When striking a new deal with a provider, make time an asset, not an enemy.
By Ben Trowbridge
“Timing is everything. There is a tide in the affairs of men which when taken at the flood leads to fortune…” —William Shakespeare
The consequences to a buyer company that fails to renegotiate certain provisions of its outsourcing contract at the right time can be devastating. And right now is the right time for many organizations.
As the outsourcing services market continues to undergo significant changes in service provider mix, technological advances, and price drops, more and more outsourcing buyers are entering into the contract renegotiation process wholly unprepared. As a result, many leave significant financial savings on the table and/or structure sub-optimal deals that don’t adequately serve their needs and deliver real value.
The best way to avoid these consequences is to understand a few key points:
1. Why you need to renegotiate your outsourcing contract;
2. When to renegotiate your outsourcing contract; and
3. How to prepare for an outsourcing contract renegotiation
A variety of situations can bring about the need to renegotiate your outsourcing contract. From an outsourcing buyer’s perspective, four triggers are most common:
• Contract expiration. This is the most obvious trigger for renegotiations. With the contract approaching expiration, the service buyer needs to determine and pursue the best course of action for its company.
• Unacceptable financial performance. When a contract fails to deliver against the business case or is otherwise not meeting financial objectives, it can lead to contract renegotiation.
• Unacceptable service performance. When service operating performance cannot be aligned with buyer expectations, it can lead to renegotiations; this includes persistent shortcomings in service levels, failure to meet key performance indicators (KPIs) over an extended period, or underperformance against market standards.
• Major business or market changes. When the buyer acquires a new business, divests an existing business, or moves into a new market or location, the existing deal may no longer apply, and the service provider, buyer (or both) may wish to restructure the agreement to accommodate these changes.
Outsourcing buyers may also choose to renegotiate their outsourcing contract in order to:
• Obtain services at current market prices, service levels and terms;
• Incorporate the latest legal terms/protections;
• Reevaluate their current delivery model and incorporate appropriate new aspects (e.g., cloud, SaaS and other new technology); and
• Take the opportunity to reset the relationship.
Buyer organizations are sometimes too nervous to approach their provider about renegotiations, fearing the mere mention of the “R” word will trigger a negative reaction and lead to degradation of services and the relationship. However, in Alsbridge’s experience, the provider is typically a willing partner in the renegotiation process. A provider will want to renegotiate the outsourcing contract in order to achieve various results:
• Reset the overall relationship and align expectations;
• Implement a standardized model that provides lower cost, increased flexibility, and visibility;
• Simplify, standardize, and modernize the environment for future efficiencies;
• Gain additional scope;
• Avoid the cost and competition of a full RFP response; and
• Restructure service delivery to implement standard processes and tools.
From a legal perspective, a buyer organization should renegotiate its outsourcing contract anytime its business or delivery model undergoes a significant change. Central questions should be asked:
• Does the current risk allocation give you the biggest bang for your buck?
• What is your spend today versus when the contract was signed?
• Has your leverage changed or can it change via the negotiations process?
• Are you adequately protected in terms of Privacy/Security (e.g., data transfer issues, data breach, PCI)? and
• Are you in full compliance with laws (BPO vs. ITO)?
You may think the question of when to renegotiate your outsourcing contract is simple. You renegotiate at the end of your contract, right? Wrong. Buyers often wait too long in the outsourcing lifecycle before initiating the renegotiation process. Unfortunately, delaying the process only narrows your options, placing your organization at a disadvantage and eroding your leverage in the renegotiation process.
The renegotiation process typically takes from two to six months, depending on the complexity of the contract and the buyer’s needs. And transitioning services back in-house or to another service provider can take much longer depending on the scope and complexity of the services. In cases where issues persist and a middle ground cannot be reached, termination and re-tendering may very well be the best course of action. In addition to the renegotiation process, buyers should retain a contingency buffer of about 18 to 30 months, leaving enough time to plan and execute a re-tendering alternative if needed.
To determine which option is best for your organization, Alsbridge suggests buyers begin to assess their outsourcing agreement at the 30-month mark by answering these questions:
• Am I happy with my current provider? If not, how can I fix it?
• Should I consider in-sourcing some or all of the services?
• Are there additional opportunities to outsource?
• How do I compare today’s pricing to my contract?
• Are my pricing mechanisms, SLAs, and SOWs aligned with my current needs?
• Are my services current/overly customized?
• Are my contract terms and conditions current?
• How long will it realistically take to transition to a new provider or move items back in-house?
“At about the 30-month mark, buyer organizations should begin to raise their heads and look around,” says Jarrod Johnson, VP of sales at ACS. “By 18 months, they should have a well defined strategy and execution plan. Anything less does not give the buyer enough running room to work with their provider to make creative and strategic changes.”
While it can be a daunting task, preparation is a vital step toward successful renegotiation and can be accomplished in only a few steps.
Step 1: Consult a Sourcing Advisor
Outsourcing buyers should consider the value of adding a sourcing advisor to their renegotiation team. A third-party advisor is accustomed to working with multiple service providers and deals with the dynamics of the outsourcing market on a daily basis.
By leveraging this market experience and databases of information on pricing terms and conditions, the advisor can assist in establishing a level playing field that greatly improves the buyer’s chances of maximizing value by achieving a balanced, sustainable contract and relationship.
Step 2: Conduct a Benchmark Analysis
In order to prepare for a renegotiation, the buyer should first benchmark its existing contract to determine where it stands in terms of pricing and service levels against today’s market. Benchmarking is a powerful means of gathering pricing and contract best practice information that can now be done in weeks instead of month—and for a fraction of the previous cost.
In most organizations, having accurate market data is a prerequisite to justifying the renegotiation approach and avoiding re-tendering the contract. From an economic point-of-view, benchmarking can help the buyer decide whether a contract renegotiation or a re-tendering has the better business case.
Step 3: Conduct an Objective Assessment of Existing Contract Provisions
To better ensure a successful and sustainable agreement, buyers should establish contract provisions that are balanced to support a long-term relationship. Such an assessment should go far beyond the price benchmark and focus on creating the most appropriate agreement between the buyer and the service provider, resulting in a sustainable relationship that recognizes the power of aligned goals and incentives.
To conduct this analysis, Alsbridge uses its proprietary market reality assessment (MRA) tool. The MRA compares the existing contract provisions against current market standards to promote better transparency and clarity of the contract provision. Our experience has shown that this enables the buyer and provider to understand and focus on the key contract areas and specific provisions that need to be realigned to in-order to better support a sustainable agreement.
“In my experience, the most successful contract renegotiations are those in which the buyer organization has done their research and is fully prepared going into the renegotiation process, says Jim Harvey, partner at Hunton & Williams. “To be successful, the buyer organization must have strong executive sponsorship from the top down, clear timelines, and scope in the decision process, include a third party in order to gain an objective view, and bring legal teams in early to hash out details.”
Renegotiation is not a cure-all for all outsourcing ills and is not a replacement for maintaining a healthy relationship with your service provider. At the end of the day, both sides of the table are looking for a positive outcome and a relationship that delivers value. Understanding how and when to renegotiate your outsourcing agreement and then taking the time to prepare for your renegotiation is fundamental to success. Start early to make time your asset, not your enemy.
Ben Trowbridge is the founder and CEO of Alsbridge, Inc., a sourcing advisory firm founded in 2003 that provides benchmarking, consulting, and research services.