How to renegotiate HRO contracts in a down economy. Know what you can sacrifice and assemble a good negotiations team.
Amid economic uncertainty, the threat of recession, and cost-cutting mandates from up high, most HR organizations are trying harder than ever to do more with less—and that includes outsourcing. If it hasn’t happened already, you’ll probably be expected to revisit your HRO contracts, find efficiencies, and renegotiate for lower costs.
But that’s easier said than done when your service provider has already banked future revenues based on current terms. Moreover, while most modern-day outsourcing contracts allow for pricing adjustments as your needs change, most legacy contracts weren’t constructed with this adaptability. So how do you go back to the table to reduce the cost of your outsourcing while continuing to get the services you need?
The key is to approach the renegotiation of your HRO contract as a positive opportunity that can benefit both parties, resulting in a more agreeable price for the buyer and a long-term renewal for the provider. History shows that when it comes to renegotiating contracts in a down economy, service providers have been willing to earn a little less in the short term as an investment in a healthier relationship for the long term.
Getting ready for renegotiation
Before engaging your service provider, prepare for the renegotiation process by taking these important steps:
- Assess the current contract and define success. First, consider your organization’s needs and how they may have changed in the current economic climate. What are your current and future HRO requirements? How does the current contract meet those requirements? How are current and emerging economic conditions affecting your HRO needs? What is the current market pricing, and how does it compare with the pricing in your contract? What are the service provider’s needs, and is the contract meeting them? In addition, define your ideal outcome, but because negotiations rarely deliver ideal outcomes, also define your relative priorities and the compromises you’re willing to make. It’s important to look at success not as a single objective but as a desirable range.
- Get executive and stakeholder support. From there, get executive sponsorship for the effort, which will make it clear to the service provider that the need to renegotiate has commitment at the highest levels. In addition, solicit the support of your stakeholder community, which might include the corporate executive team (the customers of the HR executive); the HR executive (essentially the buyer of the provider’s services); the retained HR organization (those employees who interface directly with the service provider); the workforce at large (the end users of the services provided by the HR organization); and third-party suppliers of HR services.
- Assemble the renegotiation team. It’s critical to establish a strong team that understands the need for a new contract, has a broad enterprise perspective, and can position the renegotiation as an opportunity for both buyer and provider to realign the contract for mutual benefit. An effective negotiating team usually consists of a C-level sponsor; a representative steering committee; a business-savvy functional executive who is respected by the stakeholder community; subject-matter experts for the different service components; and experienced outside counsel.
- Have a backup plan. Finally, consider your fallback sourcing strategy. What will you do if renegotiation is unsuccessful? Can you consolidate the services of several HRO contracts into a single relationship? Are there opportunities to initiate some short-term projects with a fast return? As part of your renegotiation process, remember to consider alternatives.
After these preparations, you’re ready to engage the service provider in renegotiation talks. The most senior executive in the HR organization should make contact with the most senior executive in the provider’s organization. And remember that your approach to renegotiation usually influences the provider’s response. Focus, therefore, on setting a positive tone, one that can drive a lower price for you and a long-term renewal for your service provider.