Renegotiating Outsourcing Contract for IT Cost and Services

Project Background

A health insurance client was six years into its ten-year outsourcing contract in which all its IT services were outsourced to a single vendor. The vendor had not kept its client current with the systems necessary to remain competitive in the emerging managed care environment. Furthermore, the vendor’s pricing burdened the company with IT costs nearly three and one-half times higher than the average IT costs in the health insurance industry. As a result, the company was losing market share because it could not provide its customers cost effective products and services in a timely fashion. The company faced the very real possibility of not being a viable business within three years unless its IT costs could be reined in.

Problem Summary

The client finally hired its first true CIO, having direct reporting responsible to the CEO, to gain control over IT spending and strategic direction. The CIO was formulating a strategy that would enable him reduce the company’s use of the vendor’s services, allow cost savings to be redirected toward new managed care systems, insource the company’s intellectual capital, and position the company to outsource selected services to one or more best of breed vendors at the end of the existing contract. The new CIO wanted to determine what options he had to reduce the contract’s costs and/or terminate the contract outright. To that end, he needed to verify the nature of the problems he was facing, understand the limits of the contract he had to deal with, identify opportunities for going outside the contract, and obtain market pricing to verify that equivalent services could be obtained elsewhere for less.

TBI’s Approach

TBI reviewed the outsourcing contract to understand the business and legal scope of the contract and to identify any options for relief from the contract, either in whole or in part. TBI also interviewed the client’s senior and middle management as well as members of the vendor’s account team to understand the scope and nature of the services and service levels being provided and other business issues. The TBI team also reviewed financial, planning, administrative documents, studies, and reports. Finally, TBI conducted a survey of market pricing for comparable services. The survey confirmed that the company was paying significantly more for its IT services than it should be. The analysis of the information produced a set of recommendations consistent with the CIO

Successful Business Solutions

As a result of its investigations, TBI uncovered provisions in the contract that offered the company options to reduce use of the vendor’s services thereby reducing costs without having to terminate the contract outright and incur serious legal and financial consequences. TBI’s recommendations included:

  • Audit the vendor’s other accounts to ensure lowest cost pricing and to allow the company to put out for bid new services that the vendor was unable to provide
    either strategically or cost competitively;
  • Reduce existing and avoid additional vendor processing costs by moving managed care processing onto a new platform that supports the business but is not
    functionally available from the current vendor; or if it can be supported by the
    vendor, a new, lower pricing would be negotiated.
  • Re-outsource desktop support and application development to obtain more competitive pricing and better service, including issuance of an RFP to TBI recommended best in breed vendors, the subsequent evaluation process, and audience through the process of selecting a vendor. The result of the ensuing process is that the client has identified a vendor that is capable of delivering best in class services, according to client needs, at market pricing.
  • Engage the services of outside legal counsel with outsourcing expertise to guide the company in the implementation of its strategy and in structuring future contractual terms and conditions.
  • Management of the due diligence and transition process as well as substantial assistance in creation of the contract and exhibits.
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