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 Outsourcing 2.0: Why You Must Renegotiate Your Outsourcing Agreement
Category: Strategy & Business Case Negotiations / Renegotiations IT Infrastructure & Applications...
With many buyer companies on their second or third outsourcing deals, the current generation of outsourcing has been dubbed: Outsourcing 2.0. However, many aspects of outsourcing agreements have not matured over time including legal provisions. Legal terms are just one of many components that need to be reviewed every few years to determine if they are still "in-market." If the opportunity arises and you can open the outsourcing contract, every effort should be made to renegotiate specific provisions as the consequences to the buyer company could be devastating.
For some of the most beleaguered industries such as retail and financial services, the U.S. economy has begun to slightly turn for the better. However, not every market is back on a positive note with unemployment hovering just below 10%. In economic times such as these, many companies who outsourced in the last few years look for ways to squeeze more out of their provider agreement. Oftentimes, additional cost savings is the primary objective but there are more reasons to renegotiate than the obvious financial benefits.
Outsourcing contracts that were penned over 3 years ago most likely have provisions that are "out-of-market" compared to what is being negotiated today. Acts of terrorism, data security breaches, geo-political risks and corporate malpractice (i.e., Satyam) are much more prevalent than ever before. In a study of Information Technology outsourcing buyers conducted by OutsourcingLeadership.com, 57% stated they "planned to renegotiate their contract."
If the opportunity arises, here are a few reasons, from a legal perspective, why you should consider renegotiating your outsourcing contract.
Renegotiation: Improving Sourcing Contract Terms
Category: Negotiations / Renegotiations Benchmarking Outsourcing
As many as one-fifth of outsourcing clients are dissatisfied with their sourcing contracts. Nonetheless, incumbent sourcing providers are rarely displaced (with some notable exceptions). Why is this so?
Often, presumably, incumbents perform satisfactorily, and there is much wisdom in the maxim "if it isn't broken, don't fix it." Incumbents enjoy huge practical advantages over any competitor, including inertia and intimate knowledge of the customer's business. Changing suppliers, moreover, is often complicated, disruptive and costly. Small wonder that even dissatisfied customers may prefer, or at least settle for, "the devil they know."
Faced with these realities, what can customers do to improve their position when contracts lapse? Skilled negotiators know the importance of having an alternative and being properly prepared for a contract renegotiation. Otherwise, one becomes a captive, dependent upon the other side's goodwill and willingness to make unilateral concessions. The crucial thing, therefore, is to create bargaining leverage in the form of credible alternatives to the contract provisions, without damaging existing relationships that, in the end, are likely to survive.
Surprisingly, few customers actually read the contract terms. Rather, they put the document in a drawer and leave it there - unread and unused. This is a pity, since many contracts contain provisions that anticipate expiration or renegotiation, and provide leverage when those opportunities appear. This article provides a list of common contract provisions as well as tips on how to go about improving those contract terms.
Multi-Vendor IT Sourcing, Avoid Management Pitfalls
Category: Strategy & Business Case Provider Selection Transition & Governance...
Decision making on a company’s IT sourcing comes down to the respective strengths exhibited by responding providers. While a total outsource of IT operations involves core and non-core infrastructure, applications maintenance and development, customers discover that one provider’s strength is another’s weakness and vice versa.
Further, applications are often awarded to more than one provider to leverage experience, business and regional strengths. Desktop maintenance may even be sourced by the outsourcing provider to a partner to expand its breadth of delivery capability, or the provider may manage the company’s agreements only to replace them if they acquire better pricing and service delivery. In today’s environment, cloud services do not have to reside with a company’s current outsourcing partner.
Procurement departments are challenged to negotiate lower prices and therefore may attempt to achieve price savings through multi-vendor sourcing. However, the cost may be greater in the long run taking into consideration risk, complexity and greater internal cost to manage the agreements. Still, many companies source their IT operations to more than one provider and successfully execute. The key is to avoid the common pitfalls of vendor management.
This article lists some of the reasons for successful multi-vendor IT sourcing.
Acing Contract Renegotiations
Category: Negotiations / Renegotiations IT Infrastructure & Applications Finance & Accounting Services...
No matter how well you plan, there will always be things you will want to change once you get into your outsourcing contract deal. Sometimes these will be relatively minor issues that can be dealt with through change control. And, of course, there is always the opportunity to make changes once the term runs out. But what happens if the changes you want amount to a renegotiation of your provider contract? This article looks at the key issues of both mid- and end-of-term contract renegotiation and suggests ways in which your negotiating position can be improved.
End-Term Contract Renegotiation
What should you do at 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 reassessing 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?).
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