How the ‘Unknown Unknowns’ Forged a Great Relationship | Article

Outsourcing Excellence Award – Best First Steps – National Life and Perot

National Life Group, a financial services company providing insurance products, annuities and mutual funds, relied heavily on its mainframe, a decidedly dated technology. Currently 1,000 people use the mainframe, which has 490 MIPS. For years it outsourced this technology.

If there’s one thing an insurance company has to ensure, it’s that its products are accessible and safe. Given the consolidation in the insurance industry and the stiff competition on the mutual funds side, the medium-size company has to be on top of its game to compete. Not having ready access to data can be damaging.

But in 2006 the company was “having challenges on a number of fronts,” reports Frank Costantino, vice president and chief technology officer for NLGroup.

First, it heard rumors its current supplier was ready to pull out of the mainframe space. Supporting evidence: the supplier was not willing to invest in improving its mainframe services. And “it was not willing to make this relationship work from a financial perspective,” he says.

NLGroup needed better service and wanted a stronger disaster recovery process. “This was something they should have been providing all along,” says Costantino.

The NLGroup executive says the financial services company “had a discomfort factor with the service basics” because his staff “spent too much energy monitoring the day-to-day stuff.” You know you have a problem when “you always have to closely monitor billing and disc utilization.” Not a good use of intelligent IT staff.

Supplier selection

NLGroup began checking out alternatives. It had done consulting with Perot Systems. “When the relationship with NLGroup’s supplier was going south, they called us to see if we would be interested in the work,” says Bruce Palmer, Perot Systems client executive for NLGroup.

NLGroup had to complete the entire conversion over a weekend; the company couldn’t afford to have its lifeblood down during business hours. “It was critical to select a partner that could honor a two-day transition,” says the NLGroup exec. “We tried to assess how they had done conversions in the past to get a sense of how comfortable they would be in making the kind of transition we needed.”

But cultural fit was important too. Costantino says NLGroup had to feel “we could get along with them on an ongoing basis.”

The companies signed a contract for five years in September 2006 that was later extended to six years.

The transition: shocks no one wants

Because NLGroup was testing the waters, it did not want to alert the supplier it was shopping. So Perot Systems had a difficult time pricing services since it could do no up-front due diligence. “We both knew there might be some surprises since we did not have full access to the people who were running the system,” says Costantino. “That meant both parties had to have a fair amount of trust.”

“We knew there were stress elements since we had to negotiate a contract without doing much due diligence,” adds Palmer. “This is very unusual. We agreed because we trusted them. We went in with our eyes open. We knew we’d have to bring our original contract in line with reality. We agreed because this was a collaboration from day one.”

Challenge No. 1: The wrong manager. “We got off on a shaky foot,” recalls Costantino because it became clear early on Perot Systems’s project manager had difficulties with the transition, partly because of the now-strained relationship with NLGroup’s existing supplier. “He just wasn’t strong enough for what we faced, since he had to work with four different companies,” says Palmer.

When Costantino shared this concern with Perot Systems, “they took it to heart and made a change. They brought on an excellent project manager who had much more depth and strength,” he says.

Challenge No. 2: NLGroup employee resistance. Some employees had personal relationships with their colleagues at the old supplier. “There were many times when some would say, ?We are never going to make this work.'” Costantino says there was some element of truth to this because “a lot of knowledge about our systems sat between the ears of people we would no longer be working with.”

Altering the transition plans

Challenge No. 3: The tapes. Perot Systems priced the engagement on the premise it could load up all the data tapes on a truck, drive them across country to Texas, and migrate over a weekend, as required. “That’s pretty easy to do if you actually have the tapes,” says Costantino.

After NLGroup signed the contract with Perot Systems, Perot Systems staffers visited the old supplier and made a shocking finding: The former supplier had migrated NLGroup’s data onto direct-access storage (DASD) and destroyed the tapes. “This is not an uncommon practice today,” says Palmer. The problem was NLGroup thought the data was on tape.

This discovery “destroyed our ability to do the transaction as planned,” recalls Palmer.

Since the tape migration was not going to happen in February, the two parties “had to go back to the drawing board and understand what our options were,” says the NLGroup executive. Whatever path the companies chose, it was going to be very different.

“This was a scenario where everything could have gone wrong,” says Costantino. NLGroup’s CEO and CFO met with Perot Systems leadership. The companies hammered out a plan and agreed to share the additional costs appropriately. “Perot Systems was very much interested in making sure this relationship was going to be a good one on an ongoing basis. Neither one of us wanted to start off with bad feelings about how the other behaved. Both teams rolled up their sleeves, developed alternatives, and made difficult choices without blame and with flexibility,” says Costantino.

The solution: disk mirroring. Perot Systems set up a DASD device in Texas and connected it to a similar device in the former supplier’s data center. Perot Systems then synchronized the two drives. In a few weeks “we had the same data — 45 terabytes — in both places,” reports Palmer.

Challenge No. 4: Software licensing. Everyone was surprised to discover some of the requisite software on the old supplier’s platform was not included in the original contract. “This caused more issues and increased unexpected costs.”

The companies headed back to the negotiating table. “We worked out an arrangement through negotiation and discussion,” says Costantino. The solution: Perot Systems migrated similar software it owned, and NLGroup incurred some additional expense to buy what it needed.

Ninety days after the June transition, the companies did a true-up, adjusting some of the baselines and service level agreements. “We kept a list of various little things we needed to adjust. Then we negotiated a second supplemental agreement,” Palmer says.

Why the transition was a good harbinger of the future

“Perot Systems had to adjust many times during our transition. They’ve demonstrated the ability to rethink things and modify their approach when necessary,” says the NLGroup executive.

Despite the gargantuan challenges, Costantino reports NLGroup employees experienced “minimal impact” during the transition. The financial services company was able to go live after two trial runs. “Two weeks later some people asked me when the transition was going to take place,” laughs Costantino. He says the fact that they had a successful transition under less-than-optimal circumstances “speaks volumes about Perot Systems’s capabilities.”

When the transition was over, Perot Systems sponsored a big shindig to celebrate. “They did the whole nine yards here in Vermont,” says Costantino.

Why this relationship works

At the outset, NLGroup feared distance might become a problem since Perot Systems is headquartered in Texas. “We wanted to work closely together and have high levels of communications,” says Costantino. “We were worried that wouldn’t happen because they are so far away.”

Perot Systems felt this was important, too. Palmer ordered a video conferencing system and paid to have it installed at NLGroup. “It was a little thing, but we sure appreciated it,” says the NLGroup executive. Now the two teams have a video conference every Wednesday.

Both companies have skin in the game. NLGroup needs to be able to provide good products to its customers in a highly-competitive market. Perot Systems was “eager” to have a stronger presence in the insurance industry, according to Costantino. “They wanted to prove they could be successful in this space,” he says.

NLGroup has been impressed with Perot Systems’s flexibility and its solid processes. “They’re flexible in accommodating our needs. If we try to push them outside of what they believe will be good for the relationship, they won’t go there. They want to do what’s right for the relationship,” says Costantino.

Perot Systems has strong governance experience. “They are providing visibility into our IT processes that we didn’t have before,” the NLGroup executive says. Palmer agrees that the relationship’s transparency is a strength. “Neither of us have any hidden agendas,” he says. Same for integrity. “Neither of us ever shade the truth. I don’t wonder if anyone from National Life is being honest,” says Palmer.

The NLGroup exec says Perot Systems treats this relationship as if it were the most important one at the supplier. “They make us feel like we are a critical customer to them,” he says.

Costantino says his team really likes Perot Systems’s approach to an annual “technology plan.” Palmer says Perot Systems presents its forecast on the IT industry as well as ongoing efforts. “We discuss how they might want to change their own IT plan,” he says.

Business benefits

“People sleep better,” says Costantino. “There’s a sense we are on more solid ground. The challenges we had with our old supplier have all but disappeared since moving to Perot Systems. There’s a great confidence that all our old choke holds are gone.” For example, there used to be “great consternation” around year-end processes. No more!

One reason: “We now have a greatly improved disaster recovery plan,” says Costantino.

Perot Systems instituted a strong governance mechanism for National Life to manage the relationship. Concerning costs, they are “a wash” compared to the old company. However, NLGroup is getting a larger box, more storage, and better back-up processing for the same sum.

Because the data is secure, Costantino says the company “now is more confident that it can deliver solid customer service to our policyholders without interruption.”

Why this is a winning relationship

“Transitions from one outsourced relationship to another are always challenging,” says Costantino. “The magnitude of issues that came to light after we signed the contract threatened the success of the new relationship. Both parties were committed to working through the challenges and finding mutually agreeable solutions to establish a strong, enduring relationship.

“Neither of us used the contract as a defensive or offensive tool. We relied on an environment of totally open communication to get through extremely difficult challenges. The result: a mutual trust that was built out of trial and crisis. Both of us operated on the principle that what we do today will have an impact on the overall relationship over time.

“It’s always easy working with someone when the relationship is going fine. You see how strong your relationship is when you deal with significant challenges. Ours is strong,” concludes Costantino.

Adds Palmer: “We focus on the relationship more than short-term profitability. We want to be their supplier when they need more help.”

Lessons from the Outsourcing Journal:

  • It’s easy to get along when things are going fine. Surviving major relationship challenges forges stronger relationships. It’s possible to do this when both parties put aside near-term profitability for the long-term health of the relationship.
  • Switching suppliers is always challenging. Expect major surprises if the new supplier can’t do much up-front due diligence.
  • Visibility is a strength in outsourcing relationships.

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