge to stay abreast," Mallernee comments. "I'm plugged into our legal department and our store operations so I can be alerted to anything that's different--a new risk, a new venture--and assess it in light of our core business. Our broker helps immensely by working with us to craft very broad policy language and relaxed reporting requirements. Our audits are based on rate and exposure measurements, with almost no reporting requirements unless we make a major acquisition. I keep the broker informed of changes, and the broker tells the underwriter, so at renewal everyone's current. Where possible, we try to do three- or five-year programs. We try to anticipate what directions the company might go in, given what Starbucks is all about."
How the broker adds value
In today's market, smaller brokers-those below the national and large regional levels--increasingly are seeking to provide value-added services to their clients. What does Mallernee think are some key factors these brokers should consider as they move from being merely transaction based to offering a more sophisticated menu of services?
"As a risk manager, if a broker comes to me and I can see from his credentials that he has expertise in claims, risk control, or risk management information systems, I know he can help me identify and evaluate risks and come up with solutions for treating the risk-not just insurance," Mallernee responds. "A broker needs to understand the strategic planning process for a risk management program that's not just for one year, that must incorporate the exposures that arise from growth." The broker also must "be able to anticipate client needs and bring fresh ideas to the table about how to treat risk now and the future," he says. Further, "I can't stress enough the importance of being able to understand and interpret risk management data. A regional or smaller broker could develop that expertise and make it available to clients."
For the broker who wants to take service to the next level, "It's important to be in touch regularly with the client, not just at renewal time," Mallernee emphasizes. "A continuing broker-client dialogue is essential to treating risk in the future." What's more, "The broker needs to develop and increase his level of sophistication. The client may not have a full-time risk manager; the broker can educate the financial officer or other responsible person." The broker also can be helpful, he says, by "assisting with sticky claims, and being an advocate for the person who deals with claims."
The joys of risk management
As someone who's devoted more than 30 years to mastering and refining his skills in all aspects of risk management, Erwin Mallernee clearly is a man who thrives on the challenges of his demanding job. "What I love about risk management is that I have so many ways of doing my job, of bringing things together," he says. "I feel strongly that I owe my success to the brokerage community--you help me do the things I do every day, and plan the things I'll need to do tomorrow." *
For further information:
www.starbucks.com
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