Outsourcing Global News

Private Health Exchanges: Preparing for the Affordable Care Act

As the U.S. moves toward full implementation of the Federal Affordable Care Act (ACA, also known as Obamacare), employers are seeing new challenges and opportunities in the provision of health coverage and other benefits to their employees.
Some predict that ACA will lead to cheaper, better, universal health care. Others predict a calamity. But most agree that the law will drive significant change in the way health care is delivered, paid for and insured in this country. Employers are left wondering how to plan for and manage those changes while containing costs and meeting their employees’ expectations.
Human resource consultants and product vendors are responding by aggressively promoting their services as an answer to the complexity and administrative headaches created by the legislation.  Outsourcing benefits administration functions to these specialists is one approach. Another approach is to engage one of several service providers that have launched private health insurance exchanges in the two years since the ACA legislation passed.
These exchanges promise to address two critical challenges facing employers -1) ensuring compliance with the ACA’s complex rules, in addition to any applicable state and local laws, and 2) securing appropriate coverage benefits for employees at an affordable cost.

What Are the New Private Health Exchange Options?
Individuals and small businesses may use public, government-run exchanges like Covered California to compare and purchase insurance plans.
Larger employers can continue to arrange their own health care programs. As an alternative, some will direct their employees to the public exchanges if the exchanges deliver better pricing, better service and greater options for their employees.  Sixteen states and the federal government will have such exchanges operating come January 2014. This constitutes a threat to existing payors, who may see their business migrating to commoditized public exchanges. Private exchanges recently launched by health insurers, brokers, and human resources and administration consultancies, including major players like Aon Hewitt, Mercer, and Towers Watson, offer individuals and businesses an alternative to the government-run exchanges and traditional payor health care plans. At a minimum, these exchanges generally offer:

·         An online self-service portal for covered individuals

·         Pre-packaged insurance products (medical, dental, vision, life, other)

·         Standard benefits products


In pitching their services to employers, private exchange operators are touting the prospective advantages of:

·         Outsourced regulatory compliance

·         Standardized benefits

·         Simplified administration

·         Reduced costs


Key Questions to Ask
What do companies need to know when they begin researching their options and negotiating with an exchange provider? Some key questions that employers need to consider include:

·         What are the company’s objectives for the exchange and how will they be assured? 

·         How will quality and costs be measured and benchmarked? 

·         What levels of service does the company and its employees expect from a private exchange?  Just an online site where employees can research and select their insurance plans? A call center that can provide individualized advice? Or interactive integration with the company’s existing benefits administration infrastructure?

·         What kind of contractual relationship should the company have with the exchange provider?  Some vendors are putting forward their “software as a service” (SaaS) contracts as the basis for the relationship, but such contracts are inadequate for a broader outsourcing relationship encompassing higher-level customer care and back office functions. Behind-the-scenes business processes are not part of a traditional SaaS deal and must be addressed through appropriate due diligence and contract terms.

·         Who assumes fiduciary responsibility?  Service providers typically want to avoid any fiduciary duty. On the other hand, employers and other plan fiduciaries want to mitigate their ERISA fiduciary liability by engaging a co-fiduciary. Depending on the specifics of the arrangement, the service provider may be assuming a co-fiduciary role, particularly if the service provider will handle employee funds such as premium payments or reimbursement accounts.

·         Which party is responsible for ensuring compliance with applicable laws as those laws change?  Allocating responsibility for complying with federal, state and local laws–particularly during a period of significant change like the ACA’s implementation–can be problematic.

No doubt there will be many turns in the road as the Affordable Care Act moves towards implementation.  Those companies that can’t afford to wait for the legislative dust to settle are being forced to plan in an environment of real uncertainty.   In this environment a clear strategic roadmap, supported by thoughtful contracting, is more important than ever.

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Posted in: Author Murphy, Michael, Hot Topics in Outsourcing

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A Step Up on Step-In Rights

Most outsourcing contracts that I see contain a step-in right for the customer. Generally, a step-in right allows the customer to take over the outsourced operations if the supplier cannot or does not perform, and then “step out” when the supplier demonstrates that it will meet its contractual obligations.
How realistic is it that a customer can ever exercise those rights, and are they worth the additional time and angst to negotiate?
Outsourcing contracts are not the only type of agreements in which you will find step-in rights. They are used in many other commercial agreements, including construction, project finance and development agreements. In those relationships, step-in rights are generally more straightforward and easier to exercise than in an outsourcing relationship, where it may be impossible to “step-in” and perform the supplier’s obligations.
Outsourcing arrangements can be a mix of service models. The supplier may provide all services from a multi-client service center or, at the other extreme, may be operating and providing services only from the customer’s premises, using the customer’s equipment, tools and applications. Often, there is a mix of on-premise and remote services.
The model in which the supplier is on the customer’s premises and operating the customer’s systems is the one in which step-in rights could be most easily exercised. But even in that model are you, as the customer, equipped to step-in? Do you have the in-house resources who can take over the day to day activities that the supplier performs? Chances are, as a result of outsourcing, you have a much leaner organization, and probably don’t have the resources or skill sets to take over the supplier’s operations. The alternative is to engage a third party to step-in on your behalf. That will necessitate finding the right third party, negotiating an agreement with them, and (as the arrangement is likely to be for a limited period), paying a much higher price for those services which you may or may not be able to recover from your incumbent supplier. If you are experiencing the type of service failures that are causing you to consider exercising step-in rights, then it is unlikely that you could tolerate continuing failures during the time it would take to put a third party arrangement in place. 
If any or all of the services are provided from the supplier’s shared service environment then it is unlikely that you will be able to exercise step-in rights. Other clients will not permit a third party to have access to an environment where their services are being performed, and understandably so. Even if your specific services are provided from a dedicated and isolated environment within the supplier’s service center, the problems of having the necessary in-house resources, or finding a third party to take over the operations as discussed above could be prohibitive.
So, if they are difficult or impossible to exercise, is there a benefit to having a step-in right in your outsourcing contract?  Absolutely. As the customer, you need to have every avenue available to you if the supplier is failing in its performance of the services. However, there may be similar rights that you could consider that will not only give you leverage in dealing with the supplier when it is in default, but also might provide you with solutions to help the supplier get back on track in service performance. Here are some examples:

·         Third party consultants who will work with the supplier to improve their performance. Consider requiring the supplier to engage a third party (that you approve) to help them turn around service performance. This could involve having the consultant analyze the performance, and the reasons for default, structure a turn-around plan and require the supplier to implement the turn-around plan in accordance with the consultant’s recommendations. This may not provide a quick-fix for the problems you are facing, but may have the benefit of improving the services and relationship for the remaining term of the agreement.
·         Have your management team engage with the Supplier. If you have the resources, a right to have members of your management team working side-by-side with the supplier may also help turn around performance.  Being under the constant scrutiny of customer management will cause the supplier to be on its best behavior, and that in itself may address the problem. Additionally, your team may be able to provide input on your business needs and environment that is not otherwise visible to the supplier, better aligning the services with your needs. Even if neither of these have an impact, both you and the supplier will have a better understanding of the challenges and frustrations the other is facing.
·         Obtain visibility into the supplier’s staffing and HR challenges. Many suppliers will take the position that they supply a service, and don’t guarantee the allocation of any specific number or type of resources to the performance of the services.  Most customers agree that the supplier should have flexibility to staff the services as it thinks fit, as long as it meets the required service levels.  On the other hand, when faced with chronic problems, understanding the organizational structure of the service team, the number of resources, the time they are allocated to the services, the skill and experience levels of resources, and the turnover rate of staff may provide considerable insight into the reasons for poor performance. Having visibility is not, in itself, sufficient. You will also need the right to require the supplier to make changes to its staffing in order to remedy poor performance.

In many cases, righting the ship and seeing the contract through to the end of its term may be a less painful solution for the customer than terminating for breach. These three options provide a greater chance of success in achieving that goal.


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Posted in: Author Earl, Lisa, Contracting Issues

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Avoiding the Pitfalls of the "Unlimited" License – Four questions you should ask: The Third Question

Let’s quickly revisit the scenario we’ve been following through our first two installments. That is, you are a CIO faced with a decision on whether or not to enter into an “enterprise” or an “unlimited” license arrangement with a major software publisher. With the first installment, we explored the scope of the deal (What does “enterprise” or “unlimited” really mean?“). And, with the second installment we discussed the prospect of a long-term relationship with the publisher (Do we really want to be doing business with this publisher?“).

Let’s assume you’ve gotten yourself a little more comfortable with the idea of the deal after looking at your team’s responses to the first two questions. Even so, there are additional risks to understand and address, which brings us to the third question:

“Does the deal reflect and account for the long-term nature of the arrangement and relationship with this publisher?”

There are two facets to be explored in answering this question. One facet is realizing the rightful expectation of getting better pricing than you would for a short-term relationship (or series of shorter term engagements). The other is making sure the deal is suitably structured for a long-term relationship.

The fourth installment of this series looks at the question “Am I getting a good deal?” from a price perspective.  In exploring that question we will touch on some of the pricing risks specific to an enterprise and unlimited licensing arrangement. Suffice it to say, an important consideration is whether   you will actually achieve the more attractive pricing rightfully expected in long term arrangement.

Now let’s talk about the second facet:

It should go without saying (though, surprisingly, it is often not the case) that these business arrangements should be structured (and have terms, including pricing) that will stand the test of time. That is, they should reflect the long-term nature of the relationship and the likelihood of change.

Why so important? The short answer is things inevitably change … for you, for the publisher and in the industry in general.  And the longer the term the more likely change will occur.

There are any number of changing circumstances that you ultimately may need to consider.  The potential list is long and the solutions and risk mitigation measures vary. Here are just of few examples.

Publisher or Industry-Driven Changes

·      Changes in the Publisher’s Business Strategy: The publisher may be acquired, may stop doing business, may sunset an application, may replace a product with a new (likely more expensive) one or may sell a product to another publisher. Your up-front due diligence (as discussed in question two) may help identify or offer opportunities to contain these risks, but in a long-term relationship this can (and often does) happen. Poison pills and “functionality” use rights can protect you to some extent, but at a minimum you must protect your continued use and support rights. 

·         Changes in Support Offerings: This may include changes to the scope of the support offering or changes in the price for support. There are some protections a customer can pursue. For example:

o    Customers typically can secure the right to “not purchase” annual support for an entire license grant without losing perpetual use rights for that license grant. However, these rights are often subject to tight limitations.

o    Fee “freezes” and increase caps can be negotiated.

o    Customers also can negotiate limitations on changes to the support offering.

As a practical matter, however, these measures offer only modest protections.  The leverage proposition is tipped in favor of the publisher because the customer has few, if any, alternative sources of support.  You should try to obtain as many protections as you can when you make the purchase and then, at a minimum (a) make sure you fully understand the publisher’s ability to change its support offering (in the “fine print”) and (b) determine whether or how these changes could impact the economics of the deal.

·         Changes in Law: A change in law has the potential to alter the method of support, the economics and even, in some cases, the efficacy of the system or   product (or one of its components). The risk is even more acute given the long term nature of these engagements. As a result, customers should, at a minimum, try to build in sufficient exit rights as an ultimate back-stop for this risk.

·         Publisher Insolvency:  This is a risk with in any transaction, but more acute when the product is running an important component of your business – potentially for a long time. The typical measure is a source code escrow, which may not offer the optimal solution (it can be expensive and cumbersome). If an escrow is used, the key is obtaining escrow terms and release triggers that are reasonable and offer a meaningful opportunity to secure the source code when needed.  

Customer-Driven Changes (two examples)

·         Customer Changes in Control:  Another entity acquires the customer or a customer business unit, or a business is divested. There are a variety of protections to consider in this area.  A few examples include: (1) obtaining a pre-agreed right to assign the license (or an allocated portion thereof) to the successor enterprise; (2) addressing use rights during transition and ongoing support; and (3) avoiding or limiting poison pills and analogous terms many publishers pursue if you are acquired.  

·         Price Protection: From a long-term perspective, there are two primary aspects of price that should be considered:

Growth: If your company is on a growth path, the size of an enterprise agreement must be structured to accommodate that growth.   The unlimited deployment term usually lasts only three or four years. So what is the price for additional use rights that are required after the unlimited deployment term? Price holds, for example, are a typical protection. However, you should be cautious of the conditions that are attached to them, including sunset provisions and the requirement of continuous support payments.  

Schedules Slip or Actual Deployment Falls Below Initial Estimates: In very simple terms, the economics of these arrangements (and the business case supporting them) are based on the customer’s projected deployment volumes (use rights) and anticipated deployment schedule. However, more times than not, neither projected demand nor the anticipated schedule are certain. If you wind up deploying fewer use rights and/or deploying those rights slower than your projected schedule, the financials on which you based your investment (your business case) might never come to pass. (This topic will be discussed in more detail in the fourth installment).  

So what’s the takeaway from all of this? In a nutshell, customers should approach these arrangements with a laser focus on: (1) the potential rewards of the long-term relationship, (2) the risks associated with that relationship, and (3) the measures to pursue both to achieve these rewards and address these risks. When you are asked to sign off on an enterprise or unlimited arrangement, ask the question: “Does the deal reflect and account for the long-term nature and relationship with this publisher?”

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Posted in: Author Dottori, Mario, Author Zimmerman, Hank, Enterprise Projects

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Database Marketing Outsourcing

Database marketing outsourcing is a strategic transaction for retailers. This type of outsourcing can facilitate the integration of diverse marketing channels (e.g., web, social media, catalog and in-store sales) and enable more targeted and effective marketing to consumers.

Database marketing encompasses a potentially broad array of services, including:
• Implementation and hosting of a CRM database marketing solution;
• Data cleansing, matching, updating and enrichment;
• Data licensing;
• Data mining and analytics / reporting; and
• Campaign management and analysis.

This is the first of two articles highlighting some key business and legal considerations in these transactions. In this article I will discuss scope, sizing and pricing considerations.

Scope Considerations
Database marketing services are designed to give internal marketing organizations better data, tools and capabilities to conduct marketing campaigns, analytics and related activities. Clients may also purchase a broader suite of services, including marketing campaign execution support.

In our experience, large retailers with mature internal marketing departments tend to favor the former approach (often coupled with significant customization of the supplier’s standard offering) while smaller organizations with less mature marketing capabilities gravitate toward a broader suite of the supplier’s standard service offerings that includes professional services support for marketing activities. A high level of customization of standard supplier service offerings is often beyond reach for smaller organizations that cannot afford the time, cost and resource demands of a significant customization exercise. Customers need to evaluate which approach is best aligned with their internal capabilities and business objectives.

Sizing Considerations
A significant challenge for all customers is properly sizing the solution to meet their projected needs. Pricing is largely based on the volume of customer records and related transactions (e.g., data cleansing, matching and appends) managed by the supplier. It can be extremely difficult for clients to accurately project the growth in these records and transactions, particularly if the database marketing services are being used to expand into new marketing channels such as social media.

An experienced supplier should be willing to help clients develop growth projections based on their experience with similarly situated customers. Clients would be well served to invest significant effort in this modeling before locking into a contract with a supplier. Of course, these models will likely be quite speculative, so the client’s project budget should allow for material variations.

Pricing Considerations
Pricing for database marketing services typically consists of some combination of the following elements:

Implementation Charges – Project charges for implementing the CRM database and associated tools to enable the delivery of services. Typically, this is priced on a fixed fee basis for the labor associated with implementing the solution. Clients should generally resist time and materials pricing for the implementation because it will be difficult for the client to assess the amount of effort required. Suppliers should have sufficient experience in implementing comparable solutions to provide a reliable fixed fee proposal.

Dedicated Asset Charges – Charges for hardware and third party software dedicated to the client’s solution. These costs should be treated as pass-through expenses with no markup or, at most, a small administrative fee to cover the procurement costs. There should not be a separate charge for the shared infrastructure used by the supplier in delivering the services (i.e. those costs are captured in other pricing metrics). Because the supplier will be in a better position to size the dedicated hardware / software requirements based on the projected workload volumes, it is reasonable for clients to negotiate provisions that would hold the supplier responsible for the cost of any additional dedicated hardware / software that may be required to properly support those projected volumes.

Recurring Production Services Charges – Base monthly fee for hosting and maintenance of the database marketing solution, including database management and end user support. The base monthly fee may be tied to a baseline volume of customer records with incremental records charged at a click fee per thousand records. Rates may vary between addressable (i.e. customer name with postal address) and non-addressable customer records due to differences in update processing requirements. Clients should consider negotiating lower rates for non-addressable customer records.

Data Product / Transaction Fees – Variable fees tied to the volume of transactions processed and data appended to customer records by the supplier, including data cleansing, trade area appends, reverse email appends, reverse phone appends and the like. It is important for the client to have a clear understanding of how transactions are counted, particularly how they apply to periodic update processing and refreshes of customer records, and when matches with data in the supplier’s own databases are included or excluded from the count. The processing of a single customer record can trigger multiple charges (e.g., cleansing, matching and appends) as it runs through a waterfall process. The contract should include diagrams of the process flows and suppliers should be required to provide projections of their transaction charges based on these process flows. In addition, clients should have the right to require suppliers to adjust the criteria for determining what constitutes a “match” in the waterfall process for any data matches that trigger discrete transaction charges.

Marketing Campaign Support and Other Professional Services – Monthly recurring charges for a baseline number of hours of support. Clients should have the right to scale the baseline number of hours up or down on reasonable advance notice and purchase additional hours above the baseline at discounted rate card rates.

Minimum Spend Commitments / Volume Discounts – Suppliers typically seek minimum spend commitments and tie discounts off their standard rates and charges to these commitments. Any such minimum spend commitments should meet the following requirements: (i) be easily met based on conservative projections of workload volumes; (ii) can be satisfied over the entire contract term rather than an annual “use it or lose it” approach; (iii) allow for carryover of any deficiency into at least one renewal period; and (iv) if not satisfied, result in the client only paying the supplier the unrealized profit on the unsatisfied balance of the commitment rather than the full amount of the unsatisfied balance (since the unrealized profit represents the supplier’s actual damages based on the failure of the client to meet the commitment). Conversely, clients should negotiate volume discounts for spend in excess of the minimum commitments.

In the next article I will discuss performance and data considerations in connection with database marketing outsourcing.

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Posted in: Author Hutchings, Jeffrey

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