CGI, insurer scrap contract over cost concerns

Montreal-based IT services firm CGI Group Inc. and Fireman’s Fund Insurance Co. (FFIC) of Novato, Calif., last week announced that they have mutually decided to terminate their IT infrastructure services contract.

FFIC spokesperson John Kozero said the insurer outsourced its entire IT infrastructure to CGI three years ago. “We kept the development of more sophisticated business applications (in-house)…but when it came to the infrastructure that allows processes to go on or allows each desktop, printer and mainframe to function, all of that is what [CGI has] been doing.”

The “termination for convenience” is expected to be effective May 1, 2005, a CGI news release said. According to CGI spokesperson Eileen Murphy, this is the first time this has happened to the service provider.

The decision was made after FFIC sought cost reductions beyond what it was getting already with CGI, as well as major adjustments to several key contract provisions.

“Our client FFIC came to us with more savings that they wanted,” Murphy said. After the two parties sat down to discuss these additional requirements, “we came to conclusion that it was not beneficial for us to go forward.”

In a statement CGI said the contract was already not meeting its profitability standards and that the service provider could not achieve a revised agreement that would meet FFIC’s requirements while also being in the interests of CGI’s shareholders.

“Outsourcing is very much a shared-risk model and as such it has to be beneficial for both companies to move forward. In this case, it wasn’t,” Murphy said.

The net impact of the FFIC termination on CGI’s order backlog (a “bank account” of expected revenue coming in over the years from long term contracts) is valued at $200 million, Murphy said, adding that it is only 1.5 per cent of the total backlog, which as of September 30 was $13.0 billion.

FFIC spokesperson John Kozero said his firm has gone through some major changes in business focus over the past few years, which has prompted it to start thinking about implementing a new IT model.

About four years ago FFIC had to “plunk pretty close to (US)$1.3 billion into reserves for asbestos litigation,” Kozero said, leaving the firm with “an income statement and balance sheet that was hurt by this infusion.”

Recognizing that it needed to turn around the company and shape it up for its stakeholders, FFIC “got a new CEO, shed five lines of business” and reduced its headcount from 8,500 employees to 4,600, he said, adding that by the end of 2003, “we were able to go into the black and we have been improving that situation over the last nine months.”

Emerging leaner and with a more critical eye for savings and customer retention, FFIC now wants to turn itself into “the easiest insurer to deal with,” Kozero said. The firm has started moving toward giving its customers easier access to information such as business loss reports.

“They (the customers) might have half a dozen claims going on at any given moment and they need to be able to log onto a computer and see what the status is on a carrier or a claim,” Kozero said. For that kind of accessibility, “there must be way to deliver that information easily and securely. All of this requires intensive IT understanding and work.”

The insurer also has about 20 different industry intranets set up for customer service purposes. A customer in the manufacturing industry, for example, can go into the manufacturing intranet and find information on loss control, ways of filing a claim, medical providers and risk management, all specific to that particular industry.

There’s also information on the intranets about things that have nothing to do with insurance — “anything from preferred pricing on work boots right through to data backup for systems,” Kozero said, adding that this service also requires additional IT work.

Up until its decision to implement a new IT model, the original outsourcing agreement “did meet expectations in terms of savings” for FFIC, according to CGI’s Murphy. But after discussions to renegotiate their contract, CGI and FFIC decided to part ways, she said.

Murphy said the termination of contracts is just part of the outsourcing business. “These decisions sometimes have to be made and think it is important to make sure that we provide a smooth transition for client. It was a responsible decision for both parties.”

FFIC’s Kozero said the insurer is currently looking at other outsourcers that might be able to fulfill its needs and hopefully in the next three months it will be able to choose one.

CGI will be helping FFIC in the transition away from its own services, Kozero said. That will involve taking care of “nitty-gritty” business processes that require a lot of IT work — for example, policy printing, whereby policies that have been processed on a certain day are automatically printed and put into a mailing system at the click of a button, he said.

Kozero said FFIC has learned in the past three years “to be understanding of the problems of a vendor who must deal with all of the complexity of our business …. There are so many little things you learn when you enter into an outsourcing arrangement.”

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