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By Alex Vorro

At a time when everyone, regardless of industry or title, is worried about the state of the economy, never has it been more pressing to ensure fiscal responsibility. Many insurers, trimming budgets and staff and squeezing another year or two out of still-effective legacy systems, are renegotiating IT contracts with vendors to benefit their bottom lines.

Most insurance companies, from small, regional specialty lines operations to massive multi-national carriers, have a multitude of contractual agreements with several different vendors.

The types of IT contracts range from hardware and software purchases to outsourcing and service agreements, to data centers and telecom services - with most insurers partnering with at least one vendor for most, if not all, of these needs. Highly structured, technical and punctuated with legalese, these contracts are intended to spell out the terms of an agreement - the types of goods or services being transacted, the terms and length of the transaction, price structures and maintenance fees, amid any number of other clauses, schedules and definitions. In many cases, says David Lawless, chief administrative officer, Magna Carta Cos., New York, insurers and vendors hope these contracts can be agreed upon "once and done," never reopened for major amendment unless there are serious problems.

"When you sign a contract, generally, outside of the deliverable components, it is the last time you try to look at it," he says. "If there's no need to revisit it, then you know your relationship is working well."

Because of the complexity, intensive effort and agonizing detail put into the initial process of vendor selection and subsequent signing of the original contract, renegotiation of the document can be a touchy subject. Much like a marriage on the rocks, the renegotiation process can be a bitter, venomous affair with one side feeling slighted because its needs weren't being met as outlined by the terms of the agreement. But, conversely, if both sides are forthcoming with their needs and desires, renegotiation can be amicable and mutually beneficial. 

This is the tact taken by Marj Hutchings, director of Internet operations for Esurance, a San Francisco online auto insurance aggregator, in her negotiations with vendors.

"I don't play games with them," she asserts. "I tell them this is what I'm looking for, this is what my budget is, and ask, 'What can you do for me?' Keeping your discussions honest and open, and being available-those are the keys."

In addition to its precarious nature, renegotiation is a controversial term, eliciting different interpretations from different sources. To some, renegotiation means whole-scale restructuring of a contract - in effect, blowing it up and starting anew - whereas to others, it includes everything from minor tweaks to modifying prices or payment schedules. For the sake of this story, renegotiation encompasses any change made to a contract - simply, the reopening of a dialogue between carriers and vendors to agree to any type of amendment.

Stoking the Fires

The reasons why an insurer or vendor may want to renegotiate are plentiful. The down economy looms like a spectre over everyone's ledger, and is compelling many on both sides of the fence to hop on back to the table. In addition, according to Andrew Bartels, VP and principal analyst with Forrester Research Inc., Cambridge, Mass., the most common reason for renegotiating is dissatisfaction with the vendor regarding price or service. 
 
"They may have received a reduced group price, market conditions could have changed and they want another price or it could be they simply can't afford the previous terms of the commitment," he says. "It also could be errors in the delivery, or unexpectedly high failure or repair rates for hardware that needs to be redressed."

Bill Freitag, CEO & managing partner of Agile Technologies LLC, a Bridgewater, New Jersey consultant and service provider, adds that there are numerous business events that may necessitate the reopening of discussions.

"Divestiture of a book of business, acquisition, a decline in business volume - all of these events drive carriers to go to their vendors and say, 'I need to purchase something different from you,'" Freitag explains.

The threat of vendor failure also is spurring renegotiation. Jon Neiditz and Amanda Witt, attorneys with Atlanta-based Nelson Mullins Riley & Scarborough LLP, say that the risk associated with vendor failure often resides with the carrier, so by incorporating more carefully crafted "out clauses" and other protections, carriers can mitigate the risk.

Additionally, impending expiration of outsourcing agreements or scheduled contract renewals has carriers picking up the phone, says Don Goodenow, director, product management of StoneRiver, formerly Fiserv Insurance Solutions, Brookfield, Wis.

In the case of Esurance, the company wasn't necessarily looking to renegotiate its vendor contract, but with pitches of new and cheaper services coming in from competing vendors, it couldn't help but renew talks.

"We work with our existing vendors and show them the more aggressive price offers we are getting from other vendors," Hutchings says. "We're up-front with the vendor, explaining that we're a low-cost operator, and tell them exactly what we're looking for. The majority of the time they're willing to renegotiate with us."

Striking the Iron

Similar to what's going on at Esurance, ARI Insurance Cos., a 125-year-old mutual former regional carrier turned commercial auto specialist, was contacted by Blue Cod Technologies Inc., a Marlborough, Mass.-based provider of business process outsourcing and IT solutions, to restructure their contract. A beta client of Blue Cod, the Lawrenceville, N.J., insurer not only has outsourced its policy administration functions to the company, but currently is working with them to replace its claims system.

David Gerth, CFO of ARI, says the terms of the initial contract were incredibly vague and, as a result, he had the opportunity to strong-arm Blue Cod to get what he wanted. But because of their positive relationship, Gerth wanted work with Blue Cod to do what was best, which he says, in the end, will benefit them both.