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Renegotiating HRO Contracts

Best results are assured when neither side is under pressure to restructure the deal.

by Mark Hodges

Many of the industry’s early HRO deals are reaching their renegotiation phase. These early deals are in their fourth, fifth, and even sixth years. Some, like the Accenture/British Telecom relationship, have already concluded their renegotiations.

While some renegotiations are contractual in nature—such as contract expiration at or near end of term, end of extension to term, or renegotiation built in the contract at certain dates—others are often unscheduled. Renegotiation may take place due to the occurrence of a business or exogenous event such as bankruptcy or a significant volume changes, which can trigger a review of the HRO relationship. Sometimes a change of executive management creates an HRO renegotiation. Other triggers include client perceptions of their provider, such as non-performance, unresponsiveness, or unequal economics (pricing feels out of line with the market.) This list of triggers is largely reactive.

For a healthy client/provider relationship, proactive beats reactive every time. A reactive stance reduces the probability that the client or its provider will obtain an optimal outcome, perhaps even leading to a re-compete as opposed to a renegotiation. Ideally, the client should trigger a renegotiation as a result of an un-pressured analysis of the relevance and maturity of the current contract and initiate the process proactively with the service provider.

One big surprise for renegotiation clients is how much the HRO market has changed since their original agreement was struck. Many of the most significant changes have taken place in contracting. These include the movement from baseline minus discount to unit pricing with ARC/RRC. Pricing per HR process is now possible.

Service-level methodology refinements have also taken place, such as continuous improvement, flexibility in creating new SLAs, promotion/demotion of existing SLAs, and stabilized “at-risk” bands and pool percentage inflators. Service-level metrics have also markedly improved. Two-tier SLA metrics are now the norm, which promotes higher standards. More HR services are subject to measurement than was the case years ago. This transparency has increased clients’ ability to control demand consumption and to be proactive in how HR is managed and delivered.

Governance also has a more prominent and formal role. Since EquaTerra introduced the first governance schedule to the industry three years ago, clients—not just HRO providers—now have governance deliverables. This has increased the knowledge and accountability of HRO customers, so they make better clients.

They have also gained control of key change provisions such as key personnel, approved service locations, and termination rights. They are no longer the sole purview of the
HRO provider.

If you are a mature HRO client and are willing to assume a proactive approach to renegotiation—in collaboration with your provider—there are a number of steps you can take.

  • Become well-informed. You can’t have too much information. Information and knowledge comes from both internal and external sources.
  • Know your ideal outcome. Be very clear about every aspect of the new agreement and develop contract-related documentation to support that outcome.
  • Define success. Negotiations rarely deliver ideal outcomes, so understand your relative priorities and the compromises you’re willing to make. There will be compromises, no matter what.
  • Engage the service provider. Properly positioned, service providers will see opportunity, not threat. Your provider will have a list of ideal outcomes as well.
  • Assemble the right team. Go to the table with the right team and the right executive sponsorship. This is not a part-time job or a project for amateurs.
  • Have a fallback position. What will you do if you can’t get an acceptable outcome?

Communication and messaging around renegotiation should be clear. The objective is to create a better aligned, more flexible arrangement that will ensure the long-term future and mutual benefit of the relationship. It is an opportunity to extend the agreement and give it new impetus. It should address emerging stresses in the agreement that, left unresolved, could ultimately threaten the relationship. Ensure there is full backing and public endorsement from all relevant executives and stakeholders within the client and the service provider.

Negotiations are not always successful; sometimes they only succeed in exposing an unbridgeable gap between the parties. However, renegotiations that are proactive in nature rarely end with this unpleasant result.

Tags: Consultants & Advisors, HRO Today Global, Multi-Processed HR, Professional Contribution, Sourcing

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