Face Off

[Insurers] have quite a lot of power, asserts Cynthia Saccocia, senior analyst in TowerGroups insurance practice.
Rick Omartian, CFO and chief of staff for insurance technology at Guardian Life, agrees. It has been a great time to be a buyer of technology, given the economy and given whats happened to a lot of the vendors, he says.

And maybe the best parallel is that savvy, prepared negotiators still get the best deals regardless of the market conditions. Below are maneuvers from some masters in the skills of negotiation. They reveal 10 proven strategies to help you bargain better.

1. Be Open

Im not one for political games, positioning, and hiding things, says Lynn Phillips, vice president and CIO at health insurer American Community Mutual Insurance Company, Livonia, Mich. Being upfront is the best way to establish trust and help secure the best deal for both insurer and vendor, he maintains. If you cant find people in the [vendors] organization who will lay things on the table and talk them through, you have to ask whether you want to be involved in a long-term relationship.

Being upfront also applies to establishing your demands and expectations at the outset of negotiations. It frustrates the entire process if you never stop asking for things, Phillips says.
Omartian concurs: When we get down to the short list [of vendors], well give out where we expect the finalist to be in terms of meeting specific terms and conditions. Its not a surprise when we go into the final negotiations; theres nothing that comes out of the woodwork that is new on either side. This helps create a more positive environment where the negotiation process is more like a discussion, he says.

Todd Argall, vice president of information systems at Rural Mutual Insurance Company, Madison, Wis., advises being open means letting competing vendors know where they stand. The vendor youre working with has to know you have alternatives, he says. We dont flaunt the fact there is competition, but we always have the option of going in a different direction if we arent able to negotiate to a satisfactory completion with a particular vendor.

Ultimately, insurers say, the negotiation process is supposed to establish a positive relationship and a fair deal, not to define winners and losers. Some aspects of writing a contract are like a marriage, Phillips says.

2. Get Serious

Requesting demonstrations of products with no intent to buy ultimately impacts the negotiation process negatively, according to John Johnsen, managing director at TCi Consulting & Research. [Vendors] fly three to four people out, and all [the insurers] may be doing is kicking tires, he says.

But demos are no cost to you, so why do you care? Because even though you have leverage in todays market, if youre perceived as not being serious, solution providers may be less likely to deal when you are ready to buy. Or top-tier vendors that do have more business may give you a pass, leaving you with second-tier companies. In insurance terms: adverse selection.
A lot of the vendors I deal with wont just jump up and do a demo today, Johnsen says, adding vendors are taking the time to prequalify customers to cut their sales expenses. They ask, Why is [the prospective client] talking? Is there budget money? Theyre making sure [insurers] arent asking questions just to get market updates.

On the other hand, insurers do well to hold vendors to the same standard of seriousness. Some vendors give you responses to RFPs and RFIs [requests for information] just to get a foot in the door, Argall says. We hold them to their response throughout the negotiation process to make sure they can back up what they promise.

3. Be Willing to Act

Vendors are reporting to us their sales cycle is anywhere from 12 to 24 months, says Saccocia, who adds this lead time has been extended by 1,800-page RFPs and proof-of-concept requirements.

While you shouldnt make hasty decisions, realize cash flow is important to vendors in todays market. Entering the negotiation process clearly being ready to act can make the vendor more willing to deal. You have a tendency to get better attention from a vendor if you have a clear strategy that demonstrates executive buy-in. When you start negotiating, the vendor wants to be successful, too, says Saccocia.

In a recent negotiation, Carroll ex-plains, Pekin did request numerous demonstrations. However, the carrier made it clear the purpose of the demonstrations was to ensure corporatewide buy-in of the technology rather than simply to put the vendor through its paces, and the vendor was willing to absorb the cost. [The vendor] knew it was looking at a sale, not looking to have to make a sale, so it was willing to give us the best [deal], Carroll says.

4. Give a Little

Sure, youre in the position of power, but you want the vendor to feel it wins, too. This doesnt mean compromising on what you want; it means being willing to take some risk and give some rewards yourself. In Carrolls words, this translates into demonstrating to the vendor your sole purpose in the negotiation is not to undercut its product and get it cheap.

You want a fixed cost, [vendors] want time and materials, Saccocia says. You want penalties, they want rewards for delivery on time and on budget. She does caution insurers signing on to penalty and reward clauses need to assess not only the potential hard-dollar costs but also the soft costs associated with providing resources to help vendors achieve objectives and avoid finger-pointing if deliveries are missed.
It becomes a two-way negotiation: that the insurance company can deliver what it needs to, that the business and IT is adequately aligned, that there is good definition to the project, that it has sponsorship and exposure at the executive level, and the insurer has people in the business who, when there are conflicting priorities, can work through [the problem], she says.
If there is a strategic benefit, a financial benefit to getting done early, there should be the willingness to share that benefit, just as there is a cost in being late, says William Fournell, vice president in Capgeminis financial services consulting group. If the proposal is the same, and the TCO is still the same, but there is an opportunity to integrate the parties more tightly with shared riskwhich already exists to some extentand shared reward, I dont know why [a risk/reward proposal] would not be considered.

5. Have a Plan

Under the category of Obvious is being prepared before entering into the purchasing and negotiation processes. Yet industry analysts are amazed how many insurers go in not knowing what they want or how to get it.

Johnsen maintains hes seen too many insurers approach significant technology purchases without any sort of formal RFP process. They wont abandon [the RFP process], he says, they wont even start it. Hes been surprised by insurers taking the beauty pageant approach to vendor and product selection based on what they found at a trade show, he adds, or by considering only one vendor in the selection process. Theyll send some people off to a vendor and say, What do you think? And if they come back and say, It looks good, theyll buy it.
Entering into a negotiation without a plan or a determined budget and without having established what the metrics are to measure success are the biggest mistakes insurers make in vendor selection and negotiation, Saccocia says.

Also, if you dont know whats going on in the technology arena, youre unprepared to deal with technology vendors. As a carrier, you should have some people in your organization looking at what vendors are doing, warns Johnsen, but he admits dedicating staff to market research is an impracticality at most insurers. I know of few carriers doing that, so [instead] you pick up sound bites here or there. People who are in charge of systems try to do [research] off the sides of their desks to stay aware, and when theyre ready to buy something, they get [consultants] help to make the search.

Omartian reports Guardian has a small R&D function within its Enterprise Architecture group. But like most insurers, it has a mainly informal process for staying on top of the market day to day and also uses the resources of research firmsin its case, Forrester Research, Gartner, and Robert Frances Groupfor specific coverage of selected prospective technology purchases. But he also points out motivation for keeping current with developments starts at the top. Our CIO [Dennis Callahan] is a voracious reader, he says. Hes constantly sending around examples of new applications of technology by other firms and asking if it has value to us.

6. Choose Wisely

Chances are, there are several vendors whose products or services meet your functional requirements and fit your architecture. Vendor selection is a topic unto itself, but choosing the right vendor to negotiate with is critical to a successful deal and better relationship.

Its important for our organization to identify vendors that align with our organizational structure, explains Argall. If youre misaligned, if youre pursuing high-end solutions from large vendors and youre a small company, you quickly can find you have little flexibility in the negotiation process.

As such, vendor size is a component in Rural Mutuals selection criteria. This does mean eliminating vendors that dont align based on size, big or small, Argall explains. Weve found that to give us the most flexibility in the negotiation process.

Trying to negotiate with vendors that arent a good organizational fit adversely can affect not only the initial deal but also the long-term relationship, says Johnsen. Youll be on the bottom of the totem poleyoull be lucky to get the D Team to work with you.

7. Be Structured

There is debate over whether procurement is better managed on the corporate or IT level. Proponents of the corporate approach, such as Fournell, maintain it helps vendors bid more accurately. If I can see the business partners, see what their objectives are, and connect the dots between what procurement is telling me it wants to bid for and what the business needs, I am more comfortable with what Im bidding on in the long run, says Fournell.

Others, such as Guardian Lifes Omartian, claim the process is best served by a separate IT procurement department. We felt IT was specialized, and having [IT procurement] as a separate organization had value, he says.

But either way, consolidating your purchasing activity (vs. negotiating at the department level) does several things. It brings standardization to the process, gives you better control over the types of purchases being made, and for purposes of negotiation, helps you build and consolidate expertise.

In the case of Guardian Life, for example, establishing a procurement department in IT and developing a vendor management practice has had a marked impact. Before the creation of the department three years ago, the company engaged 260 contractors and consultants but had very few contracts in place, Omartian says.

Centrally managing IT purchasing and vendor relationships has helped the company benchmark and better evaluate vendors, consolidate product and market knowledge, and increase its negotiating leverage, according to Omartian, who reports since the insurer began its formal vendor management program, IT costs have decreased 30 percent at Guardian Life.

8. But Be Flexible

I do think in the RFP process, theres too much rigidity, Fournell asserts. It becomes an overwhelming task, where [the insurers procurement staff] has no choice but to stick within the RFP process. Even if [the vendor] brings up an option or an alternative bid, it might be cast aside, because the [procurement staff] wants to give everybody the same opportunity to bid. In some cases, insurers may miss out on something interesting because of this practice, he maintains.

Insurers tend to be too rigid in their functional requirements, he adds, looking to emulate the way business currently is handled rather than embrace alternate solutions. They will describe functions in a way that is fairly prescriptive, in terms of the way they want the technology to operate. Yes, they have to put requirements down, but requirements are considered almost a design by some carriers.

Sometimes being flexible may mean entertaining alternate bids while simultaneously judging all vendors on a common baseline. Or it may mean revising the RFP altogether. We explain our position on why we see it the way we do, Omartian says. But ultimately, if the vendor can convince us were looking at it wrong, we may change our position.

9. Check the Bluebook

Every vendor is like a car dealer, Carroll says. The suggested retail price is $1 million, and the vendor will sell it for two bucks.
How can insurers assess whether the deal being offered is fair? Benchmarking services are available for some commoditized or horizontally focused technologies. However, for most insurance-vertical technology investments, theres no bluebook insurers can consult, contracts insurers sign are kept confidential, and consultants are sworn to secrecy. Ultimately what we found in the formal RFP process was by creating a short list and playing the vendors off each other, in the end, you get down to the right price, Omartian says.

Other than comparing multiple bids, the only solution is to network. We ask late in the game for final respondents to let us speak directly to clients that already have installed relatively recently and that have business parameters roughly similar to ours, says Phillips. We [also] have friends in other places we can triangulate with. Then you have your experiential judgment. You add all that up, and you get a sense of whether this [bid] is reasonable or not reasonable.

If youre a CIO, you really need to have a network among the CIO community, says Johnsen, who adds over the past three years, hes seen vendors particularly willing to negotiate on license feesincluding licensing a system at no charge to secure maintenance contracts and generate other ancillary post-sale fees. License fees are only 15 percent to 20 percent of TCO, Johnsen says.

You also need to assess the value of vendor resources, including partnerships with consulting and other services firms. Ask vendors to provide [information on] the team, Saccocia says. You want to know the names of the individuals on their team, their bios, and references from customers.

Ultimately, says Carroll, theres no substitute for experience in judging whether the upfront and total cost of a technology investment is fair. Its a gut feeling youve [negotiated] the best deal you think you could have gotten, he says.

10. Be Nice

Vendors are the traditional punching bag of the overworked, underappreciated, and micro-managed who are looking to vent frustration and exercise authority. People treat vendors poorly, asserts Johnsen, speaking from experience as both a former CIO and current consultant. The spectrum of bad behavior runs anywhere from hanging up the phone to holding up payments, he says. Weve seen someone hold up a $250,000 invoice because [the vendor] tipped $5 to a bellboy. Insurers dont realize vendors are dependent on them for cash flow.

Of course, bad behavior isnt confined to buyers. Weve seen vendors out there that are very hard to deal with, Johnsen adds. I dont know why, but theyre arrogantthey think theyre the big gorilla and can push people around. Do you want to partner with a vendor like that?

Insurers agree common courtesy can be an effective negotiation tactic. Proving to the vendor youre a good customer and you arent going to buy its product and complain every day is important, says Carroll, who demonstrates this both by his attitude in the negotiation and by showing Pekins successful existing partnerships with other vendors. He also believes Pekin has received discounts deeper than it might have otherwise gotten because of it.

Johnsen adds: In a buyers market, [attention is] easy to get, but the pendulum is going to swing back.