Fireman’s Fund’s Pay-Per-Use IT Contract

When Diane Comer, chief technology officer at the Fireman's Fund Insurance Company, based in Novato, CA, decided not to renew her company's previous IT outsourcing agreement in 2004, her decision was based on the service provider's reliance on an obsolete OS/2 platform. She sought another service provider that could deliver "innovative technology" yet cost-effective solutions. After conducting research, Fireman's Fund opted for a seven-year $157 million agreement with IBM that relied on a pay-per-IT usage or on demand agreement, which operates like a utility bill. Fireman's Fund only pays IBM for the IT technology that it uses, which can save as much as $11 million a year.

The IT agreement, which was signed in December 2004, covers mainframe services, midrange service, distributed platform, help and service desk, and break/fix support for desktops.

This case study shares eight insights gleaned from Fireman Fund's experiences.

–> INSIGHT #1. Pay-per-use eliminates pressure to buy more hardware and software.

Ms. Comer suggested that in most IT agreements, the service provider encourages additional purchases and increased fees. In its former agreement, Fireman's Fund expanded to 700 servers, though Ms. Comer estimated that most operated at about 30% capacity during most times. "The incentive from the outsourcer is for me to buy more servers," she said. But in the new IBM outsourcing agreement, IBM operates Fireman's Fund's computer operations out of IBM's Boulder, CO facilities, so there's no incentive for the insurance company to acquire additional equipment.

–> INSIGHT #2. As the business model changes and demand rises and falls, transactions determine the cost, not infrastructure.

In this new agreement, Fred Matteson, chief information officer at Fireman's Fund, said, "We are using capacity when we need it and not paying for it when we don't need it." IBM instituted this pay-on-demand outsourcing agreement because "It offers the capability of having an IT infrastructure that can be more responsive to the changes in a company's business model," explained Joe Cooper, director of insurance outsourcing at IBM, based in Somers, NY.

For example, IBM runs the Fireman's Fund help desk. Fireman Fund pays IBM for the number of service calls it answers. "If our volume rises, we pay more. It eliminates the approach of ÔWe need you to pay for 15 people,'" Ms. Comer noted.

At Fireman's Fund corporate headquarters, IBM assigned a team of about a dozen IT outsourcing specialists to handle the account, including a project manager and a manager in charge of delivery of services that interfaces with IBM's data center in Boulder.

–> INSIGHT #3. Make sure your agreement emphases innovation, not just a change in how you pay.

Ms. Comer said that while cost saving played a role in its IT agreement, innovation was the key. In its former agreement, there was no inducement for innovation. "If something broke in the old agreement, we had to replace it," Ms. Comer said. But as technology plays a more expansive role in the insurance business, Fireman's Fund wanted to stay current in technology and avoid suffering any business losses due to obsolete equipment. Mr. Cooper said that IBM is charged with updating "software, hardware, printers, email, and application computering resources on a consumption basis. Customers are charged based on resources they consume, so they don't need to pay directly for upgrades to the technology environment."

Hence, Ms. Comer said IBM conducts periodic "refresh" sessions for each category of hardware to ensure that Fireman's technology is keeping pace with the marketplace. "IBM meets with us every 90 days to participate in planning for upgrades on software as well as the most current releases of a specific application," she noted.

–> INSIGHT #4. Make sure your service provider is an active participant in helping keep costs down.

IBM is taking an active role in keeping costs down. Ms. Comer noted that Fireman's Fund relies on an abundance of printers, nearly one for every four of its employees. "They've not been managed efficiently in the past. Under the new agreement, we'll be reengineering our printing capabilities since we only pay per page printed. IBM is our partner in helping make this transition," she said.

Mr. Cooper added that IBM helped one company reduce its personal printers and inventory of over 5,000 print cartridges, moving it to a network environment, and saving the company considerable money.

–> INSIGHT #5. Don't gloss over the details inherent in figuring out your volume of work, since that is part of determining usage fees.

Determining exactly how IBM calculates savings for Fireman's Fund usage is considered proprietary information by IBM. However, Fireman's Fund and IBM agreed on an "average" usage of IT processing for the insurance company; then fees are calculated based on how much IT data processing was used compared to its norms. Ms. Comer noted that Fireman's Fund "foresees significant savings, all based on the ability of IBM to use its economy-of-scale advantages to deliver the quantity and quality we need compared to our previous model."

For example, Mr. Cooper noted that if an earthquake strikes California, where Fireman's Fund is a major personal and commercial insurer, and its claims rise, IBM's data center and storage facilities have the automated capability to handle the additional volume. "Fireman's Fund would not incur any new asset costs," he added.

–> INSIGHT #6. Make sure managers understand the value of technology, to prevent discouraging its use.

Might this pay as you go agreement lead managers to encourage their staff to avoid or limit calling the help desk in order to keep their IT costs down? Ms. Comer said that this pitfall is unlikely to happen since insurance companies rely so heavily on technology. "IT supports many functions in the organization including the underwriters, claims, lines of business, and independent agents who must perform using faster, better, smarter software," she asserted. If any manager at Fireman encouraged staff to diminish their use of technology, it would be counterproductive, she said.

–> INSIGHT #7. If you're already outsourcing IT, the transition to pay-per-use will be easier than if you're not.

Because Fireman's Fund previously relied on an IT outsourcing agreement, it incurred minimal transition to adapting to IBM and its pay as you go approach. However, it incurred some transition costs at the outset as the data center moved from its previous site to IBM's data center. Since Fireman's Fund had downsized IT staff in its previous agreement, no reduced staffing occurred under this agreement. In fact, Ms. Comer noted that in the previous outsourcing agreement, it "cut too deeply" and had to hire more networking managers to make sure that Fireman's Fund was managing its technology properly and overseeing the IT agreement.

–> INSIGHT #8. Pay-per-use provides more predictable costs in developing new lines of business.

Despite the fact that the agreement is pay for usage and fees vary, Ms. Comer suggested that this system offers more predictable costs in the future than its previous IT agreement. For example, if Fireman wants to double its number of personal insurance automobile products, which would increase printing of renewal notices, it would pay on an additional IT transaction basis. "This allows us to understand the total cost to Fireman's Fund of increasing the business line. With that information in hand, our actuaries and financial authorities can then construct pricing models that are more predictable and reliable," Ms. Comer asserts. In addition, if it eliminates a business, its IBM costs would likely decline.

If another CIO or chief technology officer were considering using as this IT pay as you go model, Ms. Comer advised that he or she review the "provider's skill and experience" in these kind of agreements. Has the company provided these services in the past, and do they possess the infrastructure and expertise to support it? Do they have the hardware, network support and staffing to support it?

Mr. Cooper added that this on-demand pricing arrangement has worked across the board with financial services, small businesses and manufacturing companies. Companies, however, have to be prepared to make subtle adjustments as "they move from managing a technology environment to managing a relationship" with their service provider.

As the pay-as-you-go contract continues, Ms. Comer expects that Fireman's Fund will continue to "transform its technology infrastructure" in addition to saving money on the pay-as-you-use basis.

Useful Links:

Fireman's Fund
http://www.firemansfund.com/

IBM's On Demand Business site
http://www-306.ibm.com/e-business/ondemand/us/index.html?P_Site=S500