Health Plan Generates $75 Million in Savings Through IT Vendor Management
After a high-profile merger, a major health management organization needed to generate the IT synergies it committed to the street. The health plan engaged Deloitte Consulting LLP to provide outsourcing advisory services help them in their efforts to streamline the predominately outsourced IT infrastructure of the newly merged company to reduce operational costs. Deloitte Consulting also helped them re-evaluate their outsourcing vendor relationships, and, with that as a basis, they were able to renegotiate their contracts and achieved $75 million in savings.
The organizational environment of the newly merged health plan was complex. The two formally “integrated” companies were still essentially separate entities undergoing a profound structural change, working through cultural differences, and striving to meet customer and market demands with a united front.
IT leadership also faced a formidable challenge: Taking control of the complex, partly unfamiliar, IT environment and delivering uninterrupted service while evaluating potential synergies. This included evaluating three critical outsourcing contracts for mainframe and mid-range systems.
Deloitte Consulting helped guide the client through a complex evaluation process which resulted in their renegotiating three outsourcing contracts and instituting new standard service level agreements (SLAs) across the vendors — all on an aggressive timetable.
The two companies historically made different decisions regarding service delivery arrangements and vendors. Deloitte Consulting worked with the merged company’s leadership to help them develop a straightforward outsourcing strategy to balance price considerations with service and quality requirements.
Assessment and Synergy Identification: The joint project team started with a comprehensive, strategic assessment of each entity’s IT service portfolio and service delivery models (e.g., in-house, outsourced and off-shore). For each model, the analysis addressed a wide range of aspects, including IT reporting structure, internal and external stakeholders, documented SLAs, and financial and legal issues.
As a result, two threads of work were identified. The first focused on revisiting the cost of the mainframe outsourcing agreement. The second focused on developing a Request for Proposal to outsource maintenance for over 1,000 mid-range servers and to manage the resulting bidding process. However, after a weighted evaluation of the potential vendors’ capabilities and a detailed financial analysis demonstrated that packaging the mainframe and mid-range components into a single negotiated deal could result in exceptional savings, the client decided to renegotiate the three existing outsourcing deals.
Contract Negotiation: The contract preparation and negotiation process took three months, with a central focus on standardizing SLAs and contract structures across vendors. By developing comprehensive and centrally-managed SLAs the client was able to more effectively evaluate the scope of existing contracts and their corresponding service levels and vendor responsibilities to determine whether they were aligned with operational needs. In addition, Deloitte Consulting recommended that the client make an important revision regarding their disaster recovery (DR) liability. Previously, the client had a “handshake” agreement for DR, which could present a large potential risk. The client was able to include in the final contract appropriate DR provisions that were aligned with their business continuity plan.
With three client negotiation teams operating in parallel, a core group acting across the project streams monitored the coherence of the contractual arrangements. Ultimately, the client achieved an excellent implementation of the new standardized service requirements.
In the final negotiation stages, a major IT service provider emerged as the clear candidate to manage both mainframe and mid-range systems. Deloitte Consulting’s knowledge of the vendor’s operational model and current, industry-specific rates for adequate service levels helped the client gain additional savings.
By adopting a holistic strategy that consolidated services and renegotiated vendor contracts, the client expects to reduce costs by an estimated $75 million over five years. These savings are driven both by realized synergies and the implementation of more efficient processes to accommodate revised and standard service level requirements. The project helped bring about a refreshed IT environment, an updated architecture, and significantly improved service quality across service categories ranging from storage to DR procedures.