Negotiating is no less complicated—or important—the second time around.
By Debora Card
Effective leverage during outsourcing contract renewal negotiations comes from developing viable alternatives that are financially, technically, and tactically feasible and desirable. It also requires being ready, willing, and able to execute on those dynamics.
Start early; don’t rush. The more time you have before expiration, the more options you have to introduce competition, move some or all of the services, and hold firm on your requirements. As the industry has matured, service providers have implemented greater discipline and approval channels. They will need time to vet the “new deal” through their organization, so allow ample time for their response. In general, you want to start renewal planning 15 to 24 months before expiration for single-process and 24 to 36 months before expiration for more complicated, multi-process contracts. To determine the time you’ll need, add 9 to 12 months to the time it would take to transition services to a new provider or back in-house.
It might not be too late: Many agreements include an extension clause that allows you to extend your agreement in one- or two-year increments at the client’s sole discretion. If you’re already past the optimal starting point, you might want to use your extension right to regain this leverage.
Do your homework. Collect market data to understand where your provider relationship stands against current market standards for pricing, SLAs, services, and terms and conditions. Understand what market alternatives exist that could meet your critical requirements. For example, what other providers offer global services on a PeopleSoft platform or what niche solutions are available to better serve your talent management objectives. Finally, consider your own organization’s willingness to transition to a different solution. With all of these things in mind, weigh the risks and benefits of all the possible options to identify those that are truly feasible alternatives that will be supported by your organization.
Realign with reality. Chances are that not everything you planned for in your original agreement is still valid. Your business may have grown or shrunk, standardization may not have materialized as planned, or your service provider may not have delivered all of the services in all of the geographies that you originally contracted for. Both sides may feel some disappointment that they didn’t get what they bargained for. What becomes important at this juncture is not what was promised, but what is the current and future reality and how do you realign expectations, service delivery, and pricing around this new paradigm. This may reasonably involve changes to pricing structure, addition or deletion of services to better match service provider capabilities, or other realignment of responsibilities.
Remove the fog. Think about the top three to five areas where you and your service provider regularly disagree. Typically, these revolve around two primary areas: 1) scope of services (what is the service provider supposed to do, and should it be in the base price or a change order?), and 2) governance (how do we manage change, performance issues, innovation, etc.). Often these are the areas that lack sufficient definition in the agreement. Now that you have a few years of experience with the relationship, this is the perfect time to clarify expectations and create a more workable structure.
Play out your hand. After you’ve gone through the preparation phases of collecting market data, understanding your current environment, weighing your options and clarifying expectations, you have all of the components necessary for a solid strategy for entering into renewal negotiations with your provider. There’s one last critical step . . . make sure you have executive alignment with all possible outcomes. Now, it’s time to execute against that strategy with confidence.
• Communicate your renewal requirements (document your expectations for changes to pricing, scope, terms, SLAs, account management, etc.)
• Communicate your timeline, which allows plenty of time to “go to market” if necessary
•Require a formal, written response from your service provider on all requirements
• Continue negotiations, keeping key stakeholders informed until you have either reached an acceptable agreement aligned with your strategy, or determined it is necessary to evaluate other alternatives.
Debora Card is an associate partner at TPI and is an HRO veteran who has participated in more than 50 contract negotiations. She can be reached at 586- 677-8351 or
debora.card@tpi.net.
