Businesses have never had a better opportunity to renegotiate outsourcing contracts
In 2014, with a record number of outsourcing contracts due to expire, there has never been a better time for companies to renegotiate outsourcing deals to seek better terms and increase profitability. The outsourcing market, which is still largely dominated by long-term, inflexible contracts, is now subject to increasing competition from high-quality sub-contractors, putting businesses in a position to renegotiate more favourable terms.
Below I outline the most important areas for business managers to consider when they are looking to renegotiate outsourcing contracts.
Conduct due diligence
One of the key aspects to renegotiating an outsourcing contract is carrying out due diligence to assess market competition and ensure effective benchmarking. On average, firms only receive 72% of the value they expected from outsourcing contracts, according to a survey conducted by ISG. This suggests that businesses need to understand better what services they are trying to secure from a particular outsourcer when they are re-negotiating to make sure the contract does match their needs. It will also facilitate the monitoring of financial and quality performance indicators, either continuously or at specific intervals. As a result, companies will be less vulnerable to renewing a contract that is not really suitable and getting services that they don’t really need.
Reduce costs/drive profitability
ISG reported that 167 outsourcing contracts were awarded in EMEA in the fourth quarter of 2013, a 25% rise year on year but the annual contract value fell to £1.8bn, a decrease of 20%. As the size of the outsourcing market grows, companies are gaining more leverage in negotiating prices, as outsourcers fear losing customers to their competitors. Introducing clauses and guarantees to ensure that outsourcing companies commit to providing you with their best prices and high-quality service is a useful tool to ensure that your business also gets maximum value from the contract.
Furthermore, in an environment where innovation is prospering, companies should attempt to renegotiate increased flexibility, including staggered financial payment packets, which help boost cash flow, and shorter, more agile contracts.
Increase scope control
After agreeing what is included in the scope for both parties, implementing appropriate ‘change control mechanisms’ to permit changes over time is essential. Throughout a contract period the circumstances of both parties may change greatly, due to internal business dealings or macroeconomic influences; therefore it is vital that a contract is flexible enough to take this into account.
In particular, if a customer wishes to assume responsibility for an in-scope service at any given point, this flexibility will need to be negotiated and included as part of the initial contract. Under such circumstances, the expectations of both parties must be clearly identified to prevent misunderstandings that can have a detrimental effect on the relationship.
Communicate goals clearly
Many issues that arise from outsourcing contracts are due to a breakdown in communication or poor governance. It is important to be clear at the outset of the renegotiation on the administrative overlap between the client and the third party, outlining how the businesses should work together to produce common goals. This involves a high level of communication not only during the renegotiating process but also throughout the length of the contract in order to increase trust and ultimately efficiency.
Prepare for exit
Exiting a contract should be a last resort. Before doing so, companies should carefully evaluate the existing partnership and explore the areas listed above to see how the contract could be changed to better suit the company’s needs. However, it is also important to have an exit strategy so as not to be caught out if a relationship fails irreparably. The contract should clearly state precisely what is expected from both parties as the relationship draws to a close. Conditions will be largely business-specific but certain areas such as seeing out current orders, continuing to provide consistent standards and the settlement of outstanding accounts should be addressed to reduce risk and minimise complications.
So as companies seek to become more efficient and take advantage of an improving economic landscape, mutually beneficial outsourcing contracts are becoming increasingly important. This is as good a time as any for smaller businesses to take the initiative and ensure that they are driving down costs and boosting performance. Successful renegotiation of a contract could breathe a new lease of life into tired, underproductive relationships.