No matter how well you plan there will always be things you will want to change once you get into an outsourcing deal.
This article addresses the key issues of both mid- and end-term renegotiations and offers tips on how to play your cards in order to improve your renegotiating position. As they say in Texas, "Sometimes you gotta hold 'em, sometimes you gotta fold 'em."
End Term Contract Renegotiations
Have you considered your strategy as you approach the end of an outsourcing contract term? The easiest thing would be to merely roll the deal forward. However, in doing so you may miss a great opportunity to look afresh at all aspects of the deal with the ultimate advantage at your disposal - competition. At this stage there is nothing to lose, and everything to be gained, from running an open competition to reassess the deal and the market. However, this all depends on one key assumption - that it is a practical proposition, operationally and financially, for you to move from your existing supplier or to bring the work back in house. (By the way, this is also an important factor in getting other suppliers interested in bidding. Why would they invest time and effort to submit a proposal if it appears you can't move anyway?)
One other practical point on end-term renegotiation - make sure you leave plenty of time (at least 18 months) before the deal runs out to get started. Otherwise the incumbent provider will be able to use inadequate time to prepare as leverage to force an ongoing agreement with them.
This is where you may wish you had devoted more time to negotiating practical termination assistance provisions. That is, the existing supplier should be obliged to provide you with specified assistance, including access, to enable you to transfer to another supplier should you wish to do so. Otherwise, you may find that you are in effect locked in. In addition, they should also be obliged to provide you with any relevant data about your deal (e.g., volumes, service levels, technology) that you may need to give to other suppliers to enable them to put together comparable bids. This could also be the time and place where you suddenly realize that all those complex intellectual property provisions in the contract actually do have a practical impact. For example, if the supplier claims a piece of software that they developed, which is now absolutely key to service delivery, they won't allow another supplier to even see it, let alone use it.
However, on the assumption that you can actually change suppliers, there is a range of options available. Unfortunately, surprisingly few companies take the opportunity to run a new competition as the existing contract comes up for renewal. This could be interpreted as a sign of the success of the current deal, but more often than not it is simply because the company either has other demands on its time or it doesn't want to damage the relationship with the incumbent provider. Given that circumstances change enormously over the life of a deal (i.e. new suppliers, new technology, new delivery locations, etc...) re-bidding a contract can come up with some surprising and beneficial results, even for the incumbent provider.
Mid Term Renegotiations
How can mid-term contract renegotiation be achieved and what levers are available to bolster your negotiating position? First of all, it is important to remember the outsourcing market is constantly changing. What seemed like a good deal three years ago may not be a good deal for today. As long as there is a genuine grievance or a legitimate case for change, most reputable suppliers will do all they can to try to meet a client's requirements.
Of course, it is impossible to provide for every eventuality in a contract, so it is essential to be able to demonstrate to the supplier that you have viable alternatives. For a mid-term negotiation, however, it is not just sufficient to have the right assistance and intellectual property (IP) provisions. You will also need the right to terminate for convenience. This means you can inform the supplier that you wish to terminate without a specific reason and pay a standard fee to cover costs the provider will incur because you are terminating early (e.g., premises or redundancy costs), but by definition no compensation (e.g., for loss of profits).
How do you keep abreast of the market to know that you should seek renegotiation? There are things you can do to make sure you know how your deal stacks up against what else is available so you can make an informed assessment of the position. The most common solution is benchmarking, where a client has the right to assess all aspects of the supplier's performance against industry norms and to require appropriate action. This sort of provision is relatively common in outsourcing contracts. Suppliers are generally prepared to accept such terms, as long as their competitors are not doing the work of benchmarking and therefore privy to sensitive information. However, third party advisors specializing in outsourcing can provide necessary independence and insight.
As an example, by conducting a benchmark Alsbridge recently helped a company realize the deal it had previously thought to be quite good was in fact no longer in line with the market. The client felt it had a well-substantiated and fair case for a better deal and furthermore it could demonstrate to the supplier that it would at least re-bid the deal at the term, if not take it back in house. The supplier realized it was in its long-term interest to cooperate and as a result a new deal was negotiated on much more favorable terms, including the right provisions to facilitate renegotiation should it ever be required again.
Of course, there are a huge number of practical issues to address in changing suppliers, managing stakeholders, ensuring the incumbent supplier doesn't divert staff off of the account, IP issues and so on, which cannot be taken lightly.
Keys to Successful Renegotiation
In summary, the keys to successful renegotiation are to:
Ensure that you can demonstrate you have a viable alternative
Make sure your initial contract has the right provisions, both operationally and financially, to make changing suppliers a practical proposition. These should include appropriate termination assistance, IP and termination rights
Give yourself plenty of time before critical deadlines
Ensure that you engage competition wherever possible
Exploit any other advantages, such as whether the incumbent supplier gets future work to be outsourced or a preferential position on other services such as consulting work or systems development
Have the right backup and justification for your renegotiation, including market testing and benchmark data where applicable