Insurance Networking News recently interviewed Michael Bieniek, a partner in Lord, Bissell & Brook LLP's Business Technology Group, Chicago. With more than 26 years of experience in various technical and legal roles relating to computer technology, Bieniek provides advice on negotiating outsourcing and IT agreements, and on various issues relating to intellectual property, such as copyright protection for Web sites and trademark licensing.INN: What is the typical duration of an insurance outsourcing contract?

BIENIEK: The duration of insurance outsourcing contracts generally ranges from three to 10 years. Vendors typically prefer long-term contracts. Insurers may also want a long-term contract, based on several factors: the value to the insurer of any favorable terms included in the contract; the complexity of providing the services; the difficulty the insurer would have changing vendors; the insurer's certainty the vendor will perform the services satisfactorily throughout the term of the contract; the pricing of the services; and the insurer's level of comfort that the vendor will cooperate in accommodating unanticipated changes.

Insurers who consider long-term contracts should insist on early termination provisions, including termination for convenience, for the vendor's repeated failure to achieve service levels, and other deal-specific conditions.

INN: How can an insurer best communicate expectations of an outsourcing relationship contractually?

BIENIEK: Insurers can reduce the risk of misunderstanding about expectations by including in the contract (on its effective date) unambiguous, detailed descriptions of the services the vendor will provide and the service levels and service-level targets the vendor must achieve.

Vendors often propose that detailed descriptions of the services and the service level targets be included in the contract only after the contract has been executed. Insurers who agree to this proposal put themselves at a disadvantage because they lose significant bargaining leverage upon executing the contract.

Another mechanism for communicating expectations is to include in the contract express consequences for the vendor's partial failure to perform. Although service-level credits perform this function to a limited extent, insurers should include other remedies in the contract, such as the insurer's express right to partial termination under specific circumstances. This is a way to alert the vendor to aspects of the contract that are most important to the insurer.

INN: What is the most important aspect of an insurance company's BPO contract? Does it differ from an ITO contract?

BIENIEK: The most important aspect of a BPO contract is ensuring that the services are described accurately. Services levels are excellent indicators of whether the vendor is performing its obligations, and the insurer has a viable termination remedy if the vendor does not perform as promised.

Although service descriptions and service levels are also the most important aspects of ITO contracts, the substantive differences between BPO and ITO contracts drive differences in the implementation of this aspect of those contracts.

BPO service levels measure the success (or failure) of the processes the vendor performs and can be linked to the results the vendor achieves. ITO service levels measure the vendor's success (or failure) in making available to the insurer tools that the company will use to perform those processes.

For both BPO and ITO contracts, the insurer will never be fully compensated by service-level credits for the vendor's failure to provide the services.

Consequently, insurers are only fully protected from the vendor's repeated failure to perform by ensuring the termination remedies available to the insurer can be practically implemented without undue disruption to its business.

In both BPO and ITO contracts, a termination remedy that can be practically implemented is valuable to the insurer because the insurer may need to terminate the contract and because the vendor will be more likely to negotiate about inadequacies in the provision of the services if the vendor knows the insurer can viably terminate the contract.

INN: Why is it so important to include change control provisions?

BIENIEK: Even if the contract includes unambiguous, detailed descriptions of the services the vendor will provide, changes in market conditions, the insurer's business objectives and available technology will lead the insurer to require changes to the original services over the term of the agreement.

Change control provisions define a formal structure the vendor and the insurer can use to accommodate the need for change. Including these provisions in the contract on the effective date protects the insurer because the vendor has much greater negotiating leverage after the contract is executed, and these provisions constrain the vendor's ability to exploit that increased leverage.

Note, however: Change control provisions are only effective when coupled with a well-drafted definition of the dividing line between those services the vendor is required to provide on the effective date and proposed services the vendor would be required to provide if the vendor and insurer use change control procedures to add those proposed services to the agreement.

It is not uncommon for more than a third of a vendor's revenue from an outsourcing contract to be attributable to "new services" that were not required under the contract on the effective date. A well-drafted definition of new services coupled with strict change control procedures can protect the insurer from significant costs attributable to scope creep and uncontrolled project costs.

INN: Why is it important for insurers to have a "divorce clause" in an outsourcing contract?

BIENIEK: After a vendor provides services for a material amount of time, the vendor will be more knowledgeable about the best way to provide those services. The vendor will also own or have licenses to intellectual property necessary to provide the services, as well as essential documentation, business records, know-how and equipment. Finally, the vendor will have entered into agreements with third parties that are necessary to provide the services.

At the time that an outsourcing relationship is terminated, negotiations between the vendor and the insurer will be, at best, difficult, and the vendor will be reluctant to empower the insurer or a replacement vendor to provide the services it was providing.

Consequently, it is important that the contract include on its effective date the vendor's obligation to provide to the insurer or the insurer's designee on termination all rights to intellectual property-including the development and production versions of the software the vendor uses-and equipment and third-party contracts the insurer will need to provide itself or obtain the services the vendor was providing under the terminated contract.

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