The state of the economy has given insurance technology executives plenty of challenges of the less-welcome sort, but there's at least one consequence of the current situation that they can be happy about. Tighter budgets and longer purchasing cycles have resulted in a buyer's market, which gives IT executives an advantage not only in negotiating new contracts, but in forcing renegotiation of existing ones to achieve immediate improvements in cost efficiency.
With fresh memories of Y2K and the rush to e-commerce, insurance companies might be forgiven for feeling that the worm has turned. In the past, vendors could use the market situation "to craft deals insurers felt were unsatisfactory in terms of pricing," or could leave an insurer feeling "that a successful deal was one in which a company wasn't fleeced," says Brian Robbins, vice president, IT, enterprise technology, MetLife ($302.5 billion in assets, New York). Under present conditions, however, "we're able to open up negotiations that we couldn't before," he adds, notingthat at press time the firm was enjoying a "fire sale," with 16 contracts expected to close by year-end.
And it's not just the public companies that are taking advantage of the moment. "Being a mutual company, we live and breathe by the idea of adding value to our policy owner, and making good deals in contract negotiations is certainly consistent with that philosophy," says Stephen Stone, director of IS financial management, Northwestern Mutual ($92.1 billion in assets, Milwaukee). In recent contract re-negotiations the firm has enjoyed 15 to 20 percent cost reductions, and is in the midst of a software maintenance deal Stone says could be "in the 40 percent range."
But as one-sided as the picture may look today, a hugely important driver in off-cycle negotiation is the persistent inefficiency in carriers' processes. That means that, however the negotiation advantage may have shifted in the insurance company's favor, both sides can gain from the work that needs to be done. "It's amazing, when you start looking at the various shelf-ware that's not being used, the number of seats, in some instances, that are being paid for even after staff cut-backs," among other sources of inefficiency, according to Andy Mayer, managing director of financial services consulting firm Arc Partners (New York), which helps companies consider sourcing alternatives.
Carriers should take advantage of the current situation to look at existing arrangements in a fresh light, Mayer believes. "The fact that you think the best thing to do would be to extend an existing contract should not preclude taking a look at what's transpired since you originally negotiated it, to make sure there's still validity behind the reasons that got you into deal," he says. In most instances, carriers will stick with a current provider because of the disruption and cost associated with change, "but that should not preclude looking to the outside, if for no other reason than it helps you solidify your position when you go to the negotiating table," he adds.
Knowledge Is Power
"We've always recommended that people treat a re-negotiation the same way they do an original negotiation," Mayer says, because by coming to the table thus forearmed, one is likely to improve on the terms of the existing contract: "You can leverage your knowledge of the marketplace, just as you would do when you're going there for the first time."
"If you've done your homework, you're going into negotiation from a position of strength," says Rick Omartian, second vice president, IT CFO and chief of staff at Guardian Life Insurance (New York, $32 billion in assets). Guardian uses outside research and consulting firms when it makes economic sense to do so, in order to ensure the firm is getting the best price in the marketplace, according to Omartian. "Once you have that information it's difficult for the vendor to make you believe that they can't go any farther," he says. "Because you have the background, you have the information, you know that they've done these deals at the lower level, and they can certainly do them with you."
Having faced burgeoning technology costs through 2000, Guardian decided to make cost reduction a priority. "Since then," Omartian relates, "we've brought down overall spending by 20 percent going into 2003, and, clearly, renegotiating all our contracts was an important contribution to that."
So was exercising the offshore option. Having used about 250 domestic consultants, Guardian is now down to about 40. Meanwhile, the firm now uses about 175 consultants from offshore firms, some of which have domestic offices. Formerly, offshore consultants "were a quarter of the domestic price, but now the domestic price has come down, as a result of competition and the economy in general," Omartian asserts. "The pressure that's putting on consultants across the board is tremendous, and we are leveraging that."
Omartian arrived at Guardian in 2002 in order to bring financial and administrative functions together to one focal point, including financial management, vendor management, business planning communications and organizational development and training. "None of those things existed on a consolidated basis before I arrived, if they existed at all," he says. The carrier's vendor management office came into existence at that point in order to leverage Guardian's purchasing power, which until then "was done in bits and pieces all over the organization, failing to exercise that leverage, and using different processes and negotiation methods."
Shortly after Omartian's arrival, Guardian brought in consulting firm A.T. Kearney (Plano, TX), which "did an engagement across the entire firm, and as part of that, they worked with IT," Omartian says. "We partnered with them and they helped set up a lot of the functions and process within our vendor management area, using their techniques and tools."
The result was a standardized process that is the essence of a centralized vendor management function, according to Omartian. "It forces the discipline of doing that homework up-front and being prepared for negotiation, which doesn't normally happen without the formal process and dedicated staff," he says. "We're leveraging the full purchasing power of the corporation and we're doing it with a standardized repeatable processit's not rocket science; it just takes the discipline to put it in place and to do it effectively," Omartian argues.
The centerpiece of Guardian's vendor management is its standard RFP/RFI process for all expenditures in excess of $500,000, according to Omartian. "My team gets involved from the beginning, working with the IT managers, identifying the critical components they need to look at, based on their requirements," he says. The importance of pricing is a given, he adds, but is only a small part of the picture. Other factors are the vendor company's financial strength, its position in the marketplace, its experience, the kind of support it provides and its technology architecture. "Each one of those items is weighted, based on finding and discussions with the managers and my staff, so it's very objective," Omartian says. RFPs are generally issued to five to 15 vendors, whose responses yield weightings. "We'll narrow that down to three to five vendors and then do a thorough review."
The Guardian's processes don't always result in cost-reduction. "When we're negotiating with some of the larger vendors-the IBMs Armonk, NY and Computer Asssociates Islandia, NY-spending hasn't come down significantly, but we've been able to get a lot more resources, product and support for similar levels of spending," Omartian claims.
Northwest Mutual's Stone holds a position similar to Omartian's Guardian role, and his firm operates with similar procedures. But Stone emphasizes continuity over competition in his firm's renegotiation successes. "We do not allow ourselves, in the name of relationships with a vendor, to become a doormat: We're definitely doing a lot of the same things that everyone else in the industry is doing, because it is a buyer's market and we'd be failing in our fiduciary responsibilities not to take advantage of it," he says. "But we feel that by establishing good working relationships with our vendors we're adding value to our policy owners, because over the long term we will get more value from a vendor with whom we have a good relationship."
In the past, when prices kept going down, Northwestern Mutual favored shorter contracts, Stone explains. "At this point we're starting to entertain longer, multi-year contracts because we feel the current pricing probably is about as good as it will get," he adds. "Eventually the economy will recover and the buyer's market will wane somewhat." But for now, the carrier is able to take advantage of the current situation while offering long-time partners something of value. "Assuming that the renegotiation is extending the period of commitment, they're generally pretty willing to sharpen the pencil on the renegotiations."
Zurich Life (more than $21 billion in assets, Schaumburg, IL) had a relationship with CSC (Austin, TX)through its predecessor companiesstretching back to 1973. While Zurich valued that relationship, it was fully prepared to terminate it if business requirements so demanded, says Russ Bostick, executive vice president and CIO, Zurich Life.
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio