According to outsourcing advisory firm Alsbridge, Inc., companies with contracts expiring in 2013 need to prepare for renegotiations in the fourth quarter.
“As the outsourcing market matures, your outsourcing contract is being pressured from all sides,” says Ben Trowbridge, CEO, Alsbridge. He goes on to explain that technological developments, standardization, heightened competition, and benchmarking “push renegotiation rapidly up the sourcing agenda.”
Research from Alsbridge’s benchmarking company; ProBenchmark revealed that despite the urgency and combined pressures, a full 20 percent of all outsourcing contracts will proceed through the lifetime of a contract without a contract renegotiation taking place.
The problem for users of outsourcing is that, like negotiation of the original deal, contract renegotiations can be complex. Outsourcing providers have skilled negotiators, an acute sense of market trends, and decades of experience in renegotiating outsourcing contracts. Their clients typically lack these advantages, and they frequently fail to devote the effort required to make their contract renegotiation successful. As a result, the outcome is often ‘more of the same’, or possibly worse – the massive disruption and complexity of a full re-tendering exercise.
“Renegotiation is a vital sourcing tool,” notes Trowbridge.
The company offers the following tips for getting the most value from a contract renegotiation:
Collaboration is Key
Strive for a collaborative and open relationship. The process is easier and more enjoyable when clear targets and honest communication are part of this process.
Know Your Options
The availability of credible alternatives (such as a range of suitable new providers) will reduce your need to reach an agreement at any price.
5 Steps You Need to Take
The best results occur in cases where the outsourcing contract renegotiation is seen as a 5-stage process.
1. Maintain a sourcing strategy - The renegotiation needs to be aligned with the long term direction of the business, and its sourcing requirements.
2. Identify the renegotiation objectives - Although the goals of renegotiation may appear clear, the specific priorities for your situation need careful consideration. Where possible, these should be communicated and agreed upon with the provider.
3. Set the rules - Agree upon clear rules of engagement with the provider in terms of timeline, scope of discussion, and participation in meetings.
4. Conduct negotiations - Plan the sessions in detail, and coach your team to handle the inevitable cut and thrust of negotiation. Make sure all key points are agreed upon and documented in a disciplined manner.
5. Implement – The agreement (or lack thereof) needs to be followed up, ranging from the implementation of price or scope changes, to preparing to exit the relationship.
Timing is Everything
In theory, renegotiation can be initiated at any stage of the contract. In practice, the timing of a decision to renegotiate will significantly affect the chances of a successful outcome. So, plan ahead. An outsourcing contract renegotiation process typically lasts from two to six months, depending on the complexity of the situation. Added to this, clients should retain an extra contingency buffer of around eighteen months; leaving enough time for a full RFP (Request for Proposal) process should an agreement with the provider not be reached. Optimal timing is about thirty months from expiration.
Know the Market
Outsourcing is a rapidly evolving business practice. The market is fragmented into a range of different subsectors covering every niche of IT, business process, and various others functions. At the same time, as established outsourcing activities become commoditized, providers regularly introduce new offerings, technologies, and certifications.
Given this changing and complex provider landscape, outsourcing clients need to keep up to date with the latest practices, capabilities, and price trends. Periodic benchmarking is one way of ‘market testing’ an existing contract. While this is a powerful means of gathering pricing and best practice information, outsourcing buyers should make sure this is not the only form of market intelligence they make use of. In addition, they should look for regular updates from a range of channels, such as new deal announcements and research from industry experts.
More information on this topic can be found on Outsourcing Leadership under the title, Renegotiation: Upgrading Your Outsourcing Relationship.
Visit http://www.outsourcingleadership.com/ for additional information on best practices in outsourcing, shared services, benchmarking, and assistance with your sourcing strategies.
About Alsbridge
Alsbridge, Inc. is an award-winning global advisory firm and a distinguished member of the 2010 Inc. 500 fastest growing privately held companies. Alsbridge redefines the way companies reduce costs and improve back office operations. Our proprietary benchmarking tools and data resources enable clients to utilize the most cost effective and value added sources globally for information technology, business processes and telecommunications networks. Through a combination of internal optimization and outsourcing, our clients achieve cost savings that support their strategic business objectives.
Founded in 2003, Alsbridge is the proven, effective difference. The company’s web site is: www.alsbridge.com.
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