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.

"Blue Cod came back to us and said, 'We want to restructure and solidify this relationship,'" he says, adding that along with wanting the terms more clearly delineated, the company was under outside financial pressure to refashion the deal. "If we didn't feel the way we do about Blue Cod, I could have easily said no. But we feel that if they succeed, we succeed, so we were willing to do it. Not all of our relationships have been that way. I don't know that I would have gone down this path with anybody else."

While Gerth admits the renegotiation process has been far more intensive than he initially expected, he finds that it has given both sides definite advantages. Revisiting the contract not only has allowed ARI to reassess their original needs and measure the progress they've made in achieving those goals, it has given them the perspective to sit back, assess the situation and be more specific about what it still wants from the vendor.

"It's definitely been good for time to go by," Gerth explains, "because I can say, 'Yeah we've agreed to this, and we're happy to do this, but we now want to make sure that we get a few additional items that we weren't getting in the past.'"

Since the beginning of the process, the two sides have met on a weekly basis to discuss development and, as a result, have come to better understand each other, and develop an enhanced level of trust as a result of going back over the agreement. A new contract between the two was expected by press time.

Tempering the Deal

While building a solid relationship based on trust and understanding from day one may seem commonsense and cliché, it's still the key to renegotiating any deal. But that can be easier said than done.

Esurance's Hutchings says she builds relationships with the salesperson and support staff so when she wants additional services or functionality, it's much easier to do so quickly and efficiently.

"Because the salesperson is typically gone as soon as the contract is signed, I try to get all of the support people involved as early as possible, and have a relationship with them during the sales process as well," she says.

Beyond that, Agile Technologies' Freitag recommends carriers have a firm strategy going into any renegotiation with all goals clearly mapped out. He also believes carriers need to make sure to test the limits in an effort to get what they want, but ensure any proposition is beneficial to both sides.

"I look at the business model of my counterparty to determine what's important to them and how they make money," Freitag says. "In order to get it to a win/win, maybe you increase the amount of volume you give them, or lengthen the commitment to buy from them - anything for them to go back and sell the plan to management. It works more frequently than you would think."

A simpler method of strengthening the bond, according to the Magna Carta Cos.' Lawless, is to limit the number of vendors with which the company does business. Currently, he deals with only about half a dozen key vendors on a regular basis. 
 
"We only try to partner with vendors that work well for us," he says, "and we try to stick with them in good times and in bad. It becomes a very simpatico relationship that way."

As for the contracts themselves, Mike Sciole, CIO of IFG Cos., Burlington, North Carolina, advocates that companies only agree to a fixed contract with no escalating fees based on their success. When negotiating the terms, he steers clear of contacts based on CPU or bandwidth utilization, or the number of installations within a developer environment.

"When it's all said and done, your contract protects both carrier and vendor," Sciole says. "You have to live with that contract, and that's important to consider. Don't concede on something that's of paramount significance to you. If you play the waiting game, you typically get what you want. But if you're impetuous, and want to sign just to get the deal done, the odds are you're going to concede on something you'll later regret."

Sharpening the Blade

The final piece of the renegotiation puzzle is legal involvement. Imperative to any contract negotiation, every shrewd carrier or vendor has its legal team engaged in the process from the start. While the details of what attorneys provide during the renegotiation phase are numerous and varied - providing everything from risk assessment, to general counsel and advice to hammering out other, more specific clauses to protect their party's interests - attorneys are counted on provide the carrier with consistent goals, definitions and feedback.

But aside from the necessary nuts and bolts work with the contracts themselves, attorneys are warning insurers to remain vigilant when negotiating their contracts in the face of the ever-vacillating regulatory climate.

"Because we're entering a more highly regulated era for all financial services companies, making sure you have good contractual ability going forward to anticipate those changes, as well as potential changes to federal rather than state regulations for insurers, is of paramount importance," says attorney Jon Neiditz. "Especially if the optional federal charter makes any headway, there will be greatly increased marketability and risks associated with information. The need for contractual protection definitely will intensify."

Two Cents from the Vendor

Don Goodenow, director, product management of StoneRiver, formerly Fiserv Insurance Solutions, Brookfield, Wis., says it's imperative for insurers to heed the following points before they begin any renegotiation with their vendor:

  1. Insurers must understand their service/technology needs as well as their organizational needs - the company's mindset and culture - and clearly define them with an eye toward the ultimate goal.
  2. Insurers must take this information and make sure they properly engage the vendor. It's easy for the vendor to oversell its services and products, so only open communication and clear definition of all requirements will ensure both sides are on the same page.

7 Reasons the Relationship Fails

Even the best-laid plans of insurance companies and vendors aren't necessarily any more successful than those of mice and men. As a result, sometimes the renegotiation fails and the relationship can't be salvaged. Attorneys Jon Neiditz and Amanda Witt of Atlanta-based Nelson Mullins Riley & Scarborough LLP offer the seven most common reasons why they see carriers and vendors split.

  1. Carrier/vendor failure to define goals and objectives (other than price in the original agreement)
  2. Overselling of vendor capabilities
  3. Poor implementation
  4. Poor project management on the part of the carrier
  5. Underestimation on both sides of required effort
  6. Carrier over-reliance on employee management skills rather than contract management skills
  7. Vendor bankruptcy

This article was originally published on InsuranceNetworking.com.

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