The story is true, and far from unique: A senior technology executive at a household-name insurance carrier has responsibility for managing the vendor relationship for a large systems implementation. Challenged by budget limitations and well aware of the atrocious record of large-project failure in the industry, he is determined to be on the winning side of the deal.
"He knew his company was a marquee account, so he insisted on all kinds of financial discounts and performance guarantees," says a consultant involved in the deal who prefers to remain anonymous. "He was going to squeeze every dime he could out of that vendor."
Negotiations were prolonged and occasionally acrimonious. One bone of contention, characteristic of the spirit of the relationship, centered around a third-party tool embedded in the vendor solution. "This tool was from a major horizontal vendor, and the carrier executive insisted that if that company ever came after the carrier, that the vendor I represented would assume all the liability," the source relates.
The vendor was fairly new on the scene and found the prospect of having a top-tier carrier on its customer list impossible to resist. "Eventually, the contract just fell apart because there was no way the vendor could fulfill its obligations," the source continues. "In the end, they both lost a lot of money and the carrier had to start over again."
Similar unfortunate stories have occurred more often than most of us in the insurance industry would like to admit. The causes have to do partly with the economics of scarcity and perennial aspects of human nature, and partly with the consequences of historically poor discipline in both contract negotiation and project management. Bitter experience and restricted budgets have made insurance technology purchasers more disciplined, and a buyers' market has encouraged them to drive hard bargains.
Those characteristics by themselves are not only unobjectionable, but actually representative of a higher standard of professionalism - which the industry badly needs in order to stop wasting money. But in the absence of further insight, discipline and professionalism, they can leave insurers in much the same predicament they suffered before. The reason is that the buyer's advantage can lead insurance executives, such as the anonymous one above, to approach vendor relationships in an adversarial spirit, resulting in the potentially disastrous belief that the alternative to a win-win result is a win-lose.
"I don't think a win-lose exists," opines Rick Roy, CIO of Madison, Wis.-based CUNA Mutual Group ($13 billion in assets). "I could believe that I have written the greatest contract in the world and that, should the project fail, I can stick it to the vendor. Well, the reality is that I don't answer to the vendor; I answer to my peer executives in the company," he continues. "If I don't accomplish what we set out to accomplish, that's not a win for me - that's a lose."
The reality places a special burden on the insurance company, which has to be mindful of how it wields its own advantage while at the same time exercising caution about the motives - and even the competence - of the vendor with which it's contemplating doing business. The wrong attitude to bring to the occasion, according to Jim Knight, senior vice president and divisional CIO, Chubb (Warren, N.J.; $44.3 billion in assets), is, "The minute we leave the table, I don't have to deal with these people again, so I can be as tough a hardball as I want." Rather, any major implementation or outsourcing arrangement, in Knight's view, is a long-term commitment, similar to a marriage.
Best Foot Forward
"When you first meet, it's like dating," Knight explains. "I'm judging the vendor on the assumption that, as in the case of the first few dates, they're putting their best foot forward. If they're doing well, great. If not, then I'm concerned and I back off big time."
Even with the best motives, an executive in Knight's position has to be wary of a vendor's judgment being affected by the allure of a contract with a prominent insurer like Chubb. "Sometimes, in their zeal to get the deal, vendors will over-commit," Knight says. "I want to make sure they know what they're getting into."
Knight relates an incident in which he was involved during an earlier phase of his career while working for a different insurer. A vendor without insurance industry experience sought to seal a contract with his employer. While not in a position to accept or reject the vendor, Knight was involved in the negotiations. "I asked them to demonstrate to me how much they knew about insurance and its regulatory regime. They didn't know much," he says. Knight warned the vendor representatives that they underestimated the complexity of the task. "We were pressured into going with them anyway," Knight recalls. The result: "They were $4 million off contract and my boss' boss got fired for it."
Knight avoids a similar fate by taking it upon himself to make sure that vendors with which he works know what they are getting into and are not simply "buying the contract," potentially absorbing losses for the sake of securing a prestigious customer. "If they say they're going to be able to reduce costs by X percent, I will need to know how," Knight explains. "I'll say, 'Walk me through that; why can you do that and I can't?' In many cases there are valid answers, but sometimes there are not."
Knight's good-faith, hands-on approach would no doubt be refreshing to many a supplier in an age when an insurance carrier's procurement professionals often interpose themselves between vendors and technology executives. The result can be a diminished capability for technology executives on both the carrier and vendor sides to candidly discuss technology options. And, to build on Knight's analogy, it also can replace the building rapprochement of dating with something more like the suspicion-laden process of crafting a prenuptial agreement.
Sometimes an emphasis on process can result in a descent into "lawyering mode," in which discussions begin with an emphasis on legal language, according to Michael Lucarini, a consultant with Accenture (Chicago). "Everybody is trained to interpret that in the worst way possible; it sets a negative tone and results in the other party countering with equally scrupulous language, and it really doesn't help," he asserts.
Most insurers have a higher level of procurement competence today than they did five or more years ago, according to Lucarini, and that's a good thing. Unfortunately, at some companies, "You have to work with procurement as a gatekeeper to even discuss with business people ideas or concepts or even build any kind of relationship," Lucarini laments.
That type of interposition may be counterproductive, but some kind of barrier building on the part of procurement can add real value. Mike Ozmeral, managing director, strategic outsourcing, Blue Cross Blue Shield Association (BCBSA, Chicago), submits that one way procurement can be helpful is by shouldering the "bad cop" role and letting the business and technology people get on with their relationship. "It takes the end users out of the negotiation game, which can be confrontational," he explains. "For that reason, we don't let our user teams negotiate."
Ozmeral acknowledges that the procurement professionals within his group - which serves as a group purchasing organization (GPO) for BCBS plans - are not necessarily expert in any of the business functions for which they act as purchasing agents. Thus, they work under the premise that the relationship between vendor and relevant carrier personnel really begins after the contract starts, and they avoid interfering with a creative interaction between vendor and carrier executives - until it's time to talk business.
"Once we're going through a competitive selection process, we're careful that procurement be the unified voice for the company," Ozmeral says. During that time, he adds, "Vendors will try to find chinks in your armor and figure out your strategy, so we have a very stringent communications policy during a competitive process. But beyond that, I'm not the gatekeeper for any of the IT executives."
That's as it should be, according to Accenture's Lucarini, who appreciates the improvement that procurement professionals bring to the purchasing phase of the insurer-vendor relationship. During the time when greater scrutiny in the technology investment process was urgently needed, financial acumen was sometimes given excessive prominence. But the trend now is for business to drive procurement.
Driven by the Business
"The most successful negotiations that I've been a part of recently are those in which business people have a discussion around business terms, procurement understands where we're trying to go and legal understands the agreements that we've made," Lucarini reports. "When we're done, then they go off and translate that into legal language."
Conversely, a failure to focus on business value up front is a recipe for trouble. It's hard to imagine an insurance executive deliberately constructing a vendor relationship in a way that disregards the business purpose of the engagement, but it's only too easy to sabotage initiatives unconsciously - by placing too high an emphasis on cost, for example, or giving too much authority to players who poorly understand the nature of both the business need and the product or service delivered.
It is crucial, therefore, to align the proper participants early and carefully order the up-front work for any significant initiative, according to CUNA Mutual's Roy. "A lot of projects derail even before they get started due to structuring project plans and vendor agreements that are not in lockstep with what companies are trying to do in terms of business objectives," he asserts.
About a year ago, CUNA Mutual applied the approach to an implementation of PeopleSoft's (Pleasanton, Calif.) Financials suite, which involved general ledger, accounts payable and related processes. "Like a lot of companies, we have an older legacy ledger system, and we've used this project as an opportunity to take a step back and think about how we're managing our financials and, very importantly, the feeds that come from many sources to feed those financials," Roy explains.
Despite technology's heavy involvement in the project, Roy says CUNA Mutual approached the initiative not as an IT project but as a business project. The idea was to minimize becoming enamored with the technology selected and to maintain strong involvement of business stakeholder leadership. From that starting point, Roy looked to the carrier's sourcing department to provide expertise on pricing parameters in the marketplace. "We leveraged their expertise because they do this full time. But they don't do it in isolation; they do it in partnership - with IT leaders and, in this case, finance leaders, because they are the direct customer of this particular project."
The involvement - or exclusion - of IT and business executives from the purchasing process varies according to the nature of the investment. For example, the recent commodity purchase by CUNA Mutual of PCs via online auction required little consultation between sourcing and its IT and business clients. Generally, sourcing's ownership of an orderly, impartial bidding process is appreciated by business people on both sides of the contract, according to Roy. "Our stronger, deeper partners have no issue with the walls that are built because it takes the noise out of the transaction for them," he says.
At the same time, Roy adds, "When there is truly a value pitch to be made from the vendor side, you need a business audience listening. Our sourcing guys are not threatened by that at all. In fact, they are very quick to bring those people to the table and say, 'You need to listen to this and translate it for what you're trying to accomplish - that's not what we do.'"
That spirit paved the way for establishing a strong working relationship with Accenture, the integration partner chosen for the PeopleSoft implementation. Roy notes that Accenture was actually chosen before CUNA's internal IT staff was fully mobilized. While that might suggest a departure from a focus on the "up-front" project work, the reverse is true, Roy explains. On the simple rationale that "Accenture has done a lot more ERP implementations than CUNA Mutual has," the carrier saw the consultant's ability to help shape the execution of the project as part of the value proposition it had to offer.
While many customers value the experience of reputable integration partners, they nevertheless typically bring in those partners too late in the game, according to Roy. "They've already set very major decision-type constraints - such as cost, date, scope - and then they lay those constraints on the integration partner," he argues. "Our take was that once we select the partner, we're going to build the plan together, we're going to own the plan together and we're both going to have financial skin in the game to execute that plan. You just get a whole different level of partnership and buy in from both parties when you lay down the plan together."
One of the important structural features of the agreement in terms of the project's ongoing success was the building in of performance-based milestones based on a time-and-materials-not-to-exceed model. "If the vendor needs to bring more resources to bear, they can do that, but they know there are limits," Roy explains. "It gives them room to flex their expense around what they think is needed for success, and yet you're not coming back to the bargaining table every three weeks to negotiate the deal."
The major pitfall CUNA Mutual avoids is simply confusing activity with results. "We could have a lot of people really busy not accomplishing anything," Roy observes. But the strategy also avoids the descent into legalism that repeated reference to the contract can inspire.
Being able to focus more on the spirit of a deal rather than the letter of the contract can make the difference between a harmonious - and ultimately successful - carrier-vendor partnership. That ability turned out to be important in the CUNA Mutual-Accenture relationship when a fundamental architectural decision had to be made.
Roy describes CUNA Mutual as a large Microsoft (Redmond, Wash.) .NET shop with a large SQL Server production environment. However, the carrier also has a very large legacy IBM (Armonk, N.Y.) DB2 environment. "I've got tons of IBM AIX UDB sitting in the middle of all that as well," notes Roy
Given the presence of these multiple operating systems, there was a real question about on which platform to run PeopleSoft Financials. "We considered this not just with regard to the core PeopleSoft application, but also business intelligence we wanted to drive off the back end of the PeopleSoft platform," Roy elaborates. "In our world, a lot of our business intelligence is really building out on the SQL Server platform."
Despite the fact that there was no provision in the carrier's contract with Accenture, CUNA Mutual insisted that it needed to rethink its plan to implement the PeopleSoft application on a platform other than Microsoft. The insurer also posited that in order to properly prove the question, Microsoft should be involved as well. "We weren't sure how Accenture was going to react to that - at a minimum, it was a complication in our overall execution plan," Roy relates. As it turned out, "Accenture was open to that conversation and it helped facilitate our bringing some Microsoft resources to the table."
The three parties rapidly worked out a proof of concept demonstrating that the Microsoft solution would work. A business decision followed to proceed on the Microsoft platform, keeping the roughly 15-month initiative on track. "It was not what we anticipated," Roy notes, "but instead of a huge tangent and diversion, it ended up being just a speed bump in the project."
Right People, Right Timing, Right Spirit
When it comes to making deals, The Main Street America Group ($1.4 billion in assets) leaves it to the professionals. The Jacksonville, Fla.-based P&C carrier relies on a contract negotiation center within its project control office (PCO) to do what IT executives are not trained to do.
"Vendors are busy negotiating deals all the time, and by virtue of doing it, they get good at it," observes Joel Gelb, The Main Street America Group's CIO. "By having our PCO involved, we are able to enforce a certain consistency; and having someone with an experience base around negotiating with vendors makes the process go smoother and levels the playing field."
Another Main Street America Group best practice for ensuring project success is including negotiating activities within IT's annual plan. "We build it into our life cycle so that we can nail down vendor negotiations as part of starting a project," Gelb explains. "What you want to avoid is suddenly finding yourself saying, 'Gosh, I need a vendor or consultant!' and delay your development timetable while trying to negotiate a deal."
Gelb likens project management to software quality issues. "You don't cut corners in your coding, testing or specifications," he says.
"Similarly, you don't want to cut corners in specifications with your vendor - including the contract details and making sure you have adequately communicated to the vendor relevant information about your technology environment," he advises. "Allowing yourself more time also gives you time to deal with multiple vendors competing for the contract, which is always a good thing."
In addition to these more-tangible measures, Gelb advises conducting the negotiations in the proper spirit. "You want to emerge from the deal feeling that you've cut your best deal but have not inflicted pain," he says. "You want the vendor to feel that there's some profit and value in the deal and some profit in dealing with you generally."
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