Vendor Management Best Practices For Successful IT And Business Process Outsourcing in the Insurance Industry
This paper was developed to provide general background to assist insurance industry clients in decisions related to implementing vendor management best practices.
Please note that this paper presents professional opinions intended to apply generally and that clients must take appropriate care to evaluate them in light of their specific needs. Technology & Business Integrators, Inc. makes no representations, warrantees or guarantees of any sort as to the applicability of the opinions presented in this paper to the specific needs of any client.
This paper will cover:
- Critical Success Factors
- Key Inhibiting Factors
- The Vendor Management Organization
- Communication And Relationship Management
- Service Levels, Performance Analysis and Improvement
- Customer Satisfaction Performance Metrics and Reporting
- Issue and Dispute Resolution
- Change Management
- Transition Monitoring
- Program Office Structure and Management Process.
This paper was developed for insurance companies who are considering or are in the process of sourcing major Information Technology (IT) or Business Process programs to an outside vendor. It talks about the processes for managing vendors in a complex,
The insurance industry has had a long history of outsourcing business processes and related technology, for example third party administrators (TPA’s) and outside claims adjusters. Insurance companies have also looked to purchase enterprise level software packages for fulfilling processing requirements as a standard way of doing business; the leap to having someone else process that software is not really a big one.
IT Outsourcing (ITO) is now a standard, accepted way of doing business in the US and overseas. Business Process Outsourcing (BPO) is growing as well, as the service providers become more efficient and insurance companies (and other industries) get over the emotional hurdle. BPO should overtake ITO in new contractual arrangements in the next few years both in number and in size, as BPO drags along the IT support necessary for that business function. Insurance, often a trailing industry in new management practices (although not in its use of technology) has embraced outsourcing now as well.
At the same time, ITO has had its share of failures, some of the most publicized ones being from the insurance industry. In hindsight, these failures have arisen from number of different factors, one of which, at least, is the failure to effectively managing the ongoing client-vendor process. The outsourcing selection and contract negotiation process is sometimes the easy part. Once the contract is signed and the chosen vendor comes in the door to begin the transition, the honeymoon is over and the challenging work begins. The selected vendor always looks good on the sales call, but doesn’t always live up to expectations during the transition. This happens partly because there are inevitable cultural differences, process differences, and language differences that were not evident before. More importantly, no matter how rigorous the due diligence and negotiation process, each side will probably have a different concept of what they signed up for.
Managing vendors can be either a chaotic, ad hoc process or a well-defined, organized process. Given the complexity of most sourcing arrangements, it is in the best interests of both company and vendor to have clearly defined Vendor Management processes, pre-defined agreements for managing and administering contract terms, and quantifiable measures for success. If both company and vendor are vigilant, they can work together to minimize the impact of their differences.
Critical Success Factors
- Insurance clients who expressed satisfaction with their sourcing contracts had excellent and frequent communications with their vendors. One of the communication tools that companies use successfully with their vendors is a tiered series of meetings where the company can provide input to their vendors on the services provided. These allow the vendors as well as the company to share information and be on the same page in terms of service expectations. Different meetings are held for different levels of executive and operating management with corresponding agendas.
- Clearly establishing the expected level of service has also been found to be critical to successful sourcing contracts. Regular vendor reporting on service levels, employee turnover, staffing levels, disaster recovery, security, customer satisfaction, etc. is important to effective service management. Performance results and issues should be discussed regularly.
- Effective vendor management requires that the Vendor Management program clearly defines what the roles are between the company and the vendors. This is most effectively stated as a part of the Statement of Work, as a Roles and Responsibility Matrix prior to contract award.
Key Risk Factors of Successful Vendor Management
- Reliance on a handshake deal (especially between CEO’s) or conversely, the lack of enough due diligence on both sides
- Lack of trust in the original decision to outsource
- Relying on a vendor as a business advisor, strategic advisor, thought leader in new or emerging technologies, unless this is specifically the service they are contracted to provide
- Assuming that cost savings will be the overriding benefit and that they will continue for the life of the contract
- Significant personnel changes at the vendor or at the client
- Outsourcing a problem area
- Failure to recognize the effort and expense required to mange a vendor relationship. In our experience companies should budget between two and five percent of the value of the deal for managing the deal.
The Vendor Management Organization
In TBI’s experience, many insurance companies find it beneficial to centralize vendor management either as a function within a Program Office (to be covered in more detail in a later installment) or as a separate entity, depending on the company’s specific organization structure and culture. Whatever the specific circumstances, the centralized Vendor Management model allows for more effective contract control, cost tracking, and resource/asset management and performance measurement across all vendor-related projects/programs. This is particularly true if the vendor environment is complex (multiple vendors, vendors crossing lines of business, few vendors with many contracts, etc.).
The position descriptions below are general in nature but all of the functions must be performed in some fashion to ensure success. The insurance company vendor management organization needs to understand and exercise the appropriate level of control over the vendor – the major change being that you are managing what the vendor does not how they do it.
The Contract Executive is a member of Senior Management who would be responsible for the executive oversight of the vendor contract and would be ultimately responsible for the program’s success. The Contract Executive would interact with the vendor’s Program Executive and the vendor’s Account Executive periodically to review contract status and issues.
A full-time Vendor Manager, under the direction of the Contract Executive, works closely with the vendor, having day-to-day responsibility for the quality and cost effectiveness of the vendor’s services. Depending on the complexity of the particular program or contract, there would be one Vendor Manager assigned to a single contract or to a group of contracts.
Provides financial analysis and audit work in support of one or more service contracts. The Financial Analyst would identify, catalogue and monitor a contract’s financial requirements and commitments.
Monitors and analyzes vendor performance in order to assure compliance with service level agreements and continuous improvement of the services. The Performance Analyst would identify, catalogue and monitor an agreement’s performance standards, reporting requirements and any financial “penalties” for poor performance on the part of one or more vendors.
Performs Contract Administration procedures to ensure that all changes to the contract are made in accordance with the base agreement and the interests of the company, and that an audit trail is maintained. The Administrative Support person would be responsible for identifying, cataloging and monitoring requirements for reports, meetings, decisions, analyses, etc. throughout the year; and maintaining a calendar of contract activities.
Communication and Relationship Management
The Communications and Relationship Management process ensures that issues of mutual interest and importance are communicated to the appropriate persons on a regular basis.
Key players in the communication process would include:
- Contract Executive
- Vendor Manager
- Line of Business management
- Program Management Office
- Change Management Committees
- Technology Architecture Committees
- Other technology groups that may have a key role in the implementation of the contract
- Key vendor personnel.
Communication with the vendor will be both written and verbal (meetings). Formal meetings should be scheduled in advance for the transition activities as well as for the ongoing arrangement. In addition, the vendor will be required to submit formal, written reports on key dates throughout the contract term.
Meetings should be structured to make the most constructive use of time. At a minimum, the following administrative meetings should be scheduled into the services contract:
- Weekly Contract Operational Review
- Monthly Management Meeting and Invoice Review
- Quarterly Steering Committee Meeting
- Semi-Annual Contract Meeting.
At a minimum, the following reports should be scheduled into the services contract:
- Weekly Internal Status
- Monthly Management
- Customer Satisfaction.
Effective issue resolution and dispute resolution procedures ensure that problems and disputes are handled as quickly as possible and are solved at the lowest possible management levels.
The vendor staff and the company staff person responsible for delivery of the particular program component would identify each issue. Issues should be documented in an electronic Program Issues Log that is readily accessible to the Vendor Manager, vendor Program Manager, and IT Business Process staff. The Program Issues Log includes a description of the problem, the person the issue is assigned to for resolution, the resolution description, the escalation and escalation date.
For each issue, the IT Business Process staff and the vendor staff should jointly determine the persons responsible for resolving the issue and the expected resolution date. The lowest most appropriate level of management should resolve issues depending on the nature of the issue. Unresolved or open issues that are past the due date should be escalated to the company’s Vendor Manager and the vendor’s Program Manager during regularly scheduled status meetings. If the Vendor Manager and vendor’s Program Manager cannot agree, these issues should be escalated to the Contract Executive and the vendor’s Program Executive and Account Executive.